Price strategies are what different companies use to price their products to achieve their profit goals. Price strategies have evolved from the age-old, cost-based pricing to the now popular discount pricing.
Traditional Price Strategies
Cost-Based Pricing
Cost-based pricing is simple. The company adds up all fixed and variable costs of each product unit and then tacks on a profit percentage margin. Cost-based pricing is an old pricing strategy that involves no in-depth analysis of the market, the consumer or the competition.
Cost-based pricing is not an effective modern pricing strategy because determining unit cost is difficult when it varies with volume. Consequently, cost-based pricing can result in high prices in bear markets and low prices in bullish markets. This result is opposite to what strategic pricing would produce if market conditions were considered.
Value-Based Pricing
Unlike cost-based pricing, value-based pricing takes into account the value the consumer places on the product. The company researches consumer needs, tastes, preferences, and financial resources. In addition, the company compares its product to the competitor’s product in light of the results of the consumer research. Value-based pricing is about highlighting the special qualities of the product through heavy advertising to convince the consumer to pay more for the product because of the inherent value it provides.
Demand-Based Pricing
Like value-based pricing, demand-based pricing is focused on the level of customer demand for the product. The company sets prices after researching consumer tastes and preferences and determining what the average price the consumer will pay for the product. For example, if the company determines that the consumer will pay $10 for the product, and the company requires $5 to make an acceptable profit, then production and selling costs must not exceed $5.
Competition-Based Pricing
Here, the company sets its prices by looking at what its competitors are charging. The company first identifies its competitors, measures the value of its own product and then sets it prices higher, lower or equal to the competitors’ prices.
Competition-based pricing has several advantages. First, companies can set prices easily and quickly because this pricing strategy does not require analysis of complicated market factors and data. Second, with competition-based pricing, distributors are more comfortable handling a company’s products because they are generally priced within the distributor’s usual product range. Third, this pricing strategy allows companies to influence customer perceptions of their products. For example, if Gizmo Co. sets its prices above that of its competitors, the higher price could suggest that Gizmo Co.’s products are better in quality. Although Gizmo Co. uses the same parts and suppliers as its competitors, Gizmo Co.’s customer loyalty and the mystique surrounding its brand name could help negate buyer resistance to Gizmo Co.’s higher prices.
Current Trends in Price Strategies
Many companies today have resorted to other relatively new pricing methods, including odd pricing, price discrimination, skimming, and discounting. Although companies have been using these pricing methods for a long time, they are the current trends in pricing strategies.
Odd Pricing
This strategy is used everywhere, especially with infomercial products. Here, the product is priced at an odd price to influence the customer’s perception of the price. An example of this is advertising a product at $19.99 instead of $20. Although the price difference is only a penny, companies think that the consumer may view a $20 price tag as significantly more expensive.
Price Discrimination
This is simply charging different people a different price for the same product. Movie theaters and amusement parks use price discrimination when they charge a different price for children than for adults. Senior citizen discounts are another form of price discrimination.
Skimming
Companies use skimming when they introduce an innovative product into a market with little or no competition. Such companies will initially set their prices high to recover R&D costs. As these costs are recovered, companies will slowly reduce the initial price of the product or service to increase sales.
Quantity Discounts
Companies use quantity discounting to offer lower prices to customers when they buy in bulk.
Seasonal Discounts
Seasonal discounting depends on the season in which a product is purchased. For example, a customer may get a discount on a winter overcoat if they buy it in the spring or summer.
Cash Discounts
Companies sometimes offer cash discounts to customers who pay for their product before a certain date.
Promotional Discounts
Companies will often reduce the price of a product or service for a limited period of time to generate sales.
Michael Short is a business advisor and blogger. He mainly does price consulting services in his local area, but enjoys teaching it to the world over the internet.