The price of a product is the quantity of payment that is paid by the customer to the seller. It is the monetary value of the goods and services sold to a customer. From organizational perspective, the pricing determines the revenue of a company, which in turn is responsible for its sustenance. While working on your marketing essay, it is absolutely imperative for your to learn about different pricing strategies, that an organization can adopt in order to attract the customers. Identifying and implementing the right pricing strategy is crucial to organization success. Just like any other strategies, pricing starts with customers and their perception of value. While setting the price of a product, the marketer first needs recognize the perceived value for the customers. To help you with your college essay, we have identified and discussed about different pricing strategies which can be applied in your own business plan or help you to identify the pricing strategy in a case study company.
The value-based pricing is based on the principle that the appropriateness of a price is based on the product value perceived by the customer. This pricing strategy involves understanding the buyers’ perception, which becomes the key to setting the price. Since, the pricing depends on the perception of the customers, therefore the marketers needs to decide the price while deciding on all the other elements of the marketing mix. A company tries its best to create a perceived value that matches the pricing of the product. For example, the Swiss watch maker Rolex has been able to create a high perceived value for its products, which justifies the hundreds of thousands of dollarsfor a timepiece. This type of product has high emotional value and aspirational value, which is enough to justify the extremely high pricing. On the other hand, a customer may want to bargain on a $50 Timex watch. In a value-based pricing strategy, the marketer first assesses the needs and value perception of the customers, then the price is set to match that perceived value. The marketer then determines the cost that can be incurred. Finally, it designs the intended product to deliver the desired value.
It should be noted that if the value perception of the customers determines the price ceiling, then the cost of product determines the price floor. A company must set the price higher than the cost so as to make profit. In a cost-based pricing, the firm sets the prices based on the cost of the production, distribution and selling, plus a decent rate of return for the company, which becomes its profit. The profit becomes an important element for deciding the price. Companies like Walmart seeks to keep the cost as low as possible so that they can offer low prices to the customers. For some companies, low pricing can be a strong differentiating factor that can attract the customers. The simplest form of cost-based pricing is cost-plus pricingor markup pricing. In this pricing method, the marketer adds a standard markup over the cost of the product.
The competition-based pricing refers to setting the prices based on the strategies, prices, value offering of the competitors. Customer often judge the value of the product on what other market players are charging for it. Moreover, the customers also try to make the best decision based on the available price options in the market. From the organizational perspective, while setting a competition-based pricing a company must find out how their product and service offering compare against that of the competitor and how the customers perceive the value of their products compared to others.
If the perceived value of the product is lower than that of the rival brand, then the company needs to lower the price, or improve the customers’ perception towards the product. In competition-based pricing, the company also have to identify how strongly positioned the competitors are. If the market consists of multiple smaller players charging relatively higher prices for a lower value product then the company can choose to charge lower price to drive off the competition from the market. However, if there are a lot of well-established players with low pricing strategy, then the company needs to identify untapped needs or unserved markets and offer value added services and charge higher for them. For your professional essay writing it should be noted that the aim of competition based pricing is not to beat or match the price of the competitors, but to set the price based on the relative value created in comparison to the competitors.
Apart from these three fundamental pricing strategies, there are others as that widely used by organizations as well. Let us take a look at some of the most popular ones.
Premium pricing involves setting the price of the product higher than the industry standards. This pricing strategy often justified by the additional value of ownership, which can be inimitable features and user experiences, better quality of service and higher hedonistic and aspirational value. However, it should be noted that the success of premium pricing depends largely on the perceived value of the product or service. In case of Apple, the company charges relatively higher for its products than most of the other market players. In return, the company is able to deliver much higher perceived quality and better customer experience. A premium price also communicates a premium quality. Whenever a brand asks for a higher price for a unique product or exclusive feature, the customer automatically perceives it of higher quality or value. However, the challenge of premium pricing is that the company needs to constantly deliver premium quality products. Whenever, the customer finds a disparity between the price and the product quality, then it will lead to customer dissatisfaction and brand rejection.
The strategy of price skimming refers to the use to setting a higher price for a new product and then skimming the revenue from different market segments, layer by layer. In this approach, a company sets a higher price for a newly introduced products and eventually reduces the price over time, especially when a newer variant in available. Smartphone manufacturers often adopt this strategy to earn revenue from customer groups from different affordability. A new flagship smartphone when launched is of higher price and will only attract a certain demography with higher affordability. This price is lowered when the next iteration of the product is available, typically within a year. This allows the company to earn its revenue from multiple market segments. During the product launch the company is able to cater to a small segment by profitable segment, which eventually expands as the price is lowered over time. While writing papers in college on pricing you must keep in mind that price skimming can only be successful when certain conditions are met. Firstly, there has to be enough customers in the market to purchase the product at a higher price when it is first launched. Secondly, the competitors should not be able to undercut the high pricing for better value.
In case of penetration pricing, instead of setting a high initial price, the company sets low initial price to create a strong brand preference, thereby penetrating deeply into the market. The low prices attract higher number of customers, which help the company to leverage higher economies of scale.In this case, the high sales volume due to the low prices, help to reduce the per unit production cost, thus enabling the company to lower the price even further. This pricing strategy can also be used to create a strong competitive advantage in the market. However, it should be noted that the success of penetration pricing relies heavily on the price sensitivity of the market. Penetration pricing can only work as intended only if the market is highly price sensitive so that the lower initial price can drive increased sales volume. Moreover, penetration pricing may only be feasible for a company with strong financial prowess.
As mentioned earlier, the price of a product is often used by a customer to assess its quality. This behavior forms the foundation of psychology pricing, where the marketers considers the psychology of prices instead of considering the economics. Typically, a customer makes a purchase decision by examining the quality of product, or recalling past experiences with the product or the brand. However, in certain cases especially when purchasing a new product or service, with no prior experience, the customer tends to use the price as a determining factor for quality. For example, a professional spa which charges more than most of the other spas in the market, will attract more attention due to high perceived value. This will also compel the customers to dig deeper into the value offering of the company, which consequently will improve its brand awareness.
While discussing psychological pricing one must also discuss about the reference pricing. The reference price is the qualitative value of a product that the customers carry in their mind, while they are browsing for a particular product. This is often based on the current industry standards and past prices. The reference price becomes the benchmark for the customers to assess the pricing of a particular brand.
In psychological pricing, even a small difference in price can communicate difference in product value. Most marketers list the prices ending with 9 or 0.99, which often suggests a bargain or a lower price. The difference between $300 and $289.99 is not much but it can have a massive psychological impact on the consumers influencing their buying decision in favor of the brand.
In promotional pricing, marketers temporarily set their prices below the marked price in order to attract more customers and drive higher sales. Promotional offers are typically seasonal in nature, and marketers target social buying trends, such as Thanksgiving, Christmas, New Year, Black Friday, etc. The promotional pricing is mostly temporary and the low price lasts only during the time of the promotion. So, more people are attracted to buy the products in a short period of time.
It should be noted that promotional pricing is not just implemented as discounted prices, but marketers also offer other value-added services as well, such as free extended warranty, easy financing options, etc. The sole purpose of promotional pricing is to drive more sales in a short span of time while reducing per unit profit. It drives customers to overcome certain barriers in the buying decision making process. It should be noted that promotional pricing can also prove to be detrimental for the companies. During the holiday season a lot of companies offer promotional offers on their products and services. The customers are bombarded with constant promotional messages and advertisements by every market player out there. This as a result can lead to high clutter and make it much more difficult for the customers to make their purchase decision.
Before you start looking for assignment help let us recapitulate what we have learnt so far. Pricing strategies determines how the marketers wants to charge the customers for selling its products and services. There are multiple pricing strategies, each of which are aimed at attracting a particular customer group or market segment and which turns out to be financially beneficial for the company. Various pricing strategies such as value-based pricing, cost-based pricing, competitive pricing, try to convince the customers to make a purchase decision by offering higher value for their money.
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