Pricing Strategy in Marketing: Definition, Types & Examples
Companies utilize a variety of pricing strategies to market their products to consumers. Throughout this lesson we will explore some of these strategies and test your knowledge with a short quiz.
We also recommend watching Marketing Research: Definition, Purpose and Role in Marketing Strategy and Economic Factors of Pricing and Pricing Strategy
Definition, Types, & Examples
The success in pricing strategies for businesses is heightened with clarity on market conditions, an understanding of the consumer's unmet desire, and the amount they are willing to pay to fulfill it.
Pricing strategy in marketing is the pursuit of identifying the optimum price for a product. This strategy is combined with the other marketing principles known as the 4 P's (product, place, price, and promotion), market demand, product characteristics, competition, and economic patterns. The pricing strategy tends to be one of the more critical components of the marketing mix and is focused on generating revenue and ultimately profit for the company.
Companies will lean on discount pricing as part of product promotions which is generally used for increasing traffic and attracting new customers. This discounted pricing draws attention to the product and can be used as a hook to bring in customers who will potentially purchase other items. Seasonal changes are good examples of times when companies utilize this strategy in which they discount the prices of the items that are going out of season.
Skim pricing is a technique that companies use to find the optimum price point for a product, usually a unique item with unknown consumer demand. The price skimming strategy consists of the company setting the initial product price high to quickly cover embedded costs such as production or advertising, and then begins to slowly reduce the price to being the product to a wider market. The goal with this strategy is to maximize potential profits layer by layer until the optimum price is reached. Electronic devices are great examples of this strategy where we see higher prices at market introduction that slowly decrease over time once the initial product buzz weakens.
Market Penetration Pricing
The market penetration pricing strategy has the main objective of gaining market share early for a company. The introduction of the product to the consumer is provided at low end prices in hopes to gain the attention, loyalty, and market share of the customer base. Typically this pricing strategy can been seen in service offerings such as cable or internet in which the provider offers promotions to gain the customers' business and then increases the price after the promotional period.
The ROI pricing strategy is unique to the company and the product offered. The strategy uses the return on investment calculation to set the product price based on a pre-determined profit structure. If the company desires a 10% profit then they will set the price 10% higher than what it costs to produce and market the product. A similar strategy to this approach is known as cost based pricing which nearly mirrors the ROI pricing strategy except that a company bases the price without a target profit in mind.
First class airline tickets represent the premium pricing strategy. A company who offers premium quality or exceptional services will use the ability to charge a premium price in comparison to the competition, which in this case is a coach seat in the back of the plane next to the engines. Companies will utilize market research surveys to understand where consumers see their products or services in relation to alternatives to assist in the price setting.
Other pricing strategies familiar to customers today include: competition pricing which provides customers with the price match guarantee, bundle pricing as seen from many service companies who offer package deals, and psychological pricing, which is the common $1.99 example which makes the customer more comfortable because the product price is below their desired top price point.
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