Question#

Write in detail pricing strategies.

Answer#

Pricing Strategy:

Price is the value that is put to a product or service and is the result of a complex set of
calculations, research and understanding and risk taking ability. A pricing strategy takes into
account segments, ability to pay, market conditions, competitor actions, trade margins and input
costs, amongst others. It is targeted at the defined customers and against competitors.
 A. Penetration Pricing:

Penetration pricing is a pricing strategy that is used to quickly gain market share by setting an
initially low price to entice customers to purchase from the company. Such pricing strategy is
generally used by new entrants into a market. An extreme form of penetration pricing is called
predatory pricing.

It is common for a new entrant to use a penetration pricing strategy to compete effectively in the
marketplace. Price is one of the easiest ways to differentiate new entrants among existing market
players. The overarching goal of the pricing strategy is to:

 Capture market share

 Create brand loyalty
 Switch customers from competitors
 Generate significant demand and utilize economies of scale
 Drive competitors out of the market

Situations where penetration pricing works effectively:

 When there is little product differentiation

 Demand is price-elastic
 Where the product is suitable for a mass market (utilizing economies of scale)
Illustration and Example of Penetration Pricing

A current small-sized player in the market place that sells laundry detergent at $15. Company A
is an international company with a large amount of excess production capacity and is, therefore,
able to produce laundry detergents at a significantly lower cost. Company A decides to enter the
market, employ a penetration pricing strategy, and sell laundry detergent at a sale price of $6.05.
The company’s cost to produce a laundry detergent is $6.

With a marginal cost of $6 and a sale price of $6.05, Company A is making nominal profits per
sale. However, the company is comfortable with this decision as their overarching goal is to
switch customers over, capture as much market share as possible, and utilize economies of scale
with their high production capacity.

Company A believes that its competitor will not be able to sustain itself in the long-term and will
eventually exit the market. When the competitor exits the marketplace, it will become the only
seller of laundry detergent and therefore be able to establish a monopoly over the market.

B. Freemium Pricing:

Freemium, a portmanteau of the words "free" and "premium", is a pricing strategy by

which a product or service is provided free of charge, but money (a premium) is charged for
additional features, services, or virtual (online) or physical (offline) goods that expand the
functionality of the free version of the software.

C. Premium pricing:

High price is used as a defining criterion. Such pricing strategies work in segments and
industries where a strong competitive advantage exists for the company. Example: Porche in cars
and Gillette in blades.

D. Economy pricing:

No-frills price. Margins are wafer thin; overheads like marketing and advertising costs
are very low. Targets the mass market and high market share. Example: Friendly wash
detergents; Nirma; local tea producers.

E. Skimming strategy:

High price is charged for a product till such time as competitors allow after which prices
can be dropped. The idea is to recover maximum money before the product or segment attracts
more competitors who will lower profits for all concerned. Example: the earliest prices for
mobile phones, VCRs and other electronic items where a few players ruled attracted lower cost
Asian players.
 F. Bundle pricing:

Similar to optional pricing, though it’s not a case of selling one item at a dramatic
decrease, but packaging products or services together at a discount to increase sales numbers.

It’s like when you buy a car, and it comes with a range of optional extras—heated seats, alloy
wheels, parking sensors. You get each individual item for less than they would otherwise be,
because they’re bundled together.

G. Psychological pricing:

Psychological pricing is a pricing strategy that utilizes specific techniques to form a

psychological or subconscious impact on consumers. It integrates sale tactics with price.

It can also be described as setting prices lower than a whole number. The idea behind it is that
customers will read the slightly lower price and treat it lower than the price actual.

H. Promotional pricing:

Promotional pricing is a sales strategy in which brands temporarily reduce the price of a
product or service to attract prospects and customers. By lowering the price for a short time, a
brand artificially increases the value of a product or service by creating a sense of scarcity.
Promotional pricing can help with customer acquisition by encouraging cost-conscious shoppers
to buy. It can increase revenue, build customer loyalty, and improve short-term cash flow.

A promotional pricing strategy works best in the short-term. Used excessively, it costs brands
money by eroding profit margins. Customers become accustomed to lower pricing—so-called
“price orientation”—or they may stock up during the promotional period. It also adds to the
noise in an already-crowded marketplace where promotions and discounts are commonly used.

I. Dynamic pricing:

In dynamic pricing, the price is not firmly set; instead it changes based on changing
circumstances, such as increases in demand at certain times, type of customer being targeted or
changing marketing conditions. This type of pricing strategy is especially common in certain
types of business, particularly those providing a service, such as airlines, but can also be used
with product pricing.
 J. Pay what you want:

In which a pricing strategy where buyers pay their desired amount for a given commodity,
sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested
price may be indicated as guidance for the buyer