PRICING STRATEGIES FOR A NEW PRODUCT

1. Skimming: In this strategy the price for new product is set very high initially (at
launch). This ensures getting high revenue from all the segment of buyers. Perhaps
launch of a new highly anticipated smartphone is an example for this. Price of the
newly launched iPhone or a Samsung flagship phone is always very high initially
and with time we can see the prices fall.

2. Penetrative: This is the strategy in which the focus is on grabbing maximum market
share. Hence, the price of the product is set very low initially (at launch) so that it
can penetrate the market and attract buyers of all segments. Reliance Jio is a
perfect example for this strategy. The prices of services were zero at launch,
eventually they were set at a fraction of the existent competition’s prices.
Consequently, Jio has been able to grab a significant market share in spite of being
a new entrant in the industry.

3. High-Low Pricing: In this strategy the pricing is set high but the product is sold
with heavy discounts and promotions. The high price (list price) signals to the
market that there is immense value being delivered in this product. This is done
to ensure an increase in the foot traffic and ensuring that enough interest is
generatedin the audience. This is seen quite frequently in the Xiaomi products
sale.

4. Freemium Pricing: This is the most common pricing model these days. Freemium
in itself has many different variations to execute. In one of the variants, the product
is available for free for a certain duration only, after which the customer has to
purchase the license to continue using. Another variant is based on usage
threshold,the customer can use the product until a certain usage threshold is hit
(number of transactions, number of users etc.) after which the customer is
required to buy.
 5. Decoy & Psychological Pricing: The prices for similar products is set differently to
drive more sales for the cheaper alternative. SAAS companies use this for driving
sales to a specific plan. Retail stores do this at times too, to drive more sales to a
new product.

6. Predatory Pricing (can be illegal): In predatory pricing, the product is given away
for free. The company may be making loss on each sale but this is potentially done
to drive the competition out of the market completely. One example of this is Uber
when they started, they were losing money on each transaction. Another legacy
example is of Internet Explorer. This was provided for free with the OS by
Microsoft. In those days, Netscape Navigator the prominent web browser in the
market was a paid product.

7. Dynamic Pricing: This is something we have all experienced in case of Uber. The
price is changed based on the demand and/or supply; known as surge pricing in case
of Uber. Hotel room booking, flights booking is other examples where dynamic
pricing is widely used.

In the Product Development Lifecycle, defining and deciding the Pricing strategy at
launch is one of the crucial decisions that paves the way for high product adoption.

PRODUCT MIX PRICING STRATEGIES

1. Product Line Pricing
Since firms usually develop product lines rather than single products, product line pricing plays
a decisive role in product mix pricing strategies. For example, when you look at a car brand,
you will see a relation between the different series and their prices. The entry model obviously
costs you less than the top-range car.

These price points are carefully determined. In product line pricing, the firm must determine
the price steps between various products in a product line based on cost differences between
the products, competitors’ prices, and, most importantly, customer perceptions of the value of
different features.
 2. Optional Product Pricing
Optional product pricing is the pricing of optional or accessory products along with a main
product. In many cases, you can buy optional or accessory products along with the main
product.

For instance, when you order your new car, you may choose to order a navigation system or an
advanced Entertainment system. However, for the company, pricing these options is not easy.
They must decide carefully which items to include in the base price and which to offer as
options.
3. Captive Product Pricing
We speak of captive product pricing when companies make products that must be used along
with the main product. On the contrary, in optional product pricing, we should think of products
that can be bought/ sold with the main product.
Examples for captive product pricing are razor blade cartridges and printer cartridges. Captive
product pricing is an extremely powerful strategy in the set of product mix pricing strategies.
Producers of the main products, e.g. printers and razors, often price them very low and set high
mark-ups on the supplies you need in order to operate the main products.

However, companies that use this type of product mix pricing must be very careful. The
difficulty is in finding the right balance between the main product and captive product prices.
Also, consumers trapped into buying expensive captive products could resent the brand that
ensnared them.

4. By-Product Pricing
By-product pricing refers to setting a price for by-products to make the main product’s price
more competitive. It is the result of the fact that producing products and services often generates
by-products. Often, these by-products (as singly sold products) would not have any value and
getting rid of them is costly. This would then increase the price of the main product. But by
using by-product pricing, the company tries to find a market for these by-products to help offset
the costs of disposing of them and make the price of the main product more competitive.

5. Product Bundle Pricing

The last product mix pricing strategy is product bundle pricing. Using product bundle pricing,
companies combine several products and offer the bundle at a reduced price.
A good example is a menu at McDonald’s: you get a bundle consisting of a burger, fries and a
soft drink at a reduced price. Also, companies such as Sky, Telecom and other
telecommunications companies offer TV, telephone and high-speed internet connections as a
bundle at a low combined price. For the company, product bundle pricing is a very effective
product mix pricing strategy: it can promote the sales of products consumers might otherwise
not buy or buy less. However, the combined price must be low enough to get consumers to buy
the bundle instead of a selection of single products.

PRICING STRATEGIES FOR PRICE ADJUSTMENTS

1. Discount and Allowance Pricing – Price Adjustment Strategies

The first one of the price adjustment strategies is applied in a large share of businesses.
Especially in B2B, this price adjustment strategy is rather common. Most companies adjust
their basic price to reward customers for certain responses, such as the early payment of bills,
volume purchases and off-season buying. Discount and allowance pricing can take many
forms: Discounts can be granted as a cash discount, a price reduction to buyers who pay their
bills promptly. Typical payment terms look like this: “2/10, net 30”, meaning that payment is
due within 30 days, but the buyer can deduct 2 per cent if the bill is paid within 10 days. Also,
a quantity discount can be given, which is a price reduction to buyers who buy large volumes.
A seasonal account is a third form of discount, being a price reduction to buyers who buy
merchandise or services out of season. Allowances refer to another type of reduction from the
list price. For instance, trade-in allowances are price reductions given for turning in an old item
when buying a new one. Especially in the car industry, trade-in allowances are very common.
Promotional allowances refer to payments or price reductions to reward dealers for
participating in advertising and sales support programmes.

2. Segmented Pricing – Price Adjustment Strategies

Often, companies adjust their basic prices to allow for differences in customers, products and
locations. In short: adjusting prices to account for different segments. In segmented pricing,
the company thus sells a product or service at different prices in different segments, even
though the price-difference is not based on differences in costs. Several different forms of
segmented pricing exist. Under customer-segment pricing, different customers pay different
prices for the same product or service. For instance, museums and theatres may charge a lower
admission for students and senior citizens. Under product-form pricing, different versions of
the product are priced differently, although the difference is not due to cost differences.

3. Psychological Pricing – Price Adjustment Strategies

Another one of the price adjustment strategies is psychological pricing. It refers to pricing that
considers the psychology of prices, not simply the economics. Indeed, the price says something
about the product.

For instance, many consumers use price to judge quality. A €100 bottle of perfume may contain
only €3 worth of scent, but people will be willing to pay the €100 because the high price
indicates that the product is something special.

However, this does not work forever. When consumers can judge the quality of a product by
examining it or by calling on past experience with it, price is less used to judge quality. But
when they cannot judge quality, price becomes an important signal.

4. Promotional Pricing – Price Adjustment Strategies

Promotion pricing calls for temporarily pricing products below the list price, and sometimes
even below cost, to increase short-run sales. Thus, companies try to create buying excitement
and urgency. Promotional pricing could take the form of discounts from normal prices to
increase sales and reduce inventories. Also, special-event pricing in certain seasons to draw
more customers could be used. Even low-interest financing, longer warranties or free
maintenance are parts of promotional pricing.

However, promotional pricing can have adverse effects. If it is used too frequently and copied
by competitors, price promotions can create customers who wait until brands go on sale before
buying them. Or the brand’s value and credibility can be reduced in the eyes of customers. The
danger is in using price promotions as a quick fix in difficult times instead of sweating through
the difficult process of developing effective longer-term strategies for building the brand. For
that reason, price adjustment strategies such as promotional pricing must be treated with care.

5. Geographical Pricing – Price Adjustment Strategies

The next one of the price adjustment strategies is geographical pricing. In geographical pricing,
the company sets prices for customers located in different parts of the country or world. Should
the company risk losing the business of more-distant customers by charging them higher prices
to cover the additional shipping costs? Or should the same prices be charged regardless of
location?

6. Dynamic Pricing – Price Adjustment Strategies

Dynamic pricing refers to adjusting prices continually to meet the characteristics and needs of
individual customers and situations. If you look back in history, prices were normally set by
negotiation between buyers and sellers. Thus, prices were adjusted to the specific customer or
situation. Exactly at that point, dynamic pricing starts. Instead of using fixed prices, prices are
adjusted on a day-by-day or even hour-by-hour basis, taking many variables into account, such
as current demand, inventories and costs. In addition, consumers can negotiate prices at online
auction sites such as eBay.

7. International Pricing – Price Adjustment Strategies

The last one of the major price adjustment strategies is international pricing. Companies that
market their products internationally must decide what prices to charge in the different
countries in which they operate. The price that a company should charge in a country can
depend on many factors, involving economic conditions, competitive situations, laws and
regulations, and the development of the wholesaling and retailing system. In addition,
consumer perceptions and preferences may vary from country to country, calling for
differences in prices. Also, the company might have different marketing objectives in
different markets, which require changes in pricing strategy. Without doubt, costs play an
important rolein setting international prices. Higher costs of selling in another country, which
is the additionalcosts of operations, product modifications, shipping and insurance, import
tariffs and taxes, and even exchange-rate fluctuations may create a need to charge different
markets in the various markets.