ECONOMICS

CASE STUDY ON HOW PRICING METHODS ARE USED IN THE BUSINESS WORLD
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 ACKNOWLEDGEMENT

I WOULD LIKE TO EXPRESS TO MY GRATITUDE TO MY TEACHER WHO GAVE

ME THE OPPORTUNITY TO DO THIS WONDERFUL PROJECT ON PRICING
METHODS AND ALSO HELPED ME COMPLETE MY PROJECT. I CAME TO KNOW
ABOUT SO MANY NEW THINGS, I AM REALLY THANKFUL TO THEM. I WOULD
ALSO LIKE TO THANK MY PARENTS AND FRIENDS WHO HELPED ME IN
FINISHING THIS PROJECT IN THE LIMITED TIMEFRAME.
I. New Product Pricing Strategies
Pricing strategies usually change at different phases of a product’s life cycle. The most
challenging phase of setting a pricing strategy is that of product introduction. During this
phase, marketers face the challenge of setting prices of business offerings for the first time.
There are two strategies that they can follow:

1. Price Skimming
Price skimming involves setting rates high during the introductory phase. This is designed to
help businesses maximize sales on new products and services. Once the products or services
are introduced, company lowers the prices gradually. This is done eventually as competitor
goods appear on the market.

One of the benefits of price skimming is that it allows you to maximize profits on early
adopters. You then drop the prices eventually to attract more price-sensitive consumers. Not
only does price skimming help your small business recoup its development costs. It also
creates an illusion of quality and exclusivity when your item is first introduced to the
marketplace.

Take for instance Sony. Its HDTV set costed $43,000 when it introduced them into the
Japanese market in the year 1990. These television sets were bought by customers who could
afford to pay such a high price. These customers were the ones who desperately wanted this
new technology. However, over the next few years, Sony reduced the prices of these HDTV
sets. This was done in order to lure more customers. Hence, by the year 1993, a 28 inch
HDTV costed just over $6,000. This by the year 2001 reduced to about $2,000 for a 40 inch
HDTV set. Thus, Sony skimmed huge amounts of revenue as a result of an early adopter of
the technology.

2. Pricing Strategies For Market Penetration

Penetration strategies aim to attract buyers by offering lower prices on goods and services.
Many new companies use this technique to draw attention away from their competition. But
penetration pricing does lead to an initial loss of income for the business.

Over time, however, the increase in awareness can drive profits. Furthermore, it can help
small businesses to stand out from the crowd. After sufficiently penetrating a market,
companies often end up raising their prices in the long run. This is done to better reflect the
state of their position within the market.

Take for example the smartphone market. Apple skimmed maximum amount of revenue
owing to its ingenious operating system. Samsung, on the other hand, entered the market with
penetration pricing. Accordingly, Apple maintained its high price position given its brand
building strategy. Whereas Samsung’s market share was seized by Micromax. This is because
it offered similar smartphone features at highly competitive prices. As of now, Chinese
smartphone brand Xiaomi has acted as a drag on Samsung’s market share. This is because its
offering online only smartphones at cheaper prices.

II. Product Mix Pricing Strategies

The pricing strategy for each of the products is different when you sell different set of
products. This variation in pricing is based on the costs, demand and the different level of
competition that a product has to face in the market. Now, you vary pricing in order to
maximize profits on your total product mix. Accordingly, there are different product mix
pricing strategies. These include:

Product Line Pricing

You have to set different prices for various offerings in a product line in case your business
offers different product lines. This price differentiation takes into account cost differences
between the products in a given product line. Furthermore, it also considers customer
perceptions with regards to the value offered by different products in a given line.

For instance, HUL offers shampoos like Sunsilk and Dove for price conscious consumers.
While shampoos like TIGI and Toni and Guy are offered at premium prices for high end
customers.

Optional Product Pricing

You have to add the price of accessories to the base price of the product in case you offer
accessory products along with the main product. This means that accessories are given as an
option to the customers.

Take for example the automobile industry. The basic price of a car is different from the upper
models offering functionalities like automatic windows, alloys, infotainment system etc.

Captive Product Pricing

This pricing strategy is used by companies manufacturing products that are essential for using
the main product. For example, in the case of razors, cartridges form captive products.
Whereas the razors act as main products. Companies like Gillette offer razors at low prices,
but makes huge amounts of money from the razor cartridges.
III. Price Adjustment Strategies
Generally, companies adjust the basic price of their products. This is undertaken to consider
customer differences and changing situations. Hence there are many price adjustment
strategies that companies follow. These include:

1. Pricing at a Premium
With premium pricing, businesses set costs higher than their competitors. Premium pricing is
often most effective in the early days of a product’s life cycle. Furthermore, it is ideal for
small businesses that sell unique goods.

A business must work hard to create a value perception. This is because customers need to
perceive products as being worth the higher price tag. There are many things a business can
do to support premium pricing of its offerings.

These include:

 creating a high-quality product,

 intense marketing efforts,
 quality product packaging and
 plush store décor

Take for instance Yeti. It is a company that makes camping coolers. It was founded in the
year 2006. It’s objective was to build camping coolers that were meant for serious outdoor
enthusiasts.

Now, rugged expeditions involved changing weathers and vulnerability to challenges. So

these enthusiasts needed coolers that could withstand any sort of camping abuse. Therefore,
Yeti introduced high performance, premium priced camping coolers. These were coolers that
wouldn’t break. Thus, eventually these became a benchmark for competitive outdoor
products.

2. Economy Pricing
Economy pricing aims to attract the most price-conscious consumers. This strategy is used by
a wide range of businesses. These include generic food suppliers, discount retailers etc. Thus,
businesses are able to minimize costs associated with marketing and production with this
strategy. This further helps in keeping the product prices down. As a result, customers can
purchase the products they need without frills.

Economy pricing is incredibly effective for large companies like Wal-Mart and Target.
However, the technique can be dangerous for small businesses. Small businesses may
struggle to generate a sufficient profit when prices are too low. This is because small
businesses lack the sales volume of larger companies. Still, selectively tailoring discounts to
your loyal customers is a great way to guarantee their patronage for years to come.

5. Discount and Allowance Pricing strategies

Brands usually change the basic price of their offerings in order to honor customers for their
actions. These actions may include volume purchases, early clearance of bills, off season
purchases or stays etc. Thus, discount pricing involves adjustment in two ways:

Discounts
Discount can be offered in different forms. These include cash discount, a quantity discount,
trade discount, and seasonal discount.

 Cash discount refers to offering products at prices for customers making prompt cash
payments.
 Quantity discount refers to offering products reduced prices to customers who make
bulk purchases. These discounts instigate customers to purchase more products from a
single seller rather than approaching different sellers for different products.
 Trade discount is offered by a seller to its channel partners for performing various
functions. These functions include selling, storing, and record keeping. This discount
is also known as a functional discount.
 Seasonal Discount refers to giving products at reduced prices to customers who
purchase merchandise or services during the offseason.

Sometimes, companies reduce product prices below the market price or even below cost for a
temporary period of time. This strategy is followed in order to increase sales in the short run
or to reduce inventories. This is known as promotional pricing. This takes place in several
forms.

For instance, sellers follow special event pricing on certain occasions in order to lure more
customers. Such occasions may include festivals, special occasions, etc. These occasions
include independence day, women’s day, festivals like Diwali, Christmas, etc.

7. Geographical Pricing
This pricing strategy refers to adjusting the list price of the products based on the location of
the customer. Thus, the Geographical pricing strategy basically reflects the shipping costs
involved in delivering the products from the point of origin to the point of sale.
Hence, a low price may be charged if the customer location is closer to the point of
origination. And the higher price is charged in case customers are located at a faraway place.

Accordingly, there are five different geographical pricing strategies:

FOB Pricing
The goods are placed free on board a carrier at a specific location under this pricing strategy.
It is at this location that the title to and responsibility of the goods gets passed on to the
consumer. Furthermore, the consumer pays for the freight from the factory to the destination.
Hence, the closer the customer destination, the lower the price, and vice versa.

Uniform Delivered Pricing

This pricing strategy contrasts with FOB pricing. Thus, a company charges the same price
plus freight for the products under this strategy. This is irrespective of the location of the
customers. Furthermore, the freight cost is levied on the basis of average freight cost.

Zone Pricing

This pricing strategy falls somewhere between FOB pricing and uniform – delivered pricing
strategies. Thus, the company sets up two or more zones under zone pricing. The customers
that fall in a particular zone pay the same price. This is to say farther the zone, the higher
would be the price of the products and vice versa.
Basing – Point Pricing

The company chooses a particular city as a basing point as per this strategy. Additionally, the
company charges freight costs to all customers from that city to the location of the customer.
This is irrespective of the city from where the goods are shipped.

8. Dynamic Pricing
Earlier, a fixed price policy was followed by companies while setting the price for goods.
However today, companies are resorting to dynamic pricing. Dynamic pricing involves
adjusting the price of products continuously to meet the needs of individual customers.

For instance, platforms like MakeMyTrip showcase the pricing of airline tickets. These
airline companies constantly adjust the price of tickets based on demand dynamics.

Here is an infographic on the different pricing strategies that a business entity can adopt
while pricing its products.
 CONCLUSION

A right pricing strategy helps you determine the price point at which you can maximize
profits on sales of your product or service. You need to consider a wide range of factors when
setting the prices of your offerings. These include:

 production and distribution costs,

 competitor offerings,
 positioning strategies and
 the business’ target customer base.

Your customers won’t purchase goods that are priced too high. On the other hand, your
company won’t succeed if it prices goods too low. This is because low prices will not allow
you to cover all of the business’ costs.

Thus, product or service price can have a profound effect on the success of your small
business. This is in addition to other factors that impact your business. These include the
product itself, the place where it is sold and its promotion.
 BIBLIOGRAPHY

https://www.myconsultingcoach.com/

https://quickbooks.intuit.com/