Pricing Strategies.

There are many ways to price a product. Listed below are some of
them.  Try to understand the best policy/strategy in various
situations.

Strategy 1: Premium Pricing.

Use a high price where there is a uniqueness about the product or

service. This approach is used where a a substantial competitive
advantage exists. Such high prices are charge for luxuries such as
Cunard Cruises, Savoy Hotel rooms, and Concorde flights.  High
Price – High Quality

Strategy 2: Penetration Pricing.

The price charged for products and services is set artificially low in
order to gain market share. Once this is achieved, the price is
increased. This approach was used by France Telecom and Sky TV.
High Quality – Low Price

Strategy 3: Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture

are kept at a minimum. Supermarkets often have economy brands
for soups, spaghetti, etc.  Low Quality – Low Price

Strategy 4: Price Skimming.

Charge a high price because you have a substantial competitive

advantage. However, the advantage is not sustainable. The high
price tends to attract new competitors into the market, and the price
inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s more recently
mobile phone manufacturers use a similar technique. Once other
manufacturers were tempted into the market and the watches were
produced at a lower unit cost, other marketing strategies and pricing
approaches are implemented.  High Price – Low Quality

 Pricing Methods

There are other pricing methods which may be used by operators

depending on their individual operation and some may use a mixture
of a number of methods.

Forward Pricing

The marketeer will calculate the total cost of the ingredients and
then add additional money as the Gross Profit.  This is often
expressed as a percentage (and referred to as the Gross Margin) and
similar groups of products (e.g. all starters) will often have a similar
percentage of profit applied to them in order to ensure that an
overall gross profit target is achievable.

Backward Pricing

Backward pricing is used when the marketeer has an idea of what

the market will pay and has an idea of the amount of Gross Profit
required.  This allows them to perform a calculation which will give
a value for the amount of money which can be spent on ingredients. 
This is often used when pricing products on a competitive basis.  Eg.
Sunday lunches are offered at many establishments at a variety of
prices.  The astute operator will use backward pricing to ensure his
competitive selling price will deliver the expected gross profit by
setting a maximum amount of money which can be spent on all the
ingredients used in the production of the meal.

Contribution Pricing

This is a technique widely used in the Hotel sector, but equally valid
in all markets.  In this case the operator will calculate exactly what
the variable costs associated with each sale are.  In the case of an
hotel room this might be the total cost of cleaning, linen, teas,
coffees, an element for the TV licence and electricity and something
for wear and tear, etc.  Having calculated this, the operator knows
exactly how much it costs to service the room, therefore, so long as
he covers the costs – he loses nothing!  If, however, the guest who
rents the room buys a couple of beers, orders from room service and
eats breakfast, the operator will generate profit from the additional
sales at the normal rate.  The extra profit which is generated will
then make a contribution (hence the name) to the fixed costs which
he would not have had if he had not sold the room.  This is widely
used by hotels to sell rooms at short notice.

Ratio Pricing

Ratio pricing is simply using a multiplier to establish the selling

price.  The cost price is calculated and if the ratio is 5:1 it is simply
multiplied by 5 to arrive at the selling price.  This is a crude version
of forward pricing and does not necessarily reflect perceived value
or products which are similar but have marked differences in cost
price.  It can lead to product pricing being disproportionately high or
low.

Mark up or Breakeven Pricing

In this case the break even figure is calculated first for each item
produced and then a markup is applied to this.

If we calculate that the breakeven figure (i.e. total fixed costs

associated with the product plus the total variable costs divided by
the number of items produced) we would then apply a mark up
percentage of say 15%.

Minimum Pricing

In this case the marketeer would calculate the absolute minimum

cost of production and set the selling price based on that figure. 
This is often used to dispose of old stock and is often used in
supermarkets to get rid of short date stock.  As a technique it is
dangerous as it does not allow for a profit to be generated unless a
margin is specifically set.  It can be used in restaurants on a specials
board where we either use the stock or we destroy it.

Psychological Pricing.

This approach is used when the marketeer wants the consumer to

respond on an emotional, rather than rational basis. For example
'price point perspective' 99p is nowhere near a pound!!.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the

benefits of parts of the range. For example car washes. Basic wash
could be £2, wash and wax £4, and the whole package £6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once

they start to buy. Optional 'extras' increase the overall price of the
product or service. For example airlines will charge for optional
extras such as guaranteeing a window seat or reserving a row of
seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a

premium price where the consumer is captured. For example a razor
manufacturer will charge a low price and recoup its margin (and
more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This

also serves to move old stock. Videos and CDs are often sold using
 the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There

are many examples of promotional pricing including approaches
such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in

different parts of the world. For example rarity value, or where
shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or

increased competition force companies to provide 'value' products
and services to retain sales e.g. value meals at McDonalds.

Starting a new business or launching a new product or service requires detailed thought and planning. A
critical piece of that planning is deciding how you should price your products and services. The pricing
strategy you choose dramatically impacts the profit margins of your business, and determine the pace at
which your business can grow. Several pricing strategies exist for products and services, and choosing
the best for your business depends greatly upon your overall long-term business strategy.

Competition Based
Competition-based pricing strategies focus solely on what the competition is charging, and strive
to meet or beat those prices. Sometimes this strategy is referred to as a rock-bottom pricing
strategy, or a low price leader strategy. The goal is to best your biggest competitors based on
pricing alone. As Web Marketing Today exhibits, the competition-based pricing strategy is used
by many large retailers on the Internet. Because the same products are available from multiple
sources, the consumer buying decision is simply to select the retailer with the lowest price.
This pricing strategy is a difficult one for small businesses to maintain, because it provides very
narrow profit margins that make it challenging for the business to achieve enough momentum to
grow.

Penetration Strategy
A penetration pricing strategy is used as a loyalty-building or market-entry tool. The penetration
pricing strategy offers a high-quality product at a much lower than expected price. This
combination helps the business enter a new market even when strong competitors exist, and it
builds loyalty with new customers from the beginning. The penetration strategy can dramatically
increase the lifetime value of customers, because they're "hooked" with the outstanding first
product offering and--assuming future products are just as high quality--they are more willing to
buy additional products from the company long into the future.

Loss Leader
Also known as a promotional pricing strategy, the goal of the loss leader pricing strategy is to get
new customers even if you do not make a profit from the initial sale. By taking a loss on the first
sale, businesses can offer related products or upsells at normal prices. Despite loosing profits on
the promotional product or loss leader, enough profits are normally made from the additional
regular-priced products and services to sustain the strategy for the long term.

Grocery store sales utilize the loss leader pricing strategy on a regular basis. They discount one
or more items on their shelves to the point of taking a loss of profit, with the intention of getting
customers into their stores. Once there, the customers are likely to buy more than just those
products that are on sale.

High End
Premium pricing takes advantage of a segment of consumers who believe high quality comes at a
premium price. Instead of trying to have the lowest price amongst competitors, businesses who
use the premium pricing strategy attempt to price their products and services at the highest in
their market. This strategy limits the customer base available to market products and services to,
but also provides much higher profit margins for each sale.