Marketing Aptitude: Product pricing strategies

Product-based pricing strategies

• Price-Skimming: It is also known as the ‘High initial pricing strategy’. Under this strategy, a manufacturer sets a very high price for his product till the competitors begin to enter the market. Here, higher price of a product is projected as a symbol of quality and can be used as a technique of market segmentation, with the objective of selling to ‘classes’. This is the method to recover high promotional expenses incurred during the introductory phase of the product and also to finance the cost of product planning and development of luxurious products.
• Penetration-Pricing: It is just opposite of Price-Skimming strategy. As per this strategy, a manufacturer sets a low price for his product; so as to penetrate into a new market for popularizing his product; and capture a large market share over a period of time, by establishing goodwill as ‘low-price seller’. It is suitable when there is high competition in the market, and demand is highly elastic and very sensitive to price changes. In it, the manufacturer may increase the price subsequently; once brand popularity is established by the manufacturer in the market.

Leader Pricing Strategy:

• Loss leader pricing: It is a business strategy in which a business firm offers a product or service at a price i.e. not profitable, for the sake of offering another product/service at a greater profit or to attract new customers. This is a common practice when a firm introduces new brands or stimulates consumer interest in a product or family of products.

• Follow the Leader pricing: It is a price matching strategy whereby business firm sets the price of its product and service according to its dominant competitor. Here, prices may be set higher or lower than existing levels and might not remain fixed if the competitor adjusts its pricing.

Cost oriented pricing method:

Many firms consider the cost of production as a base for calculating the price of the finished goods. The method covers the following ways of pricing:

• Cost-plus pricing: It is a simple and easily controllable pricing strategy wherein manufacturer calculates the cost of production incurred and adds certain percentage of markup in it to realize the selling price. The markup is the percentage of profit calculated on total cost i.e. fixed and variable cost associated with making a product and bringing it to market including raw materials, labor, utilities, packaging, transportation, marketing, and overhead. Profit margin is the markup on each unit sold, which can vary for retail and wholesale sales. For instance, if the cost of a product is Rs. 500 per unit and the marketer expects 10 % profit on costs, then the selling price will be Rs. 550. The difference between the selling price and the cost is the profit. This method is simpler as marketers can easily determine the costs and add a certain percentage to arrive at the selling price.

• Markup pricing: It is a method of increasing the price of product or service by a standard percentage to calculate the sale price. Markup pricing enables retailers to easily calculate profits, since the net revenue from sales will be a function of the percentage by which the price has been marked up over the price paid for the item by the vendor. Higher the markup, greater the cost to the consumer, and greater the money the retailer makes.

For example,  If the unit cost of a dairy milk is Rs. 16 and producer wants to earn the markup of 20% on sales then mark up price will be: Markup Price= Unit Cost/ (1-desired return on sales).

Markup Price= 16/ (1-0.20) = 20.

Thus, the retailer will charge Rs. 20 for one dairy milk and will earn a profit of Rs 4 per unit. 

• Target-Return pricing: In this price strategy method, the firm tries to determine the price that would give it a specified rate of return on its total costs at an estimated standard volume. This method is used almost exclusively by market leaders or monopolists that seek a fair rate of return on their costs. The target return price can be calculated by the following formula:

Target return price = Total costs + (Desired % ROI investment)/ (Total sales in units).

For instance, if the total investment is Rs. 10,000, the desired ROI is 20 per cent, the total cost is Rs.5000, and total sales expected are 1,000 units, then the target return price will be Rs. 7 per unit as shown below:

Target Return Price=5000 + (20% X 10,000)/ 1000= Rs.7

Thus, the manufacturer will earn 20% ROI provided that unit cost and sale unit is accurate. In case the sales do not reach 1,000 units then manufacturer should prepare the break even chart wherein different ROI’s can be calculated at different sales unit.

Competition-based pricing strategies:

When a company sets prices chiefly on the basis of what its competitors are charging, its pricing policy can be described as competition-oriented. There are two types of Competitive pricing methods: Going-Rate-Pricing and Sealed-bid pricing

• Going-Rate-Pricing: It is a method adopted by the firms wherein the product or service is priced as per the rates prevailing in the market especially on par with the competitors. This type of pricing is mostly followed in Oligopolistic industries where they deal in homogenous goods and in which less variation is seen from one producer to another steel, aluminium, paper, fertilizer, etc., the firms dealing with these usually charge the same price from the customers.

• Sealed-bid pricing: This kind of method is very common in case of Government or industrial purchases, wherein tenders are floated in the market and potential suppliers submit their bids in a closed envelope not disclosing the bid to anyone.

Other miscellaneous strategies

• Discrimination Pricing (or Charging what the Traffic Will Bear): It is a microeconomic pricing strategy where retailer charges different prices to different buyers for the similar quality of goods or services. For example, the price of mineral water bottles varies in hotels, railway stations, retail stores, etc.

• One Price Policy: It is a pricing strategy where a seller offers a same price to all customers who purchase the products under the same conditions. There is no question of negotiation or bargaining. If discounts offered, they are allowed on equal terms to all buyers. This is a fair trade practice and it gains customer’s confidence.

• Variable Pricing: It is a pricing strategy in which the price of a good or servicemay vary based on region, sales location, date, or other factors. Variable pricing strategies adjust product prices to achieve optimal balances between sales volume and income per unit sold based on the characteristics of different categories of points-of-sale.
• Resale Price Maintenance (RPM): It is the policy under which the price of a product or service is fixed by the manufacturer and the retailer is not allowed to sell it at a lower price. The RPM practice is generally followed by the manufacturers of consumer products such as electric appliances, drugs, cigarettes, liquor and sports goods. The basic purpose of this policy is to protect the interest of the manufacturer and to create a good image in the market of the manufacturer and his product.

• Price lining (or Product-line pricing): The method is extensively used by the retailers to separate their products and services into cost categories in order to create various quality levels in the minds of consumers. For example, a retailer of ready-made shirts may sell shirts at three prices: Rs. 100, Rs. 150 and Rs. 250. The first price stands for the economy choice, the second for the medium quality and the third for the super-find quality. The price lining simplifies pricing decisions in the future as retail prices are already set and also increases profitability in the business. This helps the retailer to plan his purchase to suit his price lining. It also simplifies buying decisions by the customers.

• Psychological Pricing (also known as price ending, charm pricing): It is a marketing strategy i.e. based on the theory that prices are fixed in such a way that they have some kind of psychological impact on the buyers. Customary pricing and price lining are the examples of psychological pricing. Another form of psychological pricing is Odd Pricing. Often, retail prices are expressed as “odd prices” viz. a little less than a round number, e.g. Rs. 299, Rs. 999 or Rs. 4,999. In simple words, it is the practice of setting prices slightly lower than rounded numbers. Hence, by this strategy, a company may increase sales without significantly reducing prices.

• Keep-out Pricing: It is a pre-emptive pricing policy which aims at discouraging the others firms in the market to offer substitutes. Generally, this strategy is followed for only one product of a firm. It is very risky venture particularly when the product is offered to the public at a price which is less than the actual cost of production and distribution. This policy can be followed by big firms with huge resources at their command. Though, once the price at a low level is fixed, it may not be possible to increase it because of the fear of other firms introducing the substitutes.