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Pricing Strategies - How would you price your product ?

Published on Saturday, November 15, 2014
Today’s topic in Marketing Awareness is – Pricing Strategies, which happens to be my personal favourite!

Pricing strategies deal with – how a product should be priced. There are many types of pricing strategies, nowadays there are hybrid strategies – even you can come up with one if you like!

But we are going to read about 5 basic types, why they are called so and on which product they will be applicable.

Check the updated syllabus for IBPS SO Marketing

1. Penetration Pricing

Penetration Pricing: is aimed towards penetrating the market, and to ensure a strong foothold for years to come.

Whenever a new product is introduced and the company’s aim is to increase its consumer base - a low price for the new product or service is offered during its initial stages/ introduction period, in order to attract as many as customers and away from competitors.
The reasoning behind this marketing/ pricing strategy is that the customers will buy and become aware of the new product due to its lower price in the marketplace.
Penetration pricing is thus lower pricing of new products to gain a large consumer base – it can often increase both market share and sales volume.

2. Skimming Pricing

Skimming Pricing aims are recovering the cost of production – it is a high-pricing strategy.

Also known as ‘creaming price strategy’ – goods which have a very high cost of production, such as state-of-the-art medical equipment, some new drug with limited licence, new model of Ferrari etc., are introduced into the market at very high prices.

This high price is over and above the cost of production, so it takes fewer sales to achieve break-even point.

These products have a limited market – the ‘cream layer’ of the market – i.e., ‘skimming’ the market – people/customers who are able to afford these products and are willing to pay the higher price for the products.

3. Predatory Pricing

Predatory Pricing: aims at the elimination of competition by setting prices lower than the competition.
It is like encroaching and eating up the other company’s consumer base like a predator!

And it can lead to price wars – like the one we recently witnessed in India with regards to airline fares and call rates! Price war is when companies continuously lower prices of their products to undercut the competition.

In the short term, a price war can be beneficial for consumers because of the lower prices, which is great! But in the long term, it can come back to bite us – as the company that wins a price war, effectively has put its competitors out of business – which means it now has monopoly and can set whatever price it wants!

4. Premium Pricing

Premium Pricing: aims at keeping the price of a product or service artificially high in order to create/ encourage favorable perceptions among buyers towards the product, based solely on the price.

We the buyers have a tendency to think that any highly-priced product is worth the price in quality; high price = great quality.

I always have this mental block that Apple Laptops are better than any other because they are so costly! People who’ve used Mac and Windows OS say – it’s easier and better to use a Windows-based laptop as they are much more user-friendly!

Thus if a firm introduces a product priced high, people will automatically think it is far superior in quality than the others – and go for it – that is who can afford it!

5. Premium decoy pricing

Premium decoy pricing: when iPhone 6 was launched in India (and elsewhere) last month, it was introduced at Rs.54,000 – Rs.62,000/- Diwali and iPhone 6!

But what actually happened is – people went out in hordes to buy iPhone 5, because its price was lower in comparison (it also fell by some grands too!) – but I am not saying they used this pricing method!

Premium pricing decoy is also used to - organization artificially sets one product price high, in order to boost sales of a lower-priced product.

6. Competitive Pricing

Competitive Pricing: is keeping up with the competition. All the soap bars/ chocolates/ chips/ cold drinks/ tooth pastes etc. of the various brands and companies all come within a difference of 2-3 rupees.

Here a new market entrant prices his product based on what the competition has priced their products at. If you can’t beat ‘em, follow ‘em!

That is all for today…

Hope you found this interesting and informative!

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ramandeep singh

Ramandeep Singh, your guide to banking and insurance exams. With 14 years of experience and 5000+ selections, Ramandeep understands the path to success, having transitioned himself from Dena Bank and SBI. He's passionate about helping you achieve your banking and insurance dreams.

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