A price is the cost set by a company for a product. Pricing is significant in the business as it determines the profit margins. Thus, we must follow an optimal pricing strategy for our brand. This article presents the different types of pricing strategies for a business.
Pricing strategy is a method used by the company to set an optimal price. The following points answer the basic question of ‘how to set price for a product’:
1. Premium Pricing
- Premium pricing is a pricing strategy for a business which involves setting high price for a product. The high price is set in order to communicate a feeling of exclusivity to the buyers.
- It is also called image pricing and prestige pricing.
- Everybody looks for low cost products these days. However, a premium pricing strategy involves setting a high price. Therefore, a premium pricing strategy must be effective enough to drive the customers towards sale. You should emphasize on the quality of your product in order to convince the customers.
- Once you set a high price, maintain consistency in price and quality to convey a feeling of superiority.
2. Penetration Pricing
- Penetration pricing strategy is a strategy that involves setting a low price for your product or service. The low price is set initially to capture a wide segment of the market.
- The strategy behind Penetration pricing is attracting the customers by offering them low prices. The market share of the company will surely increase in the initial stages along with the sales volume.
- A simple answer to ‘how to set price for a product’ under Penetration pricing is setting a low price.
- The disadvantage of Penetration pricing strategy for a business is that profits may not rise proportionately to the sales volume due to a low price.
3. Economy Pricing
- Economy pricing is a pricing strategy for a business which involves cutting down of various costs in order to keep the product prices low.
- It is a useful way to increase the market share, sales volume and the profits. It is applied by stores like Wal-Mart in a successful manner.
- Example of Economy pricing is that the price of generic food products is particularly kept low owing to their reduced promotional expenses.
- The effectiveness of this technique varies from business to business. It might not benefit the small companies due to their low sales volume.
4. Price skimming
- Price skimming is a pricing strategy which involves setting the price of product high initially. This is followed by gradually lowering the price of the product.
- Initially, the company is able to capture the market segment which doesn’t mind paying high prices.
- As the price is lowered with time, the price sensitive consumers are captured too. This is one of the most effective pricing strategies for a business.
- The manufacturers of digital watches used price skimming strategy in 1970. The competition increased which led to more innovation and development.
5. Psychological Pricing
- Psychological pricing is a pricing strategy which targets the emotional mindset of a buyer, rather than the logical mindset.
- The customer’s psychology is one of the major concerns of the strategy. E.g., setting the price of the product @ Rs.99 rather than Rs.100.
- It involves setting of prices in accordance to the customer’s psychology. This can be simply done by reducing the left digits by one.
- The key to successful implementation lies within understanding the consumer’s psychology and setting of prices accordingly.
6. Bundle Pricing
- Bundle pricing is a pricing strategy which involves selling products in a bundle. It is offered at a lower price as compared to when the products in the bundle are purchased individually.
- The key strategy behind bundle pricing is based upon consumer surplus. A consumer prefers to buy those goods which maximize his satisfaction. Moreover, high consumption adds up to his satisfaction level.
- Moreover, products in a bundle offer convenience to the consumers. E.g. the combos in McDonalds are more appealing to us than buying everything in the combo individually.
The above points provide a basic understanding of the six pricing strategies for a business and answers to the question ‘how to set price for a product’. You should apply the suitable pricing strategies according to your company’s operation level. Optimal application of the pricing strategy is one of the most important aspects involved in the growth of an organisation.