Pricing Strategies

Discount Penetration Pricing

Discount penetration pricing is a strategy designed to keep prices low to shut out potential competition. When used in
an existing market, it creates a price war. The strategy can be very effective for companies that do their market
research carefully and know that they have the resources to make it work. However, it can be difficult to later raise
prices and could result in a higher market share with a lower profit potential.

Market penetration pricing is a pricing strategy that sets a low initial price for a product. The goal is to quickly attract
new customers based on the low cost. The strategy is most effective for increasing market share and sales volume
while discouraging competition. Penetration pricing is most appropriate when demand for a new product is expected
to be high and the product can be easily copied by many competitors. Setting the price low initially discourages
competition from entering the market. It is also an appropriate strategy to use when you intend to become the
market standard, marginalizing the competition. Before implementing a penetration pricing strategy, a supplier should
be sure that it has sufficient production and distribution in place to meet the demand.

Introductory Pricing

Unlike established products in established markets, introducing a new product or breaking into a new market provides
more uncertainties about whether you can recoup your development costs at market rates. Demand for your new,
unique product is uncertain and hard to predict. The same is true of how much market share you can capture in a
fiercely competitive market. Rather than set prices based on technical inputs, such as the cost of production plus a set
mark-up, businesses introducing new products typically rely on a strategy that considers the new market’s threats and
opportunities.

Skimming Strategy

The skimming strategy consists of setting a very high introductory price, and then stepping the price down over time.
A high price helps recoup development costs up front, but in order to successfully use the skimming strategy, your
product and market must have certain characteristics. Your product must have some protection, such as a patent, that
prevents your competition from easily entering the market and undercutting you. Price shouldn’t drive demand.
Potential customers must perceive that your product is worth the price. By decreasing the price over time, you appeal
to additional price-market segments after maximizing revenue from early adopters.

Penetration Pricing Strategy

For markets that have low barriers to entry, if you have no protected features that differentiate your product, and
your goal is to obtain a large market share, the skimming strategy would be untenable. Instead, introducing your
product at a low price differentiates your product in a marketplace full of similar competitors. Typically, penetration
pricing strategy relies on the anticipation that controlling a large portion of the market will provide additional revenue
streams or benefits to offset the discounted price. For example, a video game console manufacturer may offer a new
console for less than cost in a penetration pricing strategy, with the anticipation that revenue from the sale of games
and services to console-owners will recoup the loss on the console.

Intermediate Pricing Strategy

Business leaders should consider their product and market place carefully when deciding what pricing strategy to use.
While the skimming strategy works well for a product that isn’t likely to have a direct competitor, and penetration
pricing strategy works well in a crowded market full of similar offerings, newest products fall somewhere between the
two extremes. Even in a crowded market, your product may appeal to a particular niche. Even a highly protected new
product may have several similar competitors. In the majority of new offerings, businesses use an intermediate pricing
strategy that falls between the skimming and penetration strategies. By considering how the product fits into the
overall market, a company may set a price that is very high compared to some competitors and low compared to
other similar products to establish its product’s niche.
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Pricing Strategy Methods to Influence Competitive Behaviour

Creaming or Skimming

Companies that are the first entrants to a market. or that develop a unique product or service that competitors do not
yet offer, can take advantage of a pricing strategy called creaming or skimming. This involves entering the market at a
high price point to take advantage of early sales before competitors begin replicating the product or service being
offered. But, while this strategy can help to boost revenue, it may not be sufficient to generate enough sales and
awareness among the masses to establish brand preference once competitors emerge, according to Lin Grensing-
Pophal, author of "Marketing with the End in Mind."

Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for a product or service at
first, then lowers the price over time. It is a temporal version of price discrimination/yield management. It allows the
firm to recover its sunk costs quickly before competition steps in and lowers the market price. Price skimming is
sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the
consumer surplus early in the product life cycle in order to exploit a monopolistic position or the low price sensitivity
of innovators. Price skimming is a product pricing strategy by which a firm charges the highest initial price that
customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another,
more price-sensitive segment.

Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as
prices are lowered over time.

Loss Leader

Businesses that want to quickly build market share and build awareness and preference for their products and
services will choose a loss leader pricing strategy. With this strategy, businesses offer their product or service at a very
low price, sometimes even lower than their costs of creating and delivering the product, to generate sales. This can be
a good strategy for businesses that wish to enter a market where there are already a variety of competitors. They
hope to gain rapid awareness among consumers who may be price sensitive and willing to change brands if the price
is right. A loss leader (also leader) is a pricing strategy where a product is sold at a price below its market cost to
stimulate other sales of more profitable goods or services. With this sales promotion/marketing strategy, a "leader" is
used as a related term and can mean any popular article, i.e., sold at a normal price.

One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor
expects that the typical customer will purchase other items at the same time as the loss leader and that the profit
made on these items will be such that an overall profit is generated for the vendor.

"Loss lead" describes the concept that an item is offered for sale at a reduced price and is intended to "lead" to the
subsequent sale of other services or items, the sales of which will be made in greater numbers, or greater profits, or
both. The loss leader is offered at a price below its minimum profit margin—not necessarily below cost. The firm tries
to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how
well the scheme is doing, as quickly as possible, thereby never suffering an overall net loss.

Psychological Pricing

Many businesses and products use a psychological pricing strategy. Consider the price of Starbucks coffee compared
to McDonald's, for instance. The psychological draw of Starbuck's image and upscale brand can move consumers to
spend more for a product than they might otherwise. A psychological pricing strategy must be designed to appeal to
specific consumer desires or fears by developing a distinction between the product your business is offering and what
is being offered by competitors.
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Value Based Pricing

Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived value of a product or
service. Value pricing is customer-focused pricing, meaning companies base their pricing on how much the customer
believes a product is worth. Value-based pricing is different than "cost-plus" pricing, which factors the costs of
production into the pricing calculation. Companies that offer unique or highly valuable features or services are better
positioned to take advantage of the value pricing model than companies which chiefly sell commoditized items.

Perceived-Value Pricing method, a firm sets the price of a product by considering what product image a customer
carries in his mind and how much he is willing to pay for it. In other words, pricing a product on the basis of what the
customer is ready to pay for it, is called as a Perceived-value pricing. The perceived value is made up of several
elements such as buyer’s experience with the product, service support, warranty quality, channel deliverables,
customer support, supplier’s reputation, trustworthiness, etc.

Cost-Oriented Pricing Method: Many firms consider the Cost of Production as a base for calculating the price of the
finished goods. Cost-oriented pricing method covers the following ways of pricing:

Cost-Plus Pricing: It is one of the simplest pricing method wherein the manufacturer calculates the cost of production
incurred and add a certain percentage of markup to it to realize the selling price. The markup is the percentage of
profit calculated on total cost i.e. fixed and variable cost.

E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on total cost, the selling price will be
calculated asSelling Price= cost of production + Cost of Production x Markup Percentage/100

Selling Price=500+500 x 0.25= 625

Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)

Markup pricing- This pricing method is the variation of cost plus pricing wherein the percentage of markup is
calculated on the selling price.E.g. If the unit cost of a chocolate 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 producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per unit.

Target-Return pricing– In this kind of pricing method the firm set the price to yield a required Rate of Return on
Investment (ROI) from the sale of goods and services.E.g. If soap manufacturer invested Rs 1,00,000 in the business
and expects 20% ROI i.e. Rs 20,000, the target return price is given by:

Target return price= Unit Cost + (Desired Return x capital invested)/ unit salesTarget Return Price=16 + (0.20 x
100000)/5000Target Return Price= Rs 20

Thus, Manufacturer will earn 20% ROI provided that unit cost and sale unit is accurate. In case the sales do not reach
50,000 units then the manufacturer should prepare the break-even chart wherein different ROI’s can be calculated at
different sales unit.
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Market-Oriented Pricing Method: Under this method price is calculated on the basis of market conditions. Following
are the methods under this group:

Perceived-Value Pricing: In this pricing method, the manufacturer decides the price on the basis of customer’s
perception of the goods and services taking into consideration all the elements such as advertising, promotional tools,
additional benefits, product quality, the channel of distribution, etc. that influence the customer’s perception.

E.g. Customer buy Sony products despite less price products available in the market, this is because Sony company
follows the perceived pricing policy wherein the customer is willing to pay extra for better quality and durability of the
product.

Value Pricing: Under this pricing method companies design the low priced products and maintain the high-quality
offering. Here the prices are not kept low, but the product is re-engineered to reduce the cost of production and
maintain the quality simultaneously.

E.g. Tata Nano is the best example of value pricing, despite several Tata cars, the company designed a car with
necessary features at a low price and lived up to its quality.

Going-Rate Pricing- In this pricing method, the firms consider the competitor’s price as a base in determining the price
of its own offerings. Generally, the prices are more or less same as that of the competitor and the price war gets over
among the firms.

E.g. In Oligopolistic Industry such as steel, paper, fertilizer, etc. the price charged is same.

Auction Type pricing: This type of pricing method is growing popular with the more usage of internet. Several online
sites such as eBay, Quikr, OLX, etc. provides a platform to customers where they buy or sell the commodities. There
are three types of auctions:

1. English Auctions-There is one seller and many buyers. The seller puts the item on sites such as Yahoo and bidders
raise the price until the top best price is reached.

2. Dutch Auctions– There may be one seller and many buyers or one buyer and many sellers. In the first case, the top
best price is announced and then slowly it comes down that suit the bidder whereas in the second kind buyer
announces the product he wants to buy then potential sellers competes by offering the lowest price.

3. Sealed-Bid Auctions: This kind of method is very common in the 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.

Differential Pricing: This pricing method is adopted when different prices have to be charged from the different group
of customers. The prices can also vary with respect to time, area, and product form.

E.g. The best example of differential pricing is Mineral Water. The price of Mineral Water varies in hotels, railway
stations, retail stores.