Types of Pricing Strategies

Types of Pricing Strategies

Cost-Plus Pricing

  • The cost-plus pricing involves setting the selling price by adding a markup to the unit cost.
  • This strategy guarantees that each product sold will cover its cost and provide a profit.
  • It provides simplicity and certainty, but ignores market conditions and customer perceived value.

Penetration Pricing

  • Penetration pricing involves setting a low initial price to attract customers quickly and capture a large portion of the market.
  • The objective of this strategy is high volume and fast market penetration.
  • The risk is that the low price can be associated with low quality.

Skimming Pricing

  • Skimming pricing is the strategy of setting a high initial price to maximise profits from early-adopting consumers.
  • This is often used during a product launch, where a new, innovative, or much-improved product is offered to the market.
  • It allows maximum profit early in the product lifecycle, but it may impair market entry and attract competitors.

Competitive Pricing

  • Competitive pricing involves setting a price based on what competitors are charging.
  • This strategy could be used if the product is similar to those offered by competitors and consumers are likely to shop around.
  • The business needs to understand the competitive landscape and constantly monitor competitor pricing changes.

Psychological Pricing

  • Psychological pricing aims to influence a customer’s perception of the product price.
  • Common methods include price points just below the whole numbers (i.e., £4.99 instead of £5.00) to make it seem cheaper, or premium pricing to create a sense of luxury or high-quality.
  • This strategy relies heavily on customer’s emotional responses or perceptual biases.

Demand Pricing

  • Demand pricing is a strategy that involves setting the price based on the level of demand.
  • High demand allows higher prices and vice versa.
  • This approach can be useful for products or services where demand is highly variable or seasonal.

Significance of Understanding Pricing Strategies

  • Understanding the different pricing strategies allows a business to make informed decisions on how to price its products to maximise profitability and market position.
  • The chosen pricing strategy must be consistent with the business’s overall objectives, marketing mix, and market conditions.
  • A proper pricing strategy can be a critical feature in determining the success or failure of a product in the marketplace.