Pricing strategies

Definition of Pricing Strategy

A pricing strategy is a method businesses use to set the price for their product or service.
The chosen strategy is typically guided by market conditions, cost of production, and the business’s overall objectives.

Types of Pricing Strategies

Cost-plus Pricing

Also known as markup pricing, this strategy sets the selling price by adding a predetermined percentage to the total cost of production.

Competitive Pricing

Businesses set the price of their products or services based on what their competitors are charging.
Companies can choose to price their goods at, above, or below their competitors’ prices.

Penetration Pricing

Businesses aim to attract customers by setting lower prices when launching a new product or entering a new market.
Prices can be increased once a significant customer base or market share is achieved.

Price Skimming

A strategy where businesses set high initial prices for new innovative products, targeting early adopters ready to pay a premium price.
The price is gradually reduced over time, widening the customer base.

Psychological Pricing

Utilises customers’ emotional responses to pricing, such as setting prices slightly below a round figure (e.g. £9.99 instead of £10) to make the price seem cheaper.

Factors Influencing Pricing Strategies

Market Demand

The level of market demand influences the price of a product. High demand can justify higher prices, while lower demand may require pricing adjustments.

Cost of Production

The costs involved in producing a product will affect its selling price. These costs include materials, labour, and overheads.

Competition

The pricing strategies of competitors will impact a business’s own pricing approach.
Businesses need to be aware of competitive prices to meet or exceed customers’ value expectations.

Company Objectives

A company’s pricing strategy must align with its broader objectives.
For instance, a company aiming for rapid market penetration may initially set low prices.

Economic Conditions

Influences such as inflation, economic growth and consumer confidence can impact the effectiveness of pricing strategies.

Importance of Pricing Strategies

Setting the right price is crucial as it determines the business’s profit margins and influences the perception of the product in consumers’ minds.
An effective pricing strategy can help achieve a variety of objectives including maximising profits, increasing sales, or establishing a strong presence in the market.
Pricing strategies are a vital part of a company’s complete marketing mix and contribute to building a strong brand identity.