Pricing strategies emerge as one of the most vital and indispensable tools in the success of a business throughout the world.
Particularly, in the present intricate business environment, studying markets and assigning the best price is a strategic imperative. Pricing strategies have a significant impact that can directly influence consumer perception and profitability.
In today’s dynamic and competitive market environment, businesses employ various pricing strategies to achieve their unique goals. These strategies are often planned based on the factors such as market conditions, consumer behaviour, production costs, competition, and overall business objectives. For consumers, the key consideration of the price of a product is whether they can afford it. The price predominantly decides the accessibility to a product depending on the purchasing power of the consumer. Therefore, affordability plays the most crucial role in determining the price of a product in a business.
Most often the price sensitivity of a customer segment is crucial to sustain healthy revenue growth. Customers invariably evaluate the price tag prior to the purchase of every product. Hence, setting competitive prices that align with consumers’ financial capacity makes a business more competitive and that can enhance both affordability and accessibility.
Price is the fundamental basis of comparison among consumers when they purchase any product or service. When making purchasing decisions, they often compare the prices of similar products or services to evaluate which option offers the best value for their money. These comparisons enable consumers to assess possible cost savings and affordability.
Pricing
For businesses, pricing is one of the most important elements in revenue generation, profitability and growth. Setting up prices based on the market information and consumer behaviour optimises the revenue stream.
Pricing, in most markets, decides the competitive advantage. A careful analysis of market dynamics makes companies determine more competitive prices and gain more market share. The right pricing strategy can help businesses capture market share, increase customer loyalty, and establish themselves as a preferred choice in the minds of consumers.
Cost-plus pricing is perhaps the commonest pricing strategy used mostly by micro, small, and medium-scale businesses, particularly those in retail trade. Also known as ‘markup’, the price is determined by adding an amount to the calculated unit cost.
Usually, cost plus strategy ignores the competitive prices and other external factors. This makes it inappropriate for many types of businesses. Also, due to the inflexibility of this approach, the strategy may not be responsive enough to react to sudden price fluctuations of the market.
For example, retail businesses such as clothing, grocery, and department stores often use cost-plus pricing. In these cases, there is variation in the items being sold, and different markup percentages can be applied to each product. Hence, this strategy is most effective in less competitive markets in industries where costs are relatively stable and predictable.
Value-based pricing, a method that is popular at present as well, aligns with customer perception that invariably led to higher satisfaction. In this strategy, consideration is primarily for the perceived value of the customer rather than the cost of the product. This method can maximise profits by charging what the market will bear.
The value-based pricing method is most effective for products with a strong brand identity, unique features, or in markets where customer experience and perception are critical. However, setting up the price of a product at times can be a complex exercise due to the difficulty of determining the perceived value of the target segments.
Competitive pricing methods
Most of the companies catering to price conscious markets, where products are relatively similar, choose competitive pricing methods to gain consumer attention. By aligning prices with competitors, businesses can remain competitive and attract price-sensitive customers. This can lower the effort and marketing costs of the company as comparatively less research is done on consumer behaviour and market trends. The pricing of products is done by simply focusing on competitor prices prevailing in the market. However, businesses must be alert and sensitive to possible price wars that can damage the flow.
The price penetration strategy is best at the launching period of a product where businesses offer low prices to enter a highly competitive consumer market. The strategy is to focus on increasing the customer base to an acceptable level by providing a low price and gradually increase when the product is established.
Price penetration strategy helps companies to make rapid market entries by offering low prices where large numbers of customers can be drawn in a short time. Also, by setting a low price, businesses can deter competitors from entering the market. As a negative, the low prices offered can result in minimal profit margins that can impact operational aspects of the seller.
Skimming pricing is a method used by many organisations where high prices are set at the introductory stage and lower it gradually to lure customers. The primary intention of the strategy is to draw early users to maximise profits. Skimming pricing is most effective for innovative or luxury products where there is little initial competition and strong demand from early adopters.
Harmful
Skimming increases profits significantly at the initial stage when high-end customers are willing to pay a premium for a new and unique product. However, high initial prices can attract the attention of the competitors who may offer similar products at lower prices, which can be harmful. Also, price skimming may draw a limited number of customers.
Dynamic pricing strategy that involves frequent adjustments based on real-time demand, competition, and other external factors, is significantly popular in e-commerce and businesses such as airlines, tourist hotels, and entertainment.
These organisations scrutinise the market behaviour and sensitivities of their customers deeply and intensely and adjust prices as often as possible.
Companies can entice customers to accept lower prices that are often tied with promotions to enlarge the base and maximise profits. Dynamic pricing also allows businesses to respond quickly to changes in the market or competitor actions.
Yet, this method may invite unwanted backlash through those who purchased at higher prices which can lead to customer dissatisfaction and harmful negative public response. Also, the business operation that adopts dynamic pricing strategy must be technologically capable to manipulate the complexity of algorithms.
Premium pricing, also known as prestige pricing means setting up prices higher than the common market average. Companies create a unique image of the brand to create a perception of exclusivity, quality, and/or luxury to a target prospective clientele. This strategy is often used by products that are positioned as high-end.
Premium pricing, or prestige pricing, involves setting prices higher than the market average to create a perception of quality, exclusivity, or luxury. This strategy is often used by brands that want to position themselves as high-end.
Premium pricing is most effective for luxury goods, niche markets, or products with strong brand identities. The risk of premium pricing is that if the customer’s perceived value does not match the prices, they may look elsewhere and purchase from competitors.
Pricing strategy
In modern markets, selecting the right pricing strategy is a complex but an essential task that can significantly impact a company’s success. Each strategy has its advantages and is suited to different market conditions, customer segments, and business objectives. Companies must carefully assess their products, market environment, and competition to choose a pricing strategy that aligns with their overall goals. While traditional strategies such as cost-plus and competitive pricing provided a solid foundation, modern approaches are more dynamic and mostly customer centric. The prevailing pricing models are a combination of traditional and modern concepts where technology and data analytics are leveraged. In this technological era, new methods make businesses to optimise their pricing to cater advanced and more demanding customers.
