What Is A Pricing Strategy?

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The term ‘pricing strategy’ refers to the method which companies make use of in order to price their products or services. Nearly all companies, large or small, base the price of their products and services on production, labour as well as advertising expenses. They then add on a specific percentage so that they can make a profit.

There are a few distinct kinds of pricing strategies – such as penetration pricing, price skimming, discount pricing, product life cycle pricing as well as even competitive pricing – which can be utilised. In this article, we’ll have a look at them.

Penetration-Pricing Strategy

A small company which uses penetration pricing typically sets a low price for its product or service in the hopes of building market share, in other words, the percentage of sales which a company has in the market as opposed to total sales.

The main objective of penetration pricing is to attract lots of customers with low prices and then utilise various marketing strategies in order to retain them. For instance, a small Internet software distributor may set a low price for its products and then email customers with more software product offers every month.

A small organisation will work hard in order to serve these customers so that they can build brand loyalty.

Price Skimming Strategy

Another kind of pricing strategy is price skimming. In terms of this, a company sets its prices high in order to quickly recover expenditure for product production and advertising. The main aim of a price-skimming strategy is to achieve a profit quickly.

Companies often make use of price skimming when they lack financial resources that are needed in order to produce products in great volumes.

Product Life Cycle Pricing

All products have a life span, which is called product life cycle. A product gradually goes through different stages in the cycle:

  • Introduction,
  • Growth,
  • Maturity, and the
  • Decline.

Throughout the growth stage, when sales are booming, a small business usually will keep prices higher. For instance, if the company’s product is unique or of higher quality than competitive products, customers will likely pay the higher price. A company that prices its products higher in the growth stage also may have a new technology that is in high demand.

Competitive-Based Pricing

There are times when a small organisation may need to lower its price in order to meet the prices of competitors. A Competitive-Based Pricing Strategy may be used when there is little difference between products in an industry. For instance, when people purchase paper plates, foam cups for a picnic, they often shop for the lowest price when there is minimal product differentiation.  Consequently, a small paper company may need to price its products lower or lose potential sales.

Temporary Discount Pricing

Small companies also may use temporary discounts in order to increase sales. Temporary discount pricing strategies include coupons, percentage-off sales, seasonal price reductions and even volume purchases. For instance, a small clothing manufacturer may offer seasonal price reductions after the holidays to reduce product inventory. A volume discount may include a buy-two-get-one-free promotion.

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