The pricing decision you make is part of your business’s marketing mix. It can differentiate your product from the competition. Here are eight major pricing methods and strategies. Which applies to you?
- Cost Plus: This is the simple method of taking your costs and adding a desired profit margin. It is the crudest method and most ignorant of what is happening in your market place.
- Penetration Pricing: A company will use this to grab market share and control a market as the low-cost producer.
- Perceived Value to the Consumer: Here your customers believe that they are getting good value from your products or services. The pricing of replacement parts is an example where this is applied.
- The Price/Quality Relationship: The perception of quality in a product sometimes dictates it price – for example, the pricing of luxury items such as jewellery or perfume are based on attributes of style and workmanship.
- Skimming: Early in the life cycle of a product, companies can often charge a high price. They then skim high margins from a new and novel product or service. The extra benefits will recover the initial development costs of the product.
- Price Based on the Price Elasticity of the Buyer: Sometimes a pricing policy needs to be aware of the sensitivity to price of consumers. Some products are more price elastic than others. For example, tobacco users often absorb price increases than forgo their habit.
- Meeting Competition: This is a decision to employ a pricing strategy to match or beat the prices of competitors. This is to gain or retain market share in a competitive market.
- Meeting Profit Goals Based on the Size of the Market: In a tight market, a price has to be set to justify the marketing and manufacturing effort. The alternative is to find another marketplace!