An essential factor that impacts a company’s revenue is the price. It serves as the primary determinant in the financial modelling of the business and has a long-term effect on its revenues, earnings, and investments. Price reveals a company’s idea, how it deals with competitors, and how much importance it places on its customers.
Pricing strategies are generally used by businesses to determine how much they should charge for their products and services. When pricing products, it is necessary to consider the relationship between margin, price, and selling level. Therefore, creating an effective pricing strategy that promotes business success is both needed and challenging.
These strategies usually change as a product goes through its life cycle. If a company is trying to change the price of an existing product to gain more customers, it uses different price adjustment strategies including Segmented Pricing, Discount and Allowance Pricing, Psychological Pricing, etc.
Price Adjustment Strategies
In the case of existing products, the following strategies can be used by a business to price its products:
1. Discount and Allowance Pricing:
Most businesses change their base price to give discounts to consumers who pay their bills early, buy in bulk, or shop off-season. Discounts are incentives given to customers, usually in an effort to get them to buy something from the business repeatedly. Allowances are the price reduction or discount given by a manufacturer to a member of the marketing channel in exchange for special promotion of a specific product.
Discounts and allowances, often known as price adjustments, can take different forms:
- Quantity Discounts: This discount is offered to customers who buy multiple units, at a discounted rate. A reduction from the list price for the buyer’s total purchases done during the specified time period is known as a cumulative quantity discount. A reduction in list price that applies to a single order, not to the total amount of orders placed over the course of a given time period is known as a non-cumulative quantity discount.
- Cash Discounts: A cash discount is a price reduction given to buyers who pay their bills on time. For instance, the seller can subtract 5% from the bill if the payment which is due within 30 days, is paid within 15 days. A cash discount is a price decrease for buyers who purchase in large quantities. Such discounts encourage customers to purchase more from a single seller rather than from a number of different sellers.
- Functional Discounts: The seller provides a functional discount (also known as a trade discount) to trade-channel attendees who carry out certain tasks including selling, storage, and record keeping.
- Seasonal Discounts: A price reduction for customers who buy goods or services out of season is known as a seasonal discount. For instance, to encourage early buying ahead of the busy spring and summer selling seasons, air conditioner manufacturers provide seasonal discounts to stores during the winter. Seasonal discounts enable the manufacturer to maintain consistent output throughout the year.
- Promotional Allowance: It is an incentive given to a dealer for marketing the goods of the manufacturer. It serves as a pricing tool as well as a marketing tool. For instance, A manufacturer is required to cover half the cost of advertisements that retailers run for their products.
2. Segmented Pricing:
The basic prices of the companies are frequently adjusted to allow for variances in consumers, products, and locations. In segmented pricing, a business offers a product or service at two or more prices, even if the price variation is not based on cost differences. There are various types of segmented pricing.
- Customer-Segment Pricing: Different customers pay different prices for the same product or service when using customer-segment pricing. For instance, senior citizens pay half the regular ticket price on the railways, and Spotify charges less from students on its subscription.
- Product-Form Pricing: It refers to how different product variants are priced differently, which is not based on their respective cost differences. For instance, different colours of smartphones are priced differently according to differences in demand, not cost.
- Location Pricing: A business uses location pricing to set different prices for various locations, even when the cost of providing each location is the same. For instance, different prices are charged for tickets in a movie show which are based on the preferences of customers for different locations.
- Time pricing: A company adjusts its prices according to the time of year, the month, the day, and even the hour. Some public utilities have different rates for business customers depending on the day of the week and the weekend. For instance, A Water Park charges ₹1500 from a customer on weekdays, but it charges ₹1800 from a customer on weekends. This is called time-based pricing.
3. Psychological Pricing:
The purpose of psychological pricing is to create a special appeal for consumers. When customers can determine the quality of a product by investigating it or drawing on previous experience, they use price less to judge quality. Price plays a key role in indicating quality when customers are unable to assess it because they lack the knowledge or expertise. Reference pricing, which refers to the costs that consumers hold in their minds and use while considering a particular product, is another component of psychological pricing. The reference price can be determined by recording current prices, recalling prior prices, or appraising the purchasing situation. When determining pricing, sellers can have an impact on or use the reference prices of these customers. The different types of psychological pricing are as follows:
- Pricing that ends in either an odd or even number is known as odd/even pricing.
- Reference Pricing refers to the idea of what a product’s price should be based on the frame of reference of the consumer.
- Prestige Pricing refers to selling products at a premium in order to establish a reputation for quality.
4. Promotional Pricing:
Companies use promotional pricing to temporarily reduce the list price of their products, sometimes even below the cost, in an effort to increase consumer demand and a sense of urgency. There are various variations of promotional pricing. Several products are sold at a loss at supermarkets and department stores to draw customers in with the intention that they will purchase other items at regular markups. Under this strategy, a business uses the following price strategies to encourage early purchases:
- Complementary Pricing: A company that sells one or more of its goods to customers who have high transaction costs can adopt complementary pricing. Transaction costs include all costs incurred by a customer in order to purchase a product, such as the registration fees that a flat buyer must pay in order to become a legal owner or the processing fees that the bank may charge to provide the customer with a credit card.
- Loss Leader Strategy: This is a further example of the complimentary pricing strategy. According to this strategy, a well-known brand’s price will be reduced in order to increase demand or traffic at the store. Supermarkets and department stores frequently reduce the prices of well-known brands in order to increase store traffic. For example, Vishal Mart offers customers products (from groceries to electronics) at a low price.
- Pricing for Special Events: During specific seasons, sellers set special prices in order to attract customers.
- Cash Refunds: Automobile manufacturers and other consumer goods manufacturers give cash refunds to encourage the purchase of their items within a certain time period. Rebates allow sellers to clear inventories without lowering the stated list price.
- Low-interest Financing: The business could provide low-interest financing to customers rather than lowering prices. For instance, to attract customers, automakers have even introduced zero-interest financing.
- Warranties and Service Contracts: Businesses can increase sales by including a free or low-cost warranty or service contract.
5. Geographical Pricing Strategy:
This strategy aims to take advantage of economies of scale by pricing the product at a lower price than the competition in one market and using a penetration strategy in the other. The former is referred to as second-market discounting. It is a part of the differential pricing strategy, in which the company either dumps or sells below its cost in the market to make use of its current surplus capacity. Accordingly, a company may use a global pricing strategy where it charges a premium in one market, a penetration price in another, and a discounted price in a third. It includes:
- FOB-origin Pricing: In the FOB practice, goods are placed free onto a carrier at a specific location, which is why it’s called FOB (Free on Board). The customer takes responsibility and ownership of the items and also pays the transportation costs from the factory to the destination. Those who support this pricing approach consider it a fair way to calculate freight expenses since each customer covers their own costs. However, it can be costly for customers who are far away, which is a disadvantage.
- Uniform-delivered Pricing: This pricing method is the inverse of FOB pricing. Under this, regardless of the customer’s location, a business charges the same amount for all customers plus freight fees. The freight fee is determined by the average freight rate. The benefits of uniform-delivered pricing include the fact that it is relatively simple to implement and allows businesses to advertise their prices nationally.
- Zone Pricing: The zone price lies between the FOB-origin price and the uniform delivered price. Under this, a business creates multiple zones with a consistent price for all the customers in each zone. The farther the zone, the higher the cost. As an example, a paper product company could set up three different zones: the East, where all customers are charged ₹25,000 for goods; the Midwest, where ₹15.000 is charged; and the West, where ₹10,000 is charged.
6. Dynamic Pricing:
Dynamic pricing, also known as surge pricing, demand pricing, or time-based pricing, is a business tactic that adjusts prices based on fluctuations in demand. This approach can often benefit customers by aligning prices with market forces. However, marketers need to be cautious not to misuse dynamic pricing to take advantage of certain customer groups or harm valuable relationships with customers.
For instance, Indian railways may adapt seat rates based on seat type and the availability of seats. In certain situations, customers may need to obtain a ticket urgently, such as one or two days before the scheduled travel date. The ticket booked on these days is known as a ‘tatkal ticket’ and booking it may require an additional fee.
7. International Pricing:
Companies that sell their goods around the world have to figure out the prices to charge in the various markets where they operate. A business may in some cases set a uniform global price. However, the majority of businesses modify their prices according to cost factors and local market conditions.
The price that a business should charge in a particular country is determined by a variety of factors, including economic conditions, competitive situations, rules and regulations, and the growth of the wholesale and retailing system. Additionally, customer perspectives and preferences may differ from country to country, which requires different prices. Alternatively, the business can have different marketing objectives in various worldwide markets, which demand changes in its pricing strategy.
For instance, Samsung might launch a new product in a highly developed market with the aim of fast capturing mass-market share; which necessitates using a penetration-pricing strategy. On the other hand, it might enter a market that is less developed by concentrating on smaller, less price-sensitive sectors using a market-skimming pricing strategy.