The philosophy of price
Pricing a product or a service is a tougher act than it seems. As consumers, we come into contact with ready set prices on a daily basis, but seldom consider the process that was carried out to arrive at them. The pair of shoes that you bought for $39.99 was priced as such to not only cover the cost of the material inputs and the human labor required to make them, but there were very likely some other considerations as well.
The process through which managers and decision makers in a business arrive at the price of their product is called its ‘Pricing Strategy’. Such strategies have to be employed because every business entity is faced with several constraints in their attempt to maximize their profits. These constraints include competitor’s prices, industry conditions, company’s relative power in the market, income level of customers, perception of the product etc.
The various pricing strategies
There are several different strategies that businesses around the world employ in order to arrive at the best price for their product, following are the most widely used ones:
Penetration pricing is when the price is artificially set very low. This strategy might seem counter intuitive but is very effective in certain conditions such as launching a product into an already competitive market.
Promotional pricing is the reduction of the price for a certain time period. It is done either to increase the accessibility of a product to price sensitive groups or to clear out a certain stock of a product. This strategy is practiced in the form of sale extravaganzas, discount coupons, and money-off vouchers.
Price discrimination is the strategy of charging different prices for different customer segments a product has. This strategy can be effective in increasing the profits earned from a product, especially when the various customer groups can be identified and separated.
Price skimming is when a considerably higher price is charged for a product. It is usually done for products that are a new invention or ones that offer something unique so that the customers are willing to pay the higher amount. Skimming is often employed to reimburse research and development costs that had to be incurred for a product.
Pricing that is aimed to have a positive psychological impact on the minds of customers. For example, charging $99 instead of $100 –although a difference of one dollar- can increase the sales by a considerably larger amount since the two figure cost instead of a three figure one makes the perception of it being much cheaper.
A pricing strategy for your business
What is important to remember about the above mentioned pricing strategies is that they are effective and relevant under certain external factors that include conditions of the economy, the market and the competitors. To come up for an optimum price for your product you’ll have to keep updated with these various conditions or alternatively, you can make use of consulting firms that help incorporate this information into your price.