Pricing Strategies- An Overview

1. Pricing Strategies- an overview Setting a price is the first step of any processes of selling. However, pricing strategy takes into account many things for an effective outcome. While planning a pricing strategy sellers should think about a number of factors. There are a few pricing strategies, which are discussed here.  Pricing strategy is mainly about adjusting the prices. The goal of a pricing strategy is to establish an optimum price with maximization of the current profit, maximization of the sold number of units etc. Pricing strategy is beneficial for a number of reasons  • To deal with the heterogeneous characteristic of customers. Their purchasing behavior and willingness to pay all varies over time and customer to customer. They are also attracted by various benefits offered by the same kind of products. • High demand variability and uncertainty that guarantees a booming revenue to those, proficient in pricing. • Rigid production that boosts playing with prices when demand varies. Pricing strategy is mainly about adjusting the prices. The goal of a pricing strategy is to establish an optimum price with maximization of the current profit, maximization of the sold number of units etc.  Therefore, setting a price is the first step of any processes of selling. However, pricing strategy includes more. It tries to take advantage of:

3. Time by playing with factors related to seasonality of demand,  • Preferences and purchasing behavior of Customers  • Spectrum of available products. These factors play the most important role when pricing is concerned and not exclusive. As mentioned by Talluri and Van Ryzin, 2004, pricing strategy is beneficial for a number of reasons: • To deal with the heterogeneous characteristic of customers. Their purchasing behavior and willingness to pay all varies over time and customer to customer. They are also attracted by various benefits offered by the same kind of products. • High demand variability and uncertainty that guarantees a booming revenue to those, proficient in pricing. • Rigid production that boosts playing with prices when demand varies. 1. High and low price strategies: High price is accepted where the value of the product perceived by the customers is agreeable, otherwise such a pricing strategy may lead to commercial failure. High pricing is more acceptable in luxury industry.

4. Low pricing strategy depends on the number of clients attracted by the product as the low margin can be compensated by a higher number of sold items. A low price strategy is particularly successful in the food retailing sector. 2. Adjustable strategies: • Market segmentation/Price discrimination strategy: Market segmentation is defined as the development of a plan that depends on the fact that different customer groups attach different levels of importance to different benefits offered by a product or service type. For example, the same car model may be offered in different versions (two-door or four-door, varied engine powers, different finishing levels, etc.), and each variety may attract a specific group of customers. II. Discount Strategy: A discount strategy consists in selling a particular set of items at a reduced cost for a limited time. This reduction in price is expected to generate enough supplementary sales that will compensate the reduction in income. However, many companies realize that when a discount is offered for a given span of time, it applies to all sales often leading to unsuccessful consequences

5. III. Price Skimming: In this strategy, at first a relatively high price is set, and then it is lowered over time. Price skimming is usually applicable when customers are comparatively less price sensitive (for example, clients of cosmetic industry) or when they are attracted to some innovation (particularly electronic items like computers). IV. Penetration Pricing:  Penetration pricing strategy consists of setting the initial price lower than the one of the market. It is expected that this price is low enough to break down the buying habits of the customers. The goal is to gain a larger market share. Penetration pricing is helpful to lead to cost reduction pressure and discourage competitors’ entry. V. Yield management/revenue management:  Yield management anticipates behaviors of customers and competitors in order to maximize revenue. Companies if use yield management have to review occasionally earlier situations to examine the effects of events on previous customers and competitor behaviors.

6. Key Points • High price is accepted where the value of the product perceived by the customers is agreeable, otherwise such a pricing strategy may lead to commercial failure.  • Low pricing strategy depends on the number of clients attracted by the product as the low margin can be compensated by a higher number of sold items.  • A discount strategy consists in selling a particular set of items at a reduced cost for a limited time.  • Price skimming is usually applicable when customers are comparatively less price sensitive or when they are attracted to some innovation. • Penetration pricing is helpful to lead to cost reduction pressure and discourage competitors’ entry. • Yield management anticipates behaviors of customers and competitors in order to maximize revenue.  Published by Brainware University