One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Pricing also affects other marketing mix elements as well, such as product features, channel decisions, and promotion. A pricing strategy is a course of action designed to achieve pricing objectives. This strategy helps marketers set prices. There are many ways to price a product. The following, figure 1.1, shows a list of five major types of pricing strategies. (Business, 8th Ed., pg 421)
There are two primary types of new product pricing strategies, price skimming and penetration pricing. An organization can use one or both of them over a calculated period of time.
Price Skimming involves charging the highest price possible for a short time where a new, innovative, or much-improved product is launched onto a market. The objective with skimming is to “skim the cream” off customers who are willing to pay more to have the product sooner. Prices are lowered once demand falls. (Business, 8th Ed., pg 422)
Penetration Pricing is the opposite extreme; it involves the setting of lower, rather than higher price for a new product. The main purpose is to build market share quickly. The seller wants to discourage competitors from entering the market by building a large market share quickly. (Business, 8th Ed., pg 422)
Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. For this to be effective, the market must have multiple segments with different price sensitivities. Differential pricing can happen in several ways: negotiated pricing, secondary-market pricing, periodic discounting, and random discounting. The following describes two of the ways.
Negotiated Pricing happens when the final price is established through bargaining between the seller and the buyer. This occurs in various industries and at all levels of distribution. Prices are normally negotiated for houses, cars and used merchandise. (Business, 8th Ed., pg 423)
Periodic Discounting is the temporary reduction of prices. This normally happens when retailers have holiday sales or seasonal sales. The downside of this is that customers can predict when the price reductions will occur and hold off on buying until the sales take place. (Business, 8th Ed., pg 423)
Psychological pricing is a marketing practice based on the theory that certain prices have a psychological impact. This method is designed to encourage purchases that are based on emotional rather then rational responses. The following describes two of the methods.
Reference Pricing happens when a product is priced at a moderate level and placed next to a more expensive model/brand in hopes that the customer will use the higher price as a reference. The seller hopes that the comparison will cause the customer to view the moderate price favorably. (Business, 8th Ed., pg 424)
Bundle Pricing is the packaging of two or more products to be sold for a single price. This is designed to increase sales, offering discounted pricing when customers purchase several different products at the same time. The technique is often used to sell products that are complementary to a main product while showing a savings compared to purchasing each product individually. (Business, 8th Ed., pg 424)
Instead of pricing products on an item-by-item basis, some marketers use Product-line pricing. This means establishing and adjusting the prices of multiple products with in a product line. In doing this marketers can set prices so that one product can be very profitable which another increases market share by simply having a lower price. There are several strategies to choose from, they are captive...