Pricing Strategies

New-Product Pricing Strategies

During a product's life cycle, pricing tactics frequently shift. The initial stage is very difficult. Setting prices for the first time is a difficulty for businesses that release new products. They have two main options to pick from:

Market-Skimming Pricing

The majority of businesses that create new items set high initial prices in an effort to "skim" market revenues one at a time. Apple typically employs this tactic, known as market-skimming pricing (or price skimming). The initial cost of an iPhone when it was first released by Apple was as much as $599 per device. Only those who could afford to pay a premium price and truly want the stylish new technology bought those phones. Apple reduced the price to $399 for an 8GB model and $499 for a 16GB model after six months in an effort to draw in new customers. Within a year, the price was reduced once again, to $199 and $299, respectively, and the consumer can now purchase an 8GB variant for $99 today. Apple used this tactic to get the most money possible from the various market segments. Market scanning makes sense only in certain circumstances. First, a lot of buyers must demand the product at that price and the quality and reputation of the product should support its higher price. The second need is for the overall expenses of producing a lesser volume to be so high as to negate the benefit of charging more. Finally, it should be difficult for competitors to enter the market and undercut the high price.

Market-Penetration Pricing

Some businesses utilize market-penetration pricing to capture profitable but limited market segments rather than establishing a high beginning price. In order to swiftly draw in a big number of customers and capture a sizable market share, businesses establish a cheap beginning pricing to quickly and firmly penetrate the market. Since expenses are falling as a result of the high sales volume, businesses can lower their prices even more. As an illustration, the massive Swedish retailer IKEA uses penetration pricing to increase its performance in the Chinese market.

For this low-cost technique to be effective, a number of requirements must be met. The market must first be highly price sensitive in order for low prices to spur more market expansion. Second, as sales volume rises, production and distribution costs ought to fall. Last but not least, the low price ought to help keep the competition at bay and the penetration pricing ought to sustain the low price position. If not, the price advantage might only last a short while.

Product Mix Pricing Strategies

If a product is a component of a product mix, the pricing strategy for that product must often be altered. In this instance, the business seeks a range of prices that will maximize its profits across the board. Pricing is challenging since different items have overlapping demand, costs, and levels of competition. In this article, we'll talk about the five scenarios for product mix pricing: product line price, optional product pricing, captive product pricing, by-product pricing, and product bundle pricing.

Product Line Pricing

Instead of creating a single product, businesses typically create product lines. For instance, Rossignol provides customers with access to seven distinct collections of alpine skis in all shapes and sizes, with costs ranging from $150 for youth skis like Fun Girl to more than $1,100 for a pair from its Radical racing collection. Additionally, Rossignol has lines of snowboards, backcountry and Nordic skis, as well as gear for the ski industry. Management should choose the price steps to set between the various goods in a line when implementing product line pricing. The pricing steps must account for cost variations among the line's items. More significantly, businesses need to take into account how different consumers value various characteristics. The Starter, Deluxe, Premier, Home & Business, and Rental Property versions of Quicken's full line of financial management software, for instance, are priced at $29.99, $59.99, $89.99, $99.99, and $149.99, respectively. Although it doesn't cost Quicken any more to make the Premier version CD than the Starter version CD, many customers are willing to pay more to get Premier's extra features, like financial planning and investment monitoring tools. It is Quicken's responsibility to uphold and establish perceived value disparities that sustain price disparities.

Optional-Product Pricing

Numerous businesses employ optional product pricing. Companies offer to sell additional products in addition to the main product when they price optional products. For instance, a car customer can decide to add a Bluetooth wireless communication and GPRS system to their order (GPS). Ice makers are an optional addition to refrigerators. Customers can choose from an overwhelming variety of processors, hard drives, software options, docking systems, and service agreements when ordering a new PC. The cost of these options is a challenging issue. The company must choose which goods to sell as choices and which to include in the base pricing.

Captive Product Pricing

Captive product pricing is utilized by companies that produce goods that must be used in conjunction with the primary product. Video games, razor blade cartridges, and printer cartridges are a few examples of captive items. The makers of the primary items (video game consoles, razors, and printers) typically charge low prices for the main items while charging exorbitant prices for the accessories. For instance, when Sony first released their PS3 video gaming console, which costs $499 and $599 for the normal and premium versions, respectively, it suffered sales losses of up to $306 per unit. Sony wanted to make up the losses by selling more profitable PS3 games. Companies that employ captive product pricing, though, need to exercise caution. It could be challenging to strike the correct balance between the prices of the main product and the captive product. For instance, Sony has yet to recover its losses on the PS3 console despite PS3 video game sales that are the highest in the industry. Customers who are forced to purchase pricey captive products may develop a dislike for the brand that lured them in. This incident occurred in the market for inkjet printers and cartridges.

In the case of services, captive product pricing is referred to as two-part pricing. The service's cost is comprised of a fixed fee and a variable use rate. Customers thus pay a daily ticket or season pass fee, plus additional costs for meals and other in-park amenities, at Six Flags and other amusement parks.

By-Product Pricing

By-products are typically produced when goods and services are produced. The cost of disposal and the lack of value of the by-product will undoubtedly have an impact on the price of the primary product. The business uses by-product pricing to find a market for these by-products in an effort to reduce the expense of disposing of them and raise the competitiveness of the price of the primary product.

Even the by-products themselves might prove to be profitable, converting waste into money. As one illustration, the Woodland Park Zoo in Seattle discovered that its primary by-product, animal waste, might be a fantastic source of additional income.

Product Bundle Pricing

Producers frequently mix several products and sell the bundle at a discount using product bundle pricing. For instance, fast-food establishments charge a "combo" pricing for a burger, fries, and soft drink. Comcast, Time Warner, Verizon, and other telecommunications providers bundle high-speed Internet access, phone service, and TV service at a discounted rate. Prices should be low enough to entice clients to purchase the bundle, but price bundling can encourage the sales of goods they might not have otherwise purchased.

Reference

Kotler, P., & Armstrong, G. (2013).Principles of Marketing.Chennai: Pearson India Education Services Pvt Ltd.

http://www.netmba.com/marketing/pricing/