Copyright 2002 - 2005 Bobette Kyle. All rights reserved.
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Pricing Strategies in Marketing
by Bobette Kyle
Price is an often overlooked marketing strategy, as many
tend to focus on promotions or advertising. Pricing
strategies, however, can have a large impact on sales and
(more importantly) profit.
The price is what your customer pays and/or what the end
consumer pays for a product or service. In the case of
products not sold directly to the end user, pricing is often
described as "wholesale" and "retail." When the distribution
channel is long (such as when there is a manufacturer,
broker/distributor, retailer, and end consumer), multiple
mark-ups can occur between the wholesale and the retail
price.
Your optimal pricing strategy will depend on more than your
costs. Forces within your business environment such as your
competitors, your suppliers, the availability of substitute
products, and your customers come into play as well.
Positioning (how you want to be perceived by your target
audience) is also a consideration.
Pricing Strategies
There are a variety of pricing strategies in existence. Each
strategy is used in a different set of circumstances. Some
of the things to consider when choosing the best strategy
for your situation are your costs; both short term and long
term sales and profit goals; competitors' activities; and
customer lifetime value. A few of the pricing strategies
available to you are:
Cost plus mark-up. Here, you decide the profit you want to
make before setting the price. Figure out your costs and
your selling price is simply your costs plus your pre-
determined profit number. This approach helps keep your
profitability top-of-mind, but may also result in prices
that are out-of-line with customer expectations and
competitor pricing.
Competitive pricing. When competitive pricing, you look at
the prices your competitors are charging and use those
prices as a benchmark when pricing your own products. You
and your competitors' positioning strategies will determine
whether you price at par, slightly below, or slightly above
the competition.
Price skimming. This technique is used when you offer a
unique or scarce product with few or no substitutes. The
price is set high, resulting in high margins for the seller.
Buyers are those that are willing to pay the price because
of the product's prestige and/or uniqueness. In the case of
a scarce but necessary product, customers pay the price
because they have no choice. Often, price skimming is a
short-term strategy as competitors enter with their own
products, bringing prices down. In the case of scarce
products, either the need passes (Salt during an ice storm,
for example.) or the shortage is temporary. Before
considering this technique, be aware that if your customers
feel your have taken advantage of them, you could be
building "bad will" for your business.
Penetration pricing. This is the opposite of price skimming.
Prices are set artificially low in an effort to gain large
market share. Because the penetration price does not cover
costs, this is also a temporary strategy. For this strategy
to be profitable, customers must be willing to pay your
normal, higher price.
Loss leader. Here, you price one or more products below cost
to attract customers. You hope that those customers will
purchase other profitable products from you. This strategy
is often implemented as part of a short-term promotion.
Close out. This is a tactical move to clear slow-moving or
excess products out of inventory. You sell the inventory at
a steep discount to avoid storing or discarding the product.
End-of season merchandise, perishables that are about to
expire, and prior software versions or book printings are
examples of eligible closeout items.
Multiple unit pricing. Also called quantity discount. The
customer gets a price break for purchasing multiple units or
large quantities.
Membership or trade discounting. Here, some customers (those
that you know are heavy or frequent purchasers) are given an
elite status, which gives them the privilege of a price
discount on their purchases. This elite status can be based
on occupation, membership in an organization, subscription
status, or some other criteria.
Variable pricing. With a variable pricing strategy,
different customers pay different prices. Often, this
strategy is used for project work. Each project has unique
characteristics so is priced by the job. In other cases, the
price is negotiated with each customer (Cars are an
example.).
Versioning. This is offering the same product with different
levels of functionality. Each level is priced differently
and includes a different bundle of attributes. Software and
Web hosting companies often use this pricing strategy. A
trial or very basic version may be offered at low or no
cost. Upgraded versions are available at higher costs.
Bundling. Here, several items are sold together at a price
less than if they were purchased alone. By bundling a
popular item with lesser-known products, you can increase
your sales. Additionally, in the case of inventoried items,
you may be able to avoid a closeout.
Impact of Internet on Pricing Strategies
Aside from making some pricing strategies more prevalent,
the Web has also affected the importance of choosing correct
pricing strategies, by allowing customers to be better
informed and more vocal. In the case of consumer products,
the purchaser can go to www.MySimon.com or another price
comparison service and in seconds look at a side-by-side
price comparison from several online retailers.
There are also numerous forums and discussion boards where
members discuss their experience with providers. For
example, your customer in Paris can complain or spread
praise about you to a potential customer in St. Louis. This
means the customer can not only make a better decision
before purchasing, but can also better spread the word (both
praise and complaints) after the purchase. For these
reasons, the Web has made it more important that you remain
competitively priced with your competition and maintain
sensible pricing practices.
Combined, smart use of both the Internet and available
pricing strategies can help boost your company's the bottom
line.
About the Author
Bobette Kyle draws upon 12+ years of Marketing/Executive
experience, Marketing MBA, and online marketing research in
her writing. Bobette is proprietor of the Web Site Marketing
Plan Network - http://www.WebSiteMarketingPlan.com - and
author of the marketing plan and Web promotion book "How
Much For Just the Spider? Strategic Website Marketing For
Small Budget Business."
