The price is perhaps the most important factor in any commercial transaction
and also one of the most complex to understand and manage. In this article, we will try to offer a basic framework to understand and develop the best marketing pricing strategy for your company.
The marketing pricing strategy is the plan that a company develops to determine what it will charge for its products or services. The two main types of pricing strategies are premium pricing and penetration pricing.
[poll id=”26″]Factors to Consider for Determining Pricing Strategies in Marketing
There are several factors that a company must consider when developing a marketing pricing strategy:
- Production cost
- Target market
- Competitor prices
- The overall business strategy of the company
The production cost is perhaps the most important factor when setting prices. If the production cost is high, the company will have to charge a higher price to make a profit.
The target market is also an important consideration. Different markets are willing to pay different prices for products or services. For example, consumers in developed countries are generally willing to pay higher prices than those in developing countries.
The competitor prices are also a key factor to consider. If a company’s competitors charge a lower price, the company will have to lower its prices or offer a unique selling proposition that justifies a higher price. This is why the branding strategy should also be adapted according to the chosen pricing strategy.
Finally, the overall business strategy must be taken into account. For example, a growth-focused company may be willing to sacrifice short-term profits to gain market share.
11 Types of Pricing Strategies in Marketing
Developing an effective pricing marketing strategy is essential for any company that wants to succeed. Taking into account the factors mentioned above, companies can develop different types of pricing strategies that allow them to maximize profits and gain a competitive advantage.
1. Bundle Pricing Strategy
This involves offering customers a single price for a bundle of products or services. This allows customers to save money by purchasing multiple products or services at once. The bundle pricing strategy can also help increase sales by attracting customers who otherwise would not buy the products or services.
2. Premium Pricing
This is when a company charges a high price for its products or services to reflect their high quality or uniqueness. This strategy is often used by luxury brands or when a company has a monopoly on a specific product or service.
3. Penetration Pricing
This is when a company charges a low price for its products or services to attract customers and gain market share. This strategy is typically used by companies when entering a market for the first time or when introducing a new product or service.
4. Psychological Pricing
These are pricing strategies where the final price is chosen based on a series of psychological factors, rather than a mathematical calculation of costs and benefits. It is a very common pricing technique used in marketing and sales, as it can significantly increase sales.
For example, you might list an item for €50, with a strikethrough price of €60, to make customers believe that your original €50 price is a bargain.
5. Price Increase
Price increase in pricing strategy occurs when a company raises the price of a product or service to obtain more profit. This can be done generally or by selecting a few products or services to increase their price.
The goal of this strategy is to achieve higher profits, as it is expected that customers will be willing to pay more for the product or service. The price of a similar product can also be increased in order to sell the less expensive one.
6. Dynamic Pricing (Freemium – Premium)
It’s good to use a free product, but companies need profit, and hence subscriptions and paid services, so offering plans and premium memberships is a basic way to classify prices.
The freemium option allows users to use an app or product for free, but with certain limitations. Some apps offer basic features for free, while others require payment to unlock all features. This is the case with Evernote.
This strategy is often used to attract new users as it allows them to try the product before committing to payment. It can also help drive sales since users who enjoy the free app will be more likely to pay for additional features.
7. Geographical Pricing
A geographical pricing strategy involves setting different prices for the same product in different regions of the world. This can be based on production costs in different regions, shipping costs, demand, and competition in different markets, and other factors.
The advantage of this strategy is that it allows companies to maximize their revenue by adjusting prices based on demand and competition in each market. It can also help minimize shipping and production costs by setting higher prices in regions with lower costs.
8. Competitor-Based Pricing
In general, prices for products and services are usually set based on competition. Prices that are too high can drive potential customers away, while prices that are too low can make it difficult for a company to generate enough revenue to stay afloat.
In many cases, pricing comes down to a matter of “balance”. Entrepreneurs need to carefully evaluate the prices of their competitors and then set a price that is high enough to generate adequate profit, but low enough to attract as many customers as possible.
9. Cost-Based Pricing
For many companies, the pricing process is based on the cost of production. This means that the price of a product or service is set based on the costs of materials, labor, and other indirect costs incurred in its manufacture or supply.
The theory behind this marketing pricing strategy should be the cost plus a profit margin. The problem with this strategy is that costs are not always a good indicator of the product’s value to the customer.
Customers are not willing to pay the same price for a product that others are willing to pay for the same product. For this reason, it is important for companies to understand the perceived value to the customer before setting a selling price.
10. Product Life Cycle
The product life cycle works by applying different prices to a particular product, depending on the characteristics of the market it is aimed at. They vary by demand elasticity or by demographic and economic reasons. These can be classified into 3 types:
- The first type occurs when the company knows exactly how much each consumer is willing to pay; their goal is to achieve maximum profitability.
- The second type occurs when the market is grouped based on willingness to pay for the product. This strategy is common in high-volume sales such as products sold in bundles.
- The third type applies when a linear price is charged to each consumer group.
11. Differential Strategy
Differential strategies allow you to reach different types of consumers, that is, they are functional in heterogeneous markets. They are applied especially when the brand begins a campaign to attract consumers and different pricing presentations are needed, so that discounts directly match the margin and benefits. Among the alternatives, prices can have discounts or be offered as a package.
Also used are bait-and-hook prices, which basically consist of launching a product at a low price, while its components or additional products have a higher price or represent a good percentage of the initial product.
Conclusions on Pricing Strategies in Marketing
Often, the price game is the most important game played in the market. Buyers and sellers try to guess what price the other will be willing to pay, and the one who can do this more accurately will gain a significant advantage.
Sometimes, the price game is so important that it even becomes the main game.
At our marketing agency Dos Setenta, we offer ecommerce consulting, helping our clients establish the best strategies to stand out from their competition. Do a free audit with us for your business and discover everything we can help you with.
