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What are the different methods of pricing?
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Every business must have a well-studied pricing strategy that allows it to sell its products and make a profit. Pricing methods cannot be taken for granted as each organisation is different and depends on which pricing methods works well for the company to make a profit from its goods and services.
The marketing mix is a very important concept of marketing which involves the 4 main elements i.e people, promotion, place and price. However, the second most important factor in the marketing mix after product is the type of pricing being used. This is because the type of pricing can alter the distribution and the promotion mix as well.
There are several factors which need be taken into consideration before setting up prices, and these factors are influenced by current market supply and demand, competition levels as well as other political and economic influences. During the price planning process, your main focus should lie in finding the right price point where you can maximize your sales and profits. This usually depends on your individual marketing goals and objectives.
Here are some of the various strategies that businesses implement when setting prices on their products and services.
Those factors include the offering's costs, the demand, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle.
Cost-oriented methods or pricing are as follows: Cost plus pricing: Mark-up pricing: Break-even pricing: Target return pricing: Early cash recovery pricing: Perceived value pricing: Going-rate pricing: Sealed-bid pricing.
Pricing Goals. ... The goal in pricing a service is to mark up the labor and materials costs sufficiently to cover overhead expenses and generate sufficient profit. First-time business owners often fail without realizing that they have priced their services too low.
11 different types of pricing
1) Premium pricing
It is a type of pricing which involves establishing a price higher than your competitors to achieve a premium positioning. You can use this kind of pricing when your product or service presents some unique features or core advantages, or when the company has a unique competitive advantage compared to its rivals. For example, Audi and Mercedes are premium brands of cars because they are far above the rest in their product design as well as in their marketing communications.
2) Penetration pricing
It is a commonly used pricing method amongst the various types of pricing is designed to capture market share by entering the market with a low price as compared to the competition. The penetration pricing strategy is used in order to attract more customers and to make the customer switch from current brands existing in the market. The main target group is price sensitive customers. Once a market share is captured, the prices are increased by the company.
However, this is a sensitive strategy to apply as the market might be penetrated by yet another new entrant. Or the margins are so low that the company does not survive. And finally, this strategy never creates long term brand loyalty in the mind of customers. This strategy is used mainly to increase brand awareness and start with a small market share.
3) Economy pricingThis type of pricing takes a very low cost approach. Just the bare minimum to keep prices low and attract a specific segment of the market that is highly price sensitive. Examples of companies focusing on this type of pricing include Walmart, Lidl and Aldi.
4) Skimming priceSkimming is a type of pricing used by companies that have a significant competitive advantage and which can gain maximum revenue advantage before other competitors begin offering similar products or substitutes. It can be the case for innovative electronics entering the marketing before the products are copied by close competitors or Chinese manufacturers.
After being copied, the product loses its premium value and hence the price has to be dropped immediately. Thus, to get maximum margins from their products, innovative companies keep launching new variants so that customers are always in the discovery phase and paying the required premium.
5) Psychological pricingIt is a type of pricing which can be translated into a small incentive that can make a huge impact psychologically on customers. Customers are more willing to buy the necessary products at $4,99 than products costing $5. The difference in price is actually completely irrelevant. However, it makes a great difference in the mind of the customers. This strategy can frequently be seen in the supermarkets and small shops.
6) Neutral strategyThis type of pricing focuses on keeping the price at the same level for all four periods of the product lifecycl. However, with this type of strategy, there is no opportunity to make higher profits and at the same time, it doesn’t allow for increasing the market share. Also, when the product declines in turnover, keeping the same price effects the margins thereby causing an early demise. This pricing is used very rarely.
7) Captive product pricingIt is a type of pricing which focuses on captive products accompanying the core products. For example, the ink for a printer is a captive product where the core product is the printer. When employing this strategy companies usually put a higher price on the captive products resulting in increased revenue margins, than on the core product.
8) Optional product pricingIt can be frequently observed in the case of airline companies. For example, the basic product of KLM Airlines is offering or providing seats in the airplane for different flights. However, once the customers start purchasing these seats, they are offered optional features along with the seats. Examples may be extra seat space, more drinks etc. Because of this optional product, there is more revenue generated from the main product. Customers are willing to spend for the optional product as well.
9) Bundling priceEver hear of the offer of 1 + 1 free? In the supermarket, when two different products are combined together such as a razor and the lotion for shaving, and they are offered as a deal, then we get to experience the bundling type of pricing first hand. This strategy is mainly used to get rid of excess stocks.
10) Promotional pricing strategyIt is just like Bundling price. But here, the products are bundled so as to make the customer use the bundled product for the first time. This type of pricing focuses on buying one, and getting a new type of product for free. Promotional pricing can also serve as a way to move old stock as well as to increase brand awareness.
11) Geographical pricingIt involves variations of prices depending on the location where the product and service is being sold and is mostly influenced by the changes in the currencies as well as inflation. An example of geographic pricing can also be the sales of heavy machinery, which are sold after considering the transportation cost of different locations. Click here to read more on geographical pricing strategy.
Depending on the goals and objectives of your company, and the strategies decided by your company, you can use any of the 11 types of pricing mentioned above. One can identify what strategy should be applied by analyzing the market and also the product/service lifecycle they are present in.
Pricing is important to the company and must be viewed well before implementation as this could affect the targets of the organisation and the profit if set very low there will be be no investment for the company. Quality products cost money and good pricing is a factor.
Cost-based Pricing:
Cost-based pricing refers to a pricing method in which some percentage of desired profit margins is added to the cost of the product to obtain the final price. In other words, cost-based pricing can be defined as a pricing method in which a certain percentage of the total cost of production is added to the cost of the product to determine its selling price. Cost-based pricing can be of two types, namely, cost-plus pricing and markup pricing.
i. Cost-plus Pricing:
Refers to the simplest method of determining the price of a product. In cost-plus pricing method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total cost to set the price. For example, XYZ organization bears the total cost of Rs. 100 per unit for producing a product. It adds Rs. 50 per unit to the price of product as’ profit. In such a case, the final price of a product of the organization would be Rs. 150.
Cost-plus pricing is also known as average cost pricing. This is the most commonly used method in manufacturing organizations.
iv. Markup Pricing:
Refers to a pricing method in which the fixed amount or the percentage of cost of the product is added to product’s price to get the selling price of the product. Markup pricing is more common in retailing in which a retailer sells the product to earn profit. For example, if a retailer has taken a product from the wholesaler for Rs. 100, then he/she might add up a markup of Rs. 20 to gain profit.
there are vaurious types of pricing for example pricing at premium,economy pricing,price skimming and price penetration of the market
1-pricing for market pentration.
2-economy pricing
3-price skimming
4-psychology pricing
5-bundle pricing
