PRICING STRATEGIES
1. A/B Pricing
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A pricing strategy that charges different prices as a test. The test can be
designed to find a price that maximizes overall revenue or net profit.
2. Captive Product Pricing
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Where products have complements, companies will charge a premium price
since the consumer has no choice. For example, a razor manufacturer will
charge a low price for the first plastic razor and recoup its margin (and
more) from the sale of the blades that fit the razor.
3. Break-Even Pricing; in this case, the firm determines the level of sales needed
to cover all the relevant fixed and variable costs. The break-even price is the
price at which the sales revenue is equal to the cost of goods sold. In other
words, there is neither profit nor loss.
4. Decoy Pricing
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Includes bad or useless prices on a menu to make customers feel more
confident in their choices.
5. Dynamic Pricing
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It is a strategy in which product prices continuously adjust, sometimes in
a matter of minutes, in response to real-time supply and demand.
6. Economy Pricing
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An economy pricing strategy sets prices at the bare minimum to make a
small profit. Companies minimize their marketing and promotional costs.
The key to a profitable economy pricing program is to sell a high volume of
products and services at low prices.
7. Freemium Pricing
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Freemium pricing is when companies offer a basic version of their product
hoping that users will eventually pay to upgrade or access more features.
Unlike cost-plus, freemium is a pricing strategy commonly used by SaaS
and other software companies.
8. Geographical Pricing
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It involves variations of prices depending on the location where the
product and service is being sold and is mostly influenced by the changes
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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.
8.1. Free on Board (FOB) Pricing includes no shipping charges.
8.2. Uniform-Delivered
Pricing
is a pricing system for handling
transportation costs under which all buyers are quoted the same
price, including transportation expenses.
8.3. Zone Pricing is a pricing system for handling transportation costs
under which the market is divided into geographic regions and a
different price is set in each region.
8.4. Basing-Point Pricing is used by some industries in which the buyer
paid the factory price plus freight charges form basing-point city
nearest the buyer.
9. High-Low Pricing
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A pricing strategy in which a firm relies on sales promotions to encourage
consumer purchase. In other words, high-low pricing is a pricing strategy
where a firm charges a high price for a product and then subsequently
decreases prices later on through promotions, markdowns, or clearance
sales.
10. Hourly Pricing Strategy
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Also known as rate-based pricing; it is commonly used by consultants,
freelancers, contractors, and other individuals or laborers who provide
business services. Hourly pricing is essentially trading time for money.
Some clients are hesitant to honor this pricing strategy as it can reward
labor instead of efficiency.
11. Project-Based Pricing Strategy
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It is the opposite of hourly pricing — this approach charges a flat fee per
project instead of a direct exchange of money for time. It is also used by
consultants, freelancers, contractors, and other individuals or laborers
who provide business services.
12. Value Pricing
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This approach is used where external factors such as recession or
increased competition force companies to provide value products and
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services to retain sales (e.g. value meals at McDonalds and other fast-food
restaurants).
13. Loss Leader Pricing
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It is an aggressive pricing strategy in which a store sells selected goods
below cost in order to attract customers who will, according to the loss
leader philosophy, make up for the losses on highlighted products with
additional purchases of profitable goods.
14. Neutral Strategy
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This type of pricing focuses on keeping the price at the same level for all
four periods of the product lifecycle. 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.
15. Product Bundle Pricing
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Companies combine several of their products and offer the set at
reduced/discounted prices, for the purpose of encouraging outlets and
end-users to buy product lines they might not buy, however, the combined
price must be attractively low enough to get them to buy the bundle or the
set of goods and services.
16. Market Penetration Pricing
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Companies set a low price on their new innovative product introduced into
the market in the hope of attracting more buyers and gaining a large
market share. The low pricing scheme is designed to attract a high volume
of sales in the belief that a low price generates a bigger market growth
and helps in keeping out competition.
17. Market Skimming Pricing
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New products are initially set at higher prices to “skim” maximum revenue
from segments willing to pay the higher price. When the new product
becomes established or widely accepted already, or after the initial sales
slow down, companies lower the price to attract the next price-sensitive
layer of customers.
18. Discriminatory Pricing
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The firm sells a product at two or more prices, where difference in prices
is not based on differences in costs. For example, lower prices to big
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wholesalers and distributors compared to small retailers, for the same set
of products purchased.
18.1. Customer-segment pricing is where different types of customers
pay different prices for the same product, good or services; one
pays higher or lower.
18.2. Product-form pricing is where the different versions of the
product are differentiated in brand names and marketing effort but
with the same generic names are priced differently.
19. Perceived-value Pricing
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Pricing, based on the product’s “perceived value”, the buyer’s perception
and impression of value and not the seller’s level of cost. Signature items
and imported products are perceived to be of higher quality than purely
generic or locally made products, such that they are priced high.
20. Premium Pricing
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A prestige pricing strategy in which companies price their products high
to present the image that their products are high-value, luxury, or
premium.
21. Predatory Pricing
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Setting your price unsustainably low for a long period of time in order to
damage the competition and establish a monopoly. In most countries, this
isn't legal.
22. Going-rate Pricing
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Prices are set at the average level, charged by the industry.
23. Product-line Pricing/Price Lining
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These are highly established price points for the products in their line. In
the ladies shoes department where there are three price levels, namely;
P850, P950, P1,050 and the association will be that of low, average, and
high-quality shoes with three price “points”.
24. Optional Accessory Pricing
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In this strategy, car buyers decide on buying a fully loaded or strippeddown model, the former equipped with radio-cassette-CD player,
defoggers, mag wheels, and other accessories. The economy or strippeddown model is intended to put prospective buyers into the showrooms,
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however, showrooms, will display most prominently the more expensive
feature-loaded cars.
25. Main Product Pricing
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The main product itself is priced low but higher markup are set on the
supplies, accessories, and services.
26. By-Product Pricing
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This applies to parts of the main product that have value to target market
segments when sold, thereby, creating additional income to possibly, lower
the price of the main product to be competitive in the desired segment.
27. Time Pricing
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Uses time of the day and night in manipulating price changes downward to
capture more customers at the expense of competition.
28. Onetime Hit-and-Run Pricing
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A product known to be of low quality is priced higher by the producer. This
is short-lived and sooner or later, end-users will find out and eventually
stop buying the product for good; or worst, complains to the proper
authorities or files a case in court against the suppliers.
29. Bonus-Pack Pricing
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This is price set for a product less than what it would normally cost, as a
bonus to buyers.
30. Piggyback Pricing
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Another product is attached to the main product to represent savings.
31. Clean Plate, No Left-Over Buffet
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The client is rewarded with a 50% discount on food if after eating there
are no left-overs, in the No-Sharing, No take-out buffet.
32. Early Bird Pricing
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The target market enjoys substantial discounts for early registrants
during seminars, conferences, and workshops.
33. One-Price Formula Strategy
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This means the same pricing structure for the same type of customers
regardless of volume purchased and capacity to pay.
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34. Price Bargaining Strategy
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A growing need for the negotiated price of the established price. This
holds true in many government purchase requirements for supplies,
equipment, and machinery.
35. Limit Pricing
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This is defensive pricing strategy. The company price its products
immensely low (and this price is known as entry forestalling price), to retain
the monopoly in the market. It is done to discourage the entry of
competitors by presenting the business as unattractive and non-profitable.
36. Peak Load Pricing
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It is a demand-based pricing, where the companies charge high prices in
the peak seasons or period when the demand for the product is quite high.
However, in the off-peak time when the demand falls, the prices are kept
low.
37. Psychological Pricing
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This aims to influence the customers mentally by posing a low product
price. Here, the product is priced slightly less than a round figure.
38. Everyday Low Pricing
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Continuously offering low prices rather than relying on such short-term
price cuts as cents-off coupons, rebates, and special sales.
39. Internet Pricing Models
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Internet is a modern communication platform and therefore, provides vast
scope for carrying out marketing activities. The different pricing method
for internet services (as a product) are as follows:
39.1. Priority Pricing is where the consumer’s priority for service quality
determines the price of internet services; thus, the price increases
with the quality of internet service.
39.2. Flat-Rate Pricing is where the customer is charged a fixed amount
for availing the internet services for a defined period irrespective
of the sage.
39.3. Usage-Sensitive Pricing is where the utility tariff is divided into
two sections, the provider first charges for the service connection
and then for the usage in terms of price per unit.
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39.4. Precedence Model is based on the security provided by existing
customers by setting up the priority of different applications. Data
packets are formed based on network preference and are given
different precedence numbers. In case of congestion, the packets
are sent in the sequence of their assigned precedence numbers.
39.5. Smart Market Mechanism Model is purely dependent on network
congestion. It functions through a dynamic bidding system where
the bit price fluctuates with the level of congestion or traffic in the
network. The bidder with the highest bit or unit price wins the deal.
40. Promotional Pricing
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It sets the price lower than normal which is used as a temporary ingredient
in a firm’s marketing strategy.
41. Bait and Switch Pricing
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It is an illegal practice of ‘baiting’ customers with unrealistically low prices
to bring them into the store, and then trying to sell them higher-priced
goods on the pretext that the advertised bargain- priced goods are sold
out.
42. Price Anchoring
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It refers to the practice of establishing a price point which customers can
refer to when making decisions.
PRICING METHODS
1. Cost-Oriented Method
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This 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.
1.1. Cost Plus Pricing involves adding a certain percentage to cost of
goods and services to arrive at a selling price.
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1.2. Mark-up Pricing is a variation of cost pricing. In this case, markups are calculated as a percentage of the selling price and not as a
percentage of the cost price. Firms that use cost-oriented methods
use mark-up pricing.
Since only the cost and the desired percentage markup on the selling price
are known, the following formula is used to determine the selling price:
Average unit cost/selling price
1.3. Full-Cost Pricing is a pricing method that uses all relevant variable
costs in setting a product’s price and allocates those fixed costs not
directly attributed to the production of the priced item.
1.4. Incremental Cost Pricing attempts to use only costs directly
attributable to a specific output in setting prices.
1.5. Target Return Pricing is a method wherein the firm determines the
price on the basis of a target rate of return on the investment. The
limitation of this method (like other cost-oriented methods) is that
prices are derived from costs without considering market factors
such as competition, demand and consumers’ perceived value.
However, this method helps to ensure that prices exceed all costs
and therefore contribute to profit.
The target return price can be calculated by the following formula:
Target return price = Total costs + (Desired return x ROI investment)/
Total sales in units
1.6. Early Cash Recovery Pricing; when it comes to rapidly growing
technological products or the ones with a short life cycle, the cost
needs to recover as early as possible. This method is very similar to
target return pricing; the only difference is that it considers a high
value of return on investment owing to a short recovery period.
1.7. Marginal Cost Pricing; the primary aim of the company adopting this
pricing method is to meet its marginal cost and overheads. The
marginal cost method is suitable for entering the industries which
are dominated by giant players, posing a fierce competition for the
organization to sustain in the business.
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1.8. Price-Floor Pricing is used to determine the lowest price at which
it is worthwhile for a company to increase the amount of goods and
services it makes available for sale.
2. Market-oriented Methods
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It is the act of setting prices that are closely aligned with the current
market prices of similar products.
2.1. Perceived Value Pricing – (see p. 4)
2.2. Going-rate pricing – (see p. 4)
2.2.1.
Competitors’ Parity Method; a firm may set the same
price as that of the major competitor.
2.2.2.
Premium Pricing; a firm may charge a little higher if its
products have some additional special features as compared
to major competitors.
2.2.3.
Discount Pricing; a firm may charge a little lower price if
its products lack certain features as compared to major
competitors.
2.3. Sealed-Bid Pricing is adopted in the case of large orders or
contracts, especially those of industrial buyers or government
departments. The firms submit sealed bids for jobs in response to
an advertisement. In this case, the buyer expects the lowest
possible price and the seller is expected to provide the best possible
quotation or tender. If a firm wants to win a contract, then it has
to submit a lower price bid. For this purpose, the firm has to
anticipate the pricing policy of the competitors and decide the price
offer.
3. Demand-Based Pricing
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A firm sets prices after studying consumer desires and ascertaining the
range of prices acceptable to the target market. This approach is used by
firms that believe price is a key factor in consumer decision making.
3.1. Demand-Minus Pricing; or demand-backward pricing. A firm finds
the proper selling price and works backward to compute costs.
3.2. Chain-Markup Pricing extends demand-minus calculations from
resellers all the way back to the suppliers. It determines the final
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selling price, examines markups for each channel member, and
computes the maximum acceptable costs to each other.
3.3. Price Discrimination – (see pp. 3-4)
4. Competition-Based Pricing
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A firm uses competitors’ prices rather than demand or cost considerations
as its main pricing guideposts.
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Designed to deemphasize price as a competitive variable by pricing a good
or service at the level of comparable offerings.
4.1. Opening Price Point is setting an opening price below that of the
competition, usually on a high-quality private-label item.
4.2. Price Leadership exists in situations where one or a few firms is
usually the first to announce price changes and others in the
industry follow.
4.3. Competitive Bidding is where two or more companies independently
submit prices to a customer for a specified good, project, and/or
service. Bids are usually sealed and each seller has one chance to
make its best offer.
5. Combination Pricing
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Here, cost-, demand, markup-, and competition-based pricing techniques
are combined.
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