Pricing Strategies

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Strategies

Definition

Pricing is a powerful element of a small business’s marketing strategy. The pricing structure of your products and services, and how it relates to your competitors’ pricing strategies and the expectations of consumers, play an important role in creating an image for your company and establishing a specific customer base. An analysis of pricing strategy reveals that companies have a range of options in their pricing toolkit they can use to augment their marketing initiatives. Pricing strategy refers to method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labor and advertising expenses and then add on a certain percentage so they can make a profit. There are several different pricing strategies, such as penetration pricing, price skimming, discount pricing, product life cycle pricing and even competitive pricing. Different Types of Pricing Strategies

Penetration Pricing

A small company that uses penetration pricing typically sets a low price for its product or service in hopes of building market share, which is the percentage of sales a company has in the market versus total sales. The primary objective of penetration pricing is to garner lots of customers with low prices and then use various marketing strategies to retain them. For example, a small Internet software distributor may set a low price for its products and subsequently email customers with additional software product offers every month. A small company will work hard to serve these customers to build brand loyalty among them. Price Skimming

Another type of pricing strategy is price skimming, in which a company sets its prices high to quickly recover expenditures for product production and advertising. The key objective of a price skimming strategy is to achieve a profit quickly. Companies often use price skimming when they lack financial resources to produce products in volume, according to the article "Pricing Strategy" at NetMBA.com. Instead, the company will use the quick spurts of cash to finance additional product production and advertising. Product Life Cycle Pricing

All products have a life span, called product life cycle. A product gradually progresses through different stages in the cycle: introduction, growth, maturity and decline stages. During the growth stage, when sales are booming, a small company usually will keep prices higher. For example, if the company's product is unique or of higher quality than competitive products, customers will likely pay the higher price. A company that prices its products high in the growth stage also may have a new technology that is in high demand. Competitive-Based Pricing

There are times when a small company may have to lower its price to meet the prices of competitors. A competitive-based pricing strategy may be employed when there is little difference between products in an industry. For example, when people purchase paper plates or foam cups or a picnic, they often shop for the lowest price when there is minimal product differentiation. Consequently, a small paper company may need to price its products lower or lose potential sales. Temporary Discount Pricing

Small companies also may use temporary discounts to increase sales. Temporary discount pricing strategies include coupons, cents-off sales, seasonal price reductions and even volume purchases. For example, a small clothing manufacturer may offer seasonal price reductions after the holidays to reduce product inventory. A volume discount may include a buy-two-get-one-free promotion. Cost-Plus pricing

Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of...
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