It’s no secret that small businesses play a vital role in the Indian economy. The operation and revenues of SMEs contribute a great deal towards economy as a whole.
There are various factors that affect a small business’ revenue potential. One of the most important is the pricing strategy utilized by you as an owner.
A right pricing strategy helps you determine the price point at which you can maximize profits on sales of your product or service. You need to consider a wide range of factors when setting prices of your offerings. These include:
- production and distribution costs,
- competitor offerings,
- positioning strategies and
- the business’ target customer base.
Your customers won’t purchase goods that are priced too high. On the other hand, your company won’t succeed if it prices goods too low. This is because low prices will not allow you to cover all of the business’ costs.
Thus, product or service price can have a profound effect on the success of your small business. This is in addition to other factors that impact your business. These include the product itself, the place where it is sold and its promotion.
Here are some of the strategies businesses implement when setting prices for their products and services.
I. New Product Pricing Strategies
Pricing strategies usually change at different phases of a product’s life cycle. The most challenging phase of setting a pricing strategy is that of product introduction. During this phase, marketers face the challenge of setting prices of business offerings for the first time. There are two strategies that they can follow:
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1. Price Skimming
Price skimming involves setting rates high during the introductory phase. This is designed to help businesses maximize sales on new products and services. Once the products or services are introduced, company lowers the prices gradually. This is done eventually as competitor goods appear on the market.
One of the benefits of price skimming is that it allows you to maximize profits on early adopters. You then drop the prices eventually to attract more price-sensitive consumers. Not only does price skimming help your small business recoup its development costs. It also creates an illusion of quality and exclusivity when your item is first introduced to the marketplace.
Take for instance Sony. Its HDTV set costed $43,000 when it introduced them into the Japanese market in the year 1990. These television sets were bought by customers who could afford to pay such a high price. These customers were the ones who desperately wanted this new technology. However, over the next few years, Sony reduced the prices of these HDTV sets. This was done in order to lure more customers. Hence, by the year 1993, a 28 inch HDTV costed just over $6,000. This by the year 2001 reduced to about $2,000 for a 40 inch HDTV set. Thus, Sony skimmed huge amounts of revenue as a result of an early adopter of the technology.
2. Pricing For Market Penetration
Penetration strategies aim to attract buyers by offering lower prices on goods and services. Many new companies use this technique to draw attention away from their competition. But penetration pricing does lead to an initial loss of income for the business.
Over time, however, the increase in awareness can drive profits. Furthermore, it can help small businesses to stand out from the crowd. After sufficiently penetrating a market, companies often end up raising their prices in the long run. This is done to better reflect the state of their position within the market.
Take for example the smartphone market. Apple skimmed maximum amount of revenue owing to its ingenious operating system. Samsung, on the other hand, entered the market with penetration pricing. Accordingly, Apple maintained its high price position given its brand building strategy. Whereas Samsung’s market share was seized by Micromax. This is because it offered similar smartphone features at highly competitive prices. As of now, Chinese smartphone brand Xiaomi has acted as a drag on Samsung’s market share. This is because its offering online only smartphones at cheaper prices.
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II. Product Mix Pricing Strategies
The pricing strategy for each of the products is different when you sell different set of products. This variation in pricing is based on the costs, demand and the different level of competition that a product has to face in the market. Now, you vary pricing in order to maximize profits on your total product mix. Accordingly, there are different product mix pricing strategies. These include:
Product Line Pricing
You have to set different prices for various offerings in a product line in case your business offers different product lines. This price differentiation takes into account cost differences between the products in a given product line. Furthermore, it also considers customer perceptions with regards to the value offered by different products in a given line.
For instance, HUL offers shampoos like Sunsilk and Dove for price conscious consumers. While shampoos like TIGI and Toni and Guy are offered at premium prices for high end customers.
Optional Product Pricing
You have to add the price of accessories to the base price of the product in case you offer accessory products along with the main product. This means that accessories are given as an option to the customers.
Take for example the automobile industry. The basic price of a car is different from the upper models offering functionalities like automatic windows, alloys, infotainment system etc.
Captive Product Pricing
This pricing strategy is used by companies manufacturing products that are essential for using the main product. For example, in the case of razors, cartridges form captive products. Whereas the razors act as main products. Companies like Gillette offer razors at low prices, but makes huge amounts of money from the razor cartridges.
By Product Pricing
Some industries generate by-products as a result of manufacturing goods. These by-products hold no value at times and it is a costly affair to dispose them off. This scenario may lead to increasing the cost of the core product. However, a company can sell these by-products to make for the higher cost of disposing them off by using by-product pricing. Thus, this makes the price of the core product competitive.
For instance fruit seeds, peels etc that are the leftover in the fruit juice processing can serve as raw material for cosmetic industry given its medicinal properties.
Bundle pricing means selling a package of goods or services for a lower rate than what consumers would pay on purchasing each item individually.
This pricing strategy is more effective for companies that sell complimentary products.
For example, a restaurant can take advantage of bundle pricing by including dessert with every entrée sold on a particular day of the week.
But small businesses should remember that the profits they earn on the higher-value items must make up for the losses they take on the lower-value product.
Therefore, pricing strategies are important, but it’s also important to not lose sight of the price itself.
III. Price Adjustment Strategies
Generally, companies adjust the basic price of their products. This is undertaken to consider customer differences and changing situations. Hence there are many price adjustment strategies that companies follow. These include:
1. Pricing at a Premium
With premium pricing, businesses set costs higher than their competitors. Premium pricing is often most effective in the early days of a product’s life cycle. Furthermore, it is ideal for small businesses that sell unique goods.
A business must work hard to create a value perception. This is because customers need to perceive products as being worth the higher price tag. There are many things a business can do to support premium pricing of its offerings.
- creating a high-quality product,
- intense marketing efforts,
- quality product packaging and
- plush store décor
Take for instance Yeti. It is a company that makes camping coolers. It was founded in the year 2006. It’s objective was to build camping coolers that were meant for serious outdoor enthusiasts.
Now, rugged expeditions involved changing weathers and vulnerability to challenges. So these enthusiasts needed coolers that could withstand any sort of camping abuse. Therefore, Yeti introduced high performance, premium priced camping coolers. These were coolers that wouldn’t break. Thus, eventually these became a benchmark for competitive outdoor products.
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2. Economy Pricing
Economy pricing aims to attract the most price-conscious consumers. This strategy is used by a wide range of businesses. These include generic food suppliers, discount retailers etc. Thus, businesses are able to minimize costs associated with marketing and production with this strategy. This further helps in keeping the product prices down. As a result, customers can purchase the products they need without frills.
Economy pricing is incredibly effective for large companies like Wal-Mart and Target. However, the technique can be dangerous for small businesses. Small businesses may struggle to generate a sufficient profit when prices are too low. This is because small businesses lack the sales volume of larger companies. Still, selectively tailoring discounts to your loyal customers is a great way to guarantee their patronage for years to come.
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3. Psychology Pricing
Price is certainly a concern before purchasing products or services. Psychology pricing refers to techniques marketers use to encourage customers to respond on emotional levels rather than logical ones. It considers the psychology of prices and not just the economics behind the pricing of product. Hence, there are different ways in which a marketer can use psychology pricing. These include:
- Offering discounts or buy one get one
- Differential pricing
- Price ending
Say for instance, setting the price of a watch at Rs. 4,999 is proven to attract more consumers than setting it at Rs. 5,000. Thus, the customers are attracted even though the true difference is quite small. One explanation for this trend is that consumers tend to put more attention on the first number on a price tag than the last. Thus, the goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer.
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4. Segmented Pricing
This pricing strategy involves selling a product or service at two or more prices. Provided such difference in pricing is not due to a difference in manufacturing a product or rendering a service. Rather prices are adjusted based on the customer segment, location and timing when a product is offered.
Customer Segment Pricing
Different prices are charged for the same set of products or services from different customers In case of customer segment pricing.
For instance, railway tickets are priced taking into consideration demography or age of the end customer. Likewise, no ticket is required under Indian railways for children upto the age of 5 years. Similarly, for senior citizens, tickets are given at concessional rates, defined separately for both men and women.
A brand charges different prices for products or services at different locations under location pricing. Although, the cost of offering such a product or a service at each location is the same. For instance, a real estate builder imposes different preferential location charges.For instance, a 4BHK apartment located on the 18th floor may attract extra price for its location compared to the same 4BHK apartment located on the ground floor.
A brand changes the price of its products or services as per the changing seasons, month, day or even hours in case of time pricing. Say for instance the happy hours offered by a bar restaurant or special nights for women offering discounted beverages.
5. Discount and Allowance Pricing
Brands usually change the basic price of their offerings in order to honor customers for their actions. These actions may include volume purchases, early clearance of bills, off season purchases or stays etc. Thus, discount pricing involves adjustment in two ways:
Discount can be offered in different forms. These include cash discount, quantity discount, trade discount and seasonal discount.
- Cash discount refers to offering products at prices for customers making prompt cash payments.
- Quantity discount refers to offering products reduced prices to customers who make bulk purchases. These discounts instigate the customers to purchase more products from a single seller rather than approaching different sellers for different products.
- Trade discount is offered by a seller to its channel partners for performing various functions. These functions include selling, storing and record keeping. This discount is also known as functional discount.
- Seasonal Discount refers to giving products at reduced prices to customers who purchase merchandise or services during the off – season.
Allowance refers to money paid by a brand to the retailers in return for the retailer promoting the brand’s products in some way or the other. Such allowances come in two forms:
Trade in Allowances
Trade in allowances refer to the price reductions given by a brand to the customers for returning an old item in lieu of purchasing the new one. This pricing strategy is common in the durable goods industry such as furniture.
These include the promotional money or price reductions given by a brand to its dealers as a reward for promoting its offerings.
6. Promotional Pricing
Sometimes, companies reduce product price below the marked price or even below cost for a temporary period of time. This strategy is followed in order to increase sales in the short run or to reduce inventories. This is known as promotional pricing. This takes place in several forms.
For instance, sellers follow special event pricing at certain occasions in order to lure more customers. Such occasions may include festivals, special occasions etc. These occasions include independence day, women’s day, festivals like Diwali, Christmas etc.
7. Geographical Pricing
This pricing strategy refers to adjusting the list price of the products based on the location of the customer. Thus, Geographical pricing strategy basically reflects the shipping costs involved in delivering the products from the point of origin to the point of sale.
Hence, low price may be charged if the customer location is closer to the point of origination. And higher price is charged in case customers are located at a far away place.
Accordingly, there are five different geographical pricing strategies:
The goods are placed free on board a carrier at a specific location under this pricing strategy. It is at this location that the title to and responsibility of the goods gets passed on to the consumer. Furthermore, the consumer pays for the freight from the factory to the destination. Hence, the closer the customer destination, lower the price and vice versa.
Uniform Delivered Pricing
This pricing strategy is in contrast to the FOB pricing. Thus, a company charges the same price plus freight for the products under this strategy. This is irrespective of the location of the customers. Furthermore, the freight cost is levied on the basis of average freight cost.
This pricing strategy falls somewhere between FOB pricing and uniform – delivered pricing strategies. Thus, the company sets up two or more zones under zone pricing. The customers that fall in a particular zone pay the same price. This is to say farther the zone, higher would be the price of the products and vice versa.
Basing – Point Pricing
The company chooses a particular city as a basing point as per this strategy. Additionally, the company charges freight costs to all customers from that city to the location of the customer. This is irrespective of the city from where the goods are shipped.
Freight – Absorption Pricing
The seller absorbs all or part of freight charges in order to get more business from a particular location under this strategy.
Thus, Freight-Absorption pricing strategy might result in declining average cost for the product and compensating for extra freight cost. This strategy is used to penetrate in a particular market and clinging to highly competitive markets.
8. Dynamic Pricing
Earlier, fixed price policy was followed by companies while setting the price for goods. However today, companies are resorting to dynamic pricing. Dynamic pricing involves adjusting the price of products continuously to meet the needs of individual customers.
For instance, platforms like MakeMyTrip showcase pricing of airline tickets. These airline companies constantly adjust the price of tickets based on demand dynamics.
Here is an infographic on the different pricing strategies that a business entity can adopt while pricing its products.