Strategic Pricing: From Skimming to Promotions
Market Skimming Pricing
Setting a high price for a new product to maximize revenues from the segment that is most willing to buy it.
- Introduce the product at a high price.
- Reduce the price for the second-tier segment.
- Reduce the price again for the third-tier segment.
- Continue this process as needed.
Conditions:
- The product must be perceived by customers as having high quality.
- There must be a large enough segment willing to pay the high price.
- Revenues must exceed the costs of producing on a small scale.
- Competitors should not be able to easily enter the market and undercut the high price.
Market Penetration Pricing
- Set a low price for the new product to attract a large number of customers and gain a large market share.
- Obtain profits later by: (a) selling more to these customers and (b) achieving economies of scale.
Conditions:
- The market must be highly price-sensitive, so a low price leads to a large customer base.
- There must be economies of scale.
- The low price should deter competitors from entering the market.
- Customers should remain loyal to the company.
Product Line Pricing
Setting the price for several products in a product line.
- Companies typically have a product line rather than a single product.
- The firm attempts to maximize the entire line’s profits.
- Pricing becomes more complex due to relationships and differences between products: related demand, perceptions of value, cannibalization, economies of scale, and different competitors.
Optional-Product Pricing
Offering a base product at a fair price, with extra options charged in addition.
Companies must decide what to include in the base product and what to offer as additional options, based on customer value perceptions and the margins of each option.
Captive-Product Pricing
Pricing products that must be used along with a main product. Typically, the company prices the main product low and makes a profit from selling the supplies.
Conditions:
- Find the right balance between the main product and the supplies; otherwise, customers might become dissatisfied and stop buying.
- The same company should sell both the main and captive products.
Product Bundle Pricing
Combining several products and offering the bundle at a reduced price.
- It allows for the sale of products that might not otherwise be sold.
- It can simplify operations by reducing the number of items handled.
Price Adjustment Strategies
Discount and Allowance Pricing
- Discount: A straight reduction in price during a stated period, for larger quantities, or under specific conditions.
- Allowance Pricing: (B2B only) A payment by manufacturers to retailers in return for agreed-upon conditions and/or help in promoting the product.
Segmented Pricing
Selling a product at different prices, where these differences are not based on differences in costs.
- Customer-segment pricing: Different customers pay different prices for the same product (e.g., student discounts at museums).
- Product form pricing: Different versions of products are priced differently, but this is not based on cost (e.g., flying first-class).
- Location-based pricing: Different prices for different locations.
- Time-based pricing: Differences in price due to variations by season, time of month, weekday vs. weekend, or hour.
Conditions:
- The market must be segmentable, and segments must show different degrees of demand.
- It must be profitable: the costs of segmenting should be lower than the extra gains from segmented pricing.
- It must be legal.
- It should reflect differences in customers’ perceived value.
- Customers in lower-price tiers should not feel they are second-class citizens.
Psychological Pricing
Price is a strong indicator of quality, especially when the customer cannot assess the product’s quality.
- Reference price: The price that buyers carry in their mind and use as a reference when evaluating a given product. This reference can be different products in the same category or the same product in different periods, situations, or locations.
Promotional Pricing
Temporarily pricing products below the list price.
- Used to increase sales, reduce excess stock, or combat competition.
- It might even be below cost.
- It encourages undecided customers to act/buy.
- Be careful with changing customers’ reference points.
- It should be used as a short-term fix, not a standard business practice.