Types of Pricing Strategies
Effective pricing is the most crucial aspect of all businesses because product popularity, profitability and brand marketing depend on it. Buyers will interact with your product/service, and make buying decisions based on the price bracket. Below are a few methods that are considered while working on pricing policies.
Cost Plus:
This method follows the system of adding a certain margin over the cost calculation, but it does not consider subjective factors such as competition and consumer perception. The costing is decided as per the costs of components and raw materials used in the product. Considering a B2B pricing model, if this method is used, price of the product would be more than product/service value. Hence it is not recommended for a B2B business, however it is suitable for most of the B2C products. Start-ups, small businesses with limited product lines, short term product launches for market assessments, products having more or less steady demand and others can use this system fruitfully.
Value Based:
This pricing technique price uses the perceived ‘utility value’ of the product or service. Seller must be able to convey the ‘worthiness’ of what they are offering their buyer, it as important as the price itself. The costing process is a bit complex and tricky, because of many uncertain factors like effectiveness of the product, the right product application, consumer experience, etc. But it is a highly recommended pricing strategy for a B2B setup.
Price Skimming:
Under this model the same products with lesser features or their olden versions are priced lower. Here both the distinguished audience and the indifferent buyer are covered. This system attracts both types of buyers. Customer attraction, to a certain extent also depends on brand loyalty and popularity of the product. In the next stage, when a new model is put out, price of the old model will be reduced. Price skimming can be specially of use to business-to-consumer (B2C) brands that work on fast-moving trends.
Fashion retailers mostly launch new product lines at a bit higher price, then put the same products on sale as soon as new, latest fashionable clothes come in. The basic concept here is to “skim” off the top market segment both as per the target captive audience and also with regards the pricing when your product is in "highest demand", thereby maximizing the profitability and sales in the initial period.
Penetration Pricing:
The opposite of the above strategy is penetration pricing. We begin with a lower price to attract customers, get their loyalty and then jack up the price while demand picks up. The price change can be implemented, depending on consumer’s feedback and the buying trends affecting your brand. In this scheme, when prices are lower than the competitor’s prices, mostly it is restricted or at zero profit in the beginning.
Bundle Pricing:
At MacDonald’s you get a meal at around Rs. 120/- which has a coffee and a burger, with accompanying sauce sachets. This is known as bundle pricing This is especially useful for B2C products, based on the fulfilling combination “of parts of the whole”. The idea is that a bundle will raise “perceived gained value” of the product. Thus, creating an impression of a bargain, eventually the sales will rise due to this perception.
Freebie Combo or Freemium:
This model is followed by mass mailing services like Mailchimp and many service app vendors as well. Here they offer a limited service out of the main scheme for a limited period of time as free. And then if you prefer you can use the full version after the trial period is over. Alternatively, you always (continually) get some part of the main service free and then you can get the full scheme on paying a nominal price.
Psychological Pricing:
This is based on certain psychological research and its conclusions on the buying habits of the consumer. For instance, instead of charging 999 instead of 1000 Rs. We end the price with an odd number, the buyer feels he is paying lower due of this figure. Making use of larger fonts for amounts in thousands and smaller font sizes for amounts in hundreds, while publicly displaying prices is also psychological pricing. Coupled with this charm pricing tactic, you can further stress on a customer’s feelings that they’re paying far more less than the regular price. Showing the original price next to a new sale price, and demonstrating to the customers how much they’re saving, hence creating a feeling of ‘saving money’. This procedure sometimes is called anchor pricing. Sales for most of the B2C products sales shoot up, when these tactics are used.
These are some of the major pricing models used by businesses to attain a better connect with consumers, while doing justice to the trade. Looking at the complete scenario, if we observe closely, the same pricing strategies may not work for all the time to come. Once started the strategy will have to be modified for obtaining the desired results. As the e-commerce business is growing exponentially, price comparisons are becoming simpler by the day. Now the consumers will increasingly look for the best value they can find. In today’s day and age, pricing strategies play a subtly important part!
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"Is this priced right?"-Power of Product Pricing Strategies for B2B and B2C businesses
Your best pricing strategy: 7 examples to maximize your profits
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