In today’s business world pricing plays a vital role in the success of an organization. While there are various factors that affect a business and pricing of a product is one of them. Determining pricing strategies is very important for a business organization.
Good pricing strategies help in determining the price point at which one can maximize profits on the sale of its goods or services. While setting prices, one needs to consider various factors like demand and supply of goods or services in the market, selling and distribution cost, offerings of competitors in the market, target customers, etc.
Types of Pricing Strategies
Following are the types of pricing strategies
1. Cost-plus Pricing
It is the simplest pricing method. The firm calculates the cost of producing the good and adds on a percentage (profit) to that price to give the selling price.
2. Limit Pricing
A limit price is a price set by a monopolist to discourage economic entry into a market. The limit price is often lower than the average cost of production.
3. Penetration Pricing
Setting the price lower than what it is offered by other competitors in order to attract customers and gain market share. The price can be raised later once this market share is gained.
4. Price Discrimination
Price discrimination is setting a different price for the same product in different segments to the market. For example, this can be for different classes of buyers, such as ages, or for different opening times.
5. Psychological Pricing
In this pricing designed to have a positive psychological impact on the customers. For example, selling goods on profit at ₹ 4.95 or ₹ 4.99, rather than ₹ 5.00.
Learn more about Pricing and Output Determination under Oligopoly here in detail
6. Dynamic Pricing
A flexible pricing mechanism made possible by advances in information technology and this strategy is mostly employed by internet-based companies.
7. Price Leadership
In oligopolistic business market usually, the dominant competitor among several leads the way in determining prices, and the others soon follow.
8. Target Pricing
Target pricing is a pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production.
Companies with high capital investment and public utilities like gas and electrical companies use this strategy.
9. Absorption Pricing
It is a method of pricing which recovers all costs. The price of the goods or services includes the variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-plus pricing.
10. High-low Pricing
High-Low pricing is a method of pricing where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and coupons, lower prices are offered on key items.
11. Marginal Cost Pricing
This pricing method is a practice of setting the price of products and goods to be equal to the additional cost of producing an extra unit of output.
Examples of Pricing Strategies
Give an example each of psychological pricing, penetration pricing, cost-plus pricing, and limit pricing.
- Selling goods for ₹ 999, rather than ₹ 1000 is psychological pricing.
- Selling goods at price ₹ 45 than what its competitors are offering ₹ 50 or ₹ 55 in the market. This pricing strategy is penetration pricing which increases market share.
- A produces a good and cost of producing such good is ₹ 100. It then adds 20% to the cost of goods (100 + 20% = 120) and sells the good in the market at ₹ 120. This is cost-plus pricing.
- Suppose, the average cost of producing a good is ₹ 80, but the price of good offered in the market is ₹ 75 which is lower than the average cost of the good. This type of pricing is limit pricing and it discourages competitors entry into the market.