What is pricing strategy in marketing?
Pricing strategy in marketing refers to the method a company uses to determine the price of its products or services. It’s an important aspect of marketing because it helps the company achieve its goals, such as increasing revenue, maximizing profit, or gaining market share. The pricing strategy should align with the overall marketing and business strategy, taking into account factors such as production costs, competition, target audience, and market demand. A well-crafted pricing strategy can provide a competitive advantage, build brand image, and influence customer purchasing decisions.
18 Types of Pricing Strategies
1. Cost-Plus Pricing.
Cost-plus pricing is a pricing strategy where a company sets the price of a product by adding a markup to the total cost of producing it. The markup is typically expressed as a percentage of the cost and is used to cover overhead expenses and generate a profit. In cost-plus pricing, the price of the product is determined solely based on the cost of producing it, without considering the perceived value that the product offers to the customer or the market price of similar products. This approach is often used by companies as a simple and straightforward way to set prices, but it can result in prices that are not in line with market demand or customer willingness to pay, which can negatively impact sales and profitability.
Here are a few examples of cost-plus pricing in action:
- Manufacturing industry: A manufacturer adds a markup of 20% to the cost of producing a product to determine its selling price.
- Food and beverage industry: A restaurant adds a markup of 100% to the cost of ingredients to determine the menu price for a dish.
The price of a product is based on the prices of similar products offered by competitors. This approach considers the prices of similar products in the market and the prices that customers are willing to pay for them. Companies using competition-based pricing may adjust their prices based on changes in the prices of their competitors or in response to changes in market demand or other market conditions. The goal of competition-based pricing is to remain competitive in the market and attract customers by offering a price that is perceived as fair and reasonable. This strategy is commonly used in highly competitive markets where customers have a lot of choices and are sensitive to price differences.
the price of a product or service changes in real time based on supply and demand conditions, market trends, competitor activity, and other factors. The goal of dynamic pricing is to maximize revenue by adjusting prices to match current market conditions and consumer demand.
4. Freemium Pricing
Freemium pricing is a pricing model where a basic version of a product or service is offered for free, while advanced features or additional resources are available for a fee. The goal of freemium pricing is to attract a large number of customers with the free version, and then convert some of them into paying customers as they require more advanced features or additional resources.
Freemium pricing is widely used in the software, mobile app, and gaming industries, where customers can try a basic version of the product for free, and then pay for premium features, additional storage, or other resources. For example, the Canva design tool is available for free, but editors can purchase additional package.
The freemium model is based on the idea that a certain percentage of customers will be willing to pay for premium features, while others will continue to use the free version. The success of freemium pricing depends on the quality of the free version and the perceived value of the premium features or additional resources.
High-low pricing is a pricing strategy where a company alternates between charging a high price and a low price for a product or service. The goal of high-low pricing is to create a perception of value by charging a high price for a limited time, and then offering the same product at a lower price to create a sense of urgency and encourage customers to make a purchase.
High-low pricing is widely used in retail and consumer goods industries, where companies offer sales or discounts on a regular basis to drive traffic and sales. For example, a clothing retailer may offer a high price on a particular item, and then discount the same item during a sale. The high-low pricing strategy is designed to create a perception of value and encourage customers to make a purchase during the sale period.
The high-low pricing strategy can be effective in creating a sense of urgency and driving sales, but it can also lead to confusion and decreased customer loyalty if used too frequently or in an inconsistent manner. Companies need to carefully manage the high-low pricing strategy to ensure it is aligned with their overall pricing strategy and brand positioning.
Some examples of this strategy include:
Seasonal sales: Retailers often offer high-low pricing during holiday seasons or clearance events.
Limited-time promotions: Companies might offer high-low pricing for a limited time to drive sales, such as a “buy one get one free” offer.
A company charges for its services based on the number of hours worked. This is a common pricing strategy for service-based businesses, such as consultants, lawyers, and contractors. In this model, the company sets an hourly rate and invoices the client for the number of hours worked on a specific project or task. The hourly rate may vary depending on the complexity of the work, the experience of the provider, or the location of the service. This pricing model allows for flexibility and customization in the services offered, as the client only pays for the time actually worked.
Premium pricing is a pricing strategy in which a company sets a high price for its products or services, positioning them as exclusive and high-end. This strategy is often used for luxury goods and premium brands. The high price is intended to reflect the quality, uniqueness, and perceived value of the product, and to attract consumers who are willing to pay more for a premium experience.
Premium pricing is often used in combination with other marketing strategies, such as product differentiation and brand building, to reinforce the premium image of the product and create a perception of high value. This pricing strategy can be successful in certain market segments where consumers are willing to pay a premium for high-quality products and exclusive experiences. However, it may also limit the market potential of the product if the target consumers cannot afford the high price or do not perceive the value to be worth the price.
A company charges for a specific project or task rather than for an ongoing service or by the hour. This pricing model is common in industries such as construction, design, and consulting, where the scope and complexity of the work can vary greatly from project to project.
In this model, the company provides a quote or estimate to the client based on the specific requirements and scope of the project. The quote includes all of the work that will be performed, the materials needed, and any other expenses related to the project. The client pays a fixed price for the entire project, regardless of the number of hours worked.
Project-based pricing offers several advantages, including clarity and predictability for both the client and the service provider. The client knows exactly what they will be paying for and can budget accordingly, while the service provider has a clear understanding of the work that needs to be performed and can plan their resources accordingly. This pricing strategy can also help manage client expectations, as the scope of the work is defined and agreed upon in advance.
9. Value-Based Pricing
A company sets the price of a product or service based on the perceived value that it provides to the customer, rather than on the cost of production or market competition. This pricing strategy is based on the idea that customers are willing to pay more for a product or service that they perceive to have greater value.
In this model, the company considers factors such as the customer’s needs, their budget, and the competition in order to determine the appropriate price. The goal is to set a price that accurately reflects the value that the product or service provides to the customer.
Value-based pricing is often used by companies that offer unique or high-quality products or services, as it allows them to differentiate themselves from the competition and command a premium price. This pricing strategy can also lead to increased customer satisfaction and loyalty, as customers are more likely to feel that they are getting a fair value for their money.
A company offers multiple products or services as a packaged deal at a discounted price. The goal of bundle pricing is to increase the overall value for the customer by offering a variety of products or services at a lower price than if each were purchased separately.
Bundle pricing is often used in industries such as telecommunications, where customers can purchase a bundle of services such as internet, TV, and phone service at a discounted rate. This pricing strategy can also be used in retail, where customers can purchase multiple items as a set, such as a kitchen appliance bundle.
Bundle pricing can be an effective marketing tool, as it provides customers with the convenience of purchasing multiple products or services in one transaction, while also providing them with a perceived value in the form of a discount. This can lead to increased sales and customer loyalty, as customers are more likely to return to purchase additional products or services in the future.
11. Psychological Pricing
Psychological pricing is a pricing strategy in which the price of a product or service is set to influence the customer’s perception and behaviour. This pricing strategy takes into account the psychological factors that affect how consumers perceive value and make purchasing decisions, such as anchoring, framing, and loss aversion.
Examples of psychological pricing include:
- Odd pricing: Setting prices just below a round number, such as $9.99 instead of $10, to create a perception of a lower price and increase sales.
- Anchoring: Using a high reference price to make a lower price appear more attractive, such as offering a discount from the original price.
- Price framing: Presenting prices in a way that influences the customer’s perception of value, such as offering a package of items at a discount compared to purchasing each item separately.
- Loss aversion: Creating a sense of urgency by emphasizing the limited time or availability of a product, making the customer feel like they may miss out on a good deal.
Psychological pricing can be an effective marketing tool, as it can influence the customer’s perception of value and increase sales. However, it can also be seen as deceptive or manipulative if not used ethically. It’s important to strike a balance between using psychological pricing strategies to influence customer behavior and being transparent and fair in pricing practices.
12. Geographic Pricing.
The price of a product or service is set based on the location of the customer or the location of the company’s operations. This pricing strategy takes into account differences in cost of living, economic conditions, and market competition in different regions to determine the appropriate price.
Examples of geographic pricing include:
- Regional pricing: Setting different prices for the same product or service based on the customer’s location, such as charging different prices for the same product in different countries.
- Zone pricing: Dividing a geographic area into different zones and charging different prices based on the location of the customer, such as charging higher prices for shipping to remote or rural areas.
- Transfer pricing: Setting different prices for the same product or service based on the location of the company’s operations, such as charging higher prices for products manufactured in one region compared to another.
Geographic pricing can help companies maximize profits and manage costs by taking into account regional differences in demand and cost structure. However, it can also lead to price discrimination and customer dissatisfaction if not executed fairly and transparently. It’s important to consider the ethical and legal implications of geographic pricing, and to communicate the reasons for any regional price differences clearly to customers.
13. Skimming Pricing.
A company sets a high initial price for a new product or service, and then gradually lowers the price over time. The goal of skimming pricing is to capture the maximum profit from early adopters and early adopters, who are willing to pay a premium for the latest and greatest product or service.
This pricing strategy is often used in industries such as technology and electronics, where new products are introduced regularly and customers are willing to pay a premium for the latest and greatest technology.
With skimming pricing, the company can recoup the costs of research and development, as well as generate a high profit margin in the early stages of the product’s life cycle. As the product becomes more widely adopted and competition increases, the company can gradually lower the price to maintain market share and continue to generate profit.
Skimming pricing can be an effective way to generate revenue for a new product, but it can also lead to customer frustration if the price drops too quickly or if the product is perceived as overpriced. It’s important to consider the market conditions and customer expectations when setting the initial price, and to communicate any price changes transparently to customers.
14. Penetration Pricing.
the company sets a low initial price for a new product or service, with the goal of gaining a large market share quickly. The idea is that by attracting a large number of customers with a low price, the company can establish a strong market position and then gradually raise the price over time.
This pricing strategy is often used in industries with low switching costs, where customers are not likely to incur significant costs if they switch from one product or service to another. The goal is to capture market share and gain customer loyalty, which can be leveraged to increase profits in the future.
Examples of industries where penetration pricing is commonly used include consumer goods, software, and telecommunications. In these industries, the company can use a low price to attract a large customer base, and then gradually increase the price over time as the product becomes more established in the market.
15. Razor blade pricing model
The razor blade pricing model is a pricing strategy in which a company sells a product at a low price (or even at a loss) with the expectation of making a profit from the sales of complementary products or services.
The term “razor blade” refers to the practice of selling razors at a low price, with the expectation of making profit from the sales of razor blades, which are the consumable parts that must be replaced periodically. This pricing strategy is used in many industries, including consumer goods, electronics, and software.
In the razor blade pricing model, the company provides a low-priced “entry point” product to attract customers, and then profits from the sale of complementary products or services, such as accessories, consumables, or subscriptions. This can help the company to generate a recurring revenue stream and build customer loyalty.
Examples of the razor blade pricing model include:
- Printer manufacturers selling printers at a low price, with the expectation of making profit from the sale of ink or toner cartridges.
- Mobile phone manufacturers selling phones at a low price, with the expectation of making profit from the sale of accessories and upgrades.
- Software companies selling software at a low price, with the expectation of making profit from the sale of software updates, upgrades, and support services.
The razor blade pricing model can be an effective way to generate revenue and build customer loyalty, but it also requires a strong understanding of the market and customer behavior. Additionally, the complementary products or services must be of high quality and offer good value to customers in order to maintain customer loyalty and avoid commoditization of the products.
16. Subscription pricing
Customers pay a recurring fee for access to a product or service, typically on a monthly or annual basis. The fee gives the customer access to the product or service for the duration of the subscription period. Subscription pricing is commonly used for software products, online content, and various other services. The benefits of subscription pricing include a predictable revenue stream for the company and the ability to offer customers convenient and flexible access to products or services.
17. Economy pricing
Economy pricing is a pricing strategy that focuses on offering products or services at the lowest possible price, often sacrificing some aspects of product quality, design, or service level in order to keep prices low. The goal of economy pricing is to appeal to cost-conscious consumers who are primarily concerned with getting the best value for their money. This strategy is commonly used in industries with high levels of competition, such as retail, grocery, and discount stores. Economy pricing can be an effective way for a company to capture market share and increase sales, but it can also lead to perceptions of lower quality and reduced brand value.
18. Price lining
That involves offering a limited range of products or services at a set of fixed prices. The idea behind price lining is to simplify the buying decision for customers by limiting their options and making it easy for them to compare prices. This strategy is commonly used in retail and grocery stores, where items are grouped into different price tiers, such as “economy,” “standard,” and “premium.” Price lining can make it easier for a business to manage pricing and inventory, but it can also limit the ability to offer customized pricing or promotions to different customer segments.
What are the 7 pricing factors?
- Production costs: This includes the cost of raw materials, labor, overhead, and any other expenses directly related to producing the product.
- Market place: The market conditions, including supply and demand, economic trends, and seasonality can all impact pricing.
- Value to customer: The perceived value of the product to the customer is a key factor in determining its price. If the customer perceives the product as high-quality and valuable, they may be willing to pay more.
- Competition: Pricing strategy must take into account the prices of similar products offered by competitors.
- Promotion and advertising: The cost of promoting and advertising the product must also be factored into the pricing strategy.
- Positioning: The desired image and positioning of the product in the market will also impact pricing, as the company may charge a premium price for a luxury product, for example.
- Sales strategy and tactics: The overall sales strategy, including discounts, promotions, and financing options, will also impact the final price of the product.