P for Pricing !!

P for Pricing!

Developing idea and product is very passionate work for any technical expert. It seems like technical expert faces problems in quoting its value. Pricing is very important phenomena in business process.

Pricing depends on product, market, consumer, competitor, supplier, government and conditions applied in organization itself. In brief stakeholders affect pricing decision.

Pricing in nutshell!

A price of a product or service can be set by three or more methods or a combination of them. Price can be set by cost, usually a bottoms-up approach. Looking at the value added to the customer by the product or service can set Price. Prices can also be set by competitive expectations. Finally, pricing can also be set by looking at the elasticity of the market to determine the maximum profit at a given price and volume function. Usually a pricing package includes two or more of these approaches to verify the price range.

There are many ways to price a product. Pricing strategies includes

1. Penetration pricing
2. Market Skimming
3. Value pricing / Premium pricing
4. Loss leader
5. Psychological Pricing
6. Going rate pricing
7. Tender pricing
8. Price discrimination
9. Destroyer pricing
10. Absorption pricing
11. Marginal cost pricing
12. Contribution pricing
13. Target pricing
14. Cost plus pricing
15. Economy pricing
16. Product line pricing
17. Optional product pricing
18. Captive product pricing
19. Product bundle pricing
20. Promotional pricing
21. Geographical pricing
22. Value pricing
23. And a lot………

However some of pricing overshadows others. In fact in today’s market different situations demand adopting several pricing strategies.

Basic strategies

1. Product Mix Strategy
2. Price adjustment strategies
3. New strategies

New Strategies

Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights. Premium pricing is charged accordance with customer perceptions.

Value pricing
This is a time to move away from traditional methods of setting prices such as the cost-plus model or benchmarking of competitor's prices, and begin to use the power of "value pricing."

We have numerous example who adopted value pricing - McDonald, Dell, Amazon.com, eBay, Oracle, Toyota Volkswagen, HBO, Fox, Cingular Wireless and Nextel are successful adopters.

Value pricing is adopted where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales.

Price Skimming
Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management.

Price Skimming allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.

Encouraging entry of competitors, slow rate of adoption, inefficiency in price reduction at latter stage, low inventory turnover are key disadvantages in price skimming practice.

Penetration pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than short term profit maximization.

Fast adoption, goodwill building, cost reduction & control, discouraging competitor's entry and high stock turnover are main advantages in penetration pricing. Threat of price war and image dilution in customer's minds are key disadvantages of penetration pricing.

Price Discrimination
Price discrimination exists when sales of identical goods are transacted at different prices from a single vendor. Theoretically, price discrimination is a feature only of monopoly markets. In addition to a monopoly market, price discrimination requires some means to discourage discount customers from becoming resellers and by extension competitors. This usually entails either keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence.

However there are three degrees of price discrimination.

Price skimming is a type of price discrimination. It is price discrimination over time. Typically a company starts selling a new product at a relatively high price then gradually reduces the price as the low price elasticity segment gets satiated.

Product Mix Strategy

Product line pricing
Product line pricing, a type of product mix strategy, sets price steps (also known as price points e.g. Prepaid recharge coupon in Telecom sectors with respect to different talk time available) between products in the line to appeal to different groups of consumers. Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service.

For example

1. Airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
2. Accessories with car.
3. Mobile handsets with Service connection.

Captive Product Pricing
Where products have complements, especially main products that require ancillary products, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades, which fit the razor. Other examples are Software solutions.

Product Bundle Pricing
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs, season’s tickets and computer & accessories are often sold using the bundle approach.

Price - Adjustment strategies

Promotional pricing
Loss leader and special events pricing are nothing but promotional pricing where prices are reduced for short time period to boost sale. Buy One Get One Free is also promotional pricing.

Psychological pricing
Psychological pricing is a theory in marketing that these prices have a psychological impact that drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points. E.g. Product is tagged at $499 rather $ 500 completely.

Geographical Pricing
According to boundary situations prices are set. International pricing is just like geographical pricing. Thus prices sometimes depend on geographical conditions also.

Economy Pricing
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Today’s market has been under various types of war. And Price War is one of them. Pricing is no more remained negligible. Pricing is an ultimate foundation to get competitive advantage in market.