Price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors. Having a Pricing Strategy is a standard practice within most Revenue Management strategies.
There are several pricing strategies:
Premium Pricing is a price strategy aimed at setting a high price for a premium product. Such premium pricing is done in order to highlight the higher value, greater rarity and status affiliated to a premium product.
Examples: Luxury Handbags, Clothing, Cars and Watches
Penetration pricing, is a pricing strategy aimed to gain market share quickly, often for a new product in need of promotion. It is widely understood that although the price might be low in the beginning it is widely understood that with time the price will rise for the product as soon as market share objectives are achieved.
Examples: Phone Contracts, Television, Internet
Economy pricing: Is a pricing strategy aimed for the masses, with very low marketing and advertising costs. This is generally done for products that generally aren’t in need of great promotion.
Examples: Generic goods competing with name brand products at supermarkets.
Skimming strategy: Price Skimming, is a pricing strategy which charges high prices for a product or service in the beginning. Thereby targeting early adopters which are interested in paying a maximum price for being the first to access a product. This is often done if a product is the first of its kind, as it allows to charge high prices until competitors arrive in the market – which thereafter will lower the prices for all market participants.
Example: iPhone releases, the First Flat Screen TVs and many other electronics and new technologies.
These are the four basic strategies, variations of which are used in the industry.
In terms of the marketing mix some would say that pricing is the least attractive element. Marketing companies should really focus on generating as high a margin as possible. The argument is that the marketer should change product, place or promotion in some way before resorting to pricing reductions. However price is a versatile element of the mix.