What is Pricing Strategies?
Author - Kaarthikeyan G M
Price refers to the value which the customer has to pay for the product or the service. This will be basically derived on all direct and indirect cost of the product right from the raw materials to the distribution of the product to be available in the market.
There are several pricing strategies which companies follow. Pricing strategies are decided based on the segments, market conditions, competition, input cost, margins, ability of customers to pay.
Below are the some of the pricing strategies which companies follow -
Penetration pricing: Here pricing is defined very low for the entry and to gain the market share quickly, this type of pricing is adopted usually when the new product is launched. The pricing will be raised once the promotion is over and the market share is attained.
The best example is Reliance Jio in India. Jio came up with 4G in the market of telecommunication and offered their product for free to all the people in India. It was a revolution happened in India, they made entire country to adopt to the digital technology. Even people in the rural part of India started buying smartphones, because they are getting internet for free. The adoption rate was very high for Jio and market share also increased. Later after several months Jio have started charging for their services with their customers after their penetration in the market.
Price Skimming strategy: Price skimming is the strategy where companies charge higher price for its product initially and reduces over the time. Companies adopt to this strategy for various reasons like recovering the initial R&D cost before the product attracts the competition, new products which is unique to the market, where customers ready to pay premium. They only attract their target audience who are ready to pay premium to be unique in the society. The company will reduce the pricing, when they launch the higher version of the product.
This type of strategy is more familiar in the mobile industry, where companies enter the market with the higher pricing. For example, Apple's pricing will always be higher, because they target different type of customer who are ready to pay higher value for them to be unique in the society then gradually, they will reduce the pricing. Even One plus will set their pricing higher in the android smart phone market, when competition enters with same features or One plus themselves come up with the higher version of the phone, they will reduce the pricing gradually.
Economy pricing: No-frill price, here margins will be very less. Overhead costs like marketing and advertising costs will be very low. with this pricing strategy company targets mass market with high market share.
This is mostly adopted in grocery products, which is perishable and highly consumables like milk, biscuits, etc., They don't spend more on the aspects of advertising as these are essential for humans for their day to day life.
Premium pricing: These pricing strategies are work in segment, where a strong competitive advantage exists for the company or the products/service which are higher luxury value than the product in the market.
Rolls-Royce is one good example for premium pricing. They have their own customer who is ready to pay for the premium and the luxury they get out of the product. Other than this business class tickets in airlines and 1st class AC tickets in railways can also be the example for premium pricing.
Psychological pricing: This type of pricing is used to play with the minds of the customer. This type of pricing addresses emotions of the customers. Here seller sets a price lower than the whole number. Here customer will read slightly lower than the exact value and treats lower than the actual price.
The example for psychological pricing is "Bata", here the price 999 is a psychological pricing. The customer feels that he has not paid 1000 rupees, but at the end of the day he still pays 1000 rupees. This type of pricing boosts the attention of the customer and make them to buy as that 1 rupee will make customer to perceive they are going to pay something around 900, but not 1000. Think about it!!
Product line pricing: Here companies will sell their two or three products in their product line together as a package, which could result cheaper for customer than buying each product separately.
Most FMCG companies like Reckitt & Benckiser sell their products together as a value pack, which will result customer for paying less than buying separately. For Example, the value pack with Harpic and Lizol will be Rs. 150, whereas Harpic and Lizol separately may cost Rs. 100 each which will result customer to pay Rs. 200 (Pricing is for example only)
Captive Pricing: Companies encourage their customers to buy their products which will be lower cost, but the consumables price will be higher. Even though customers will buy, since by that time the customer is used to the product. Initial product cost may be low, but the working capital will be high.
Example can be shaving razors. Where customer will invest only Rs. 20 for the 1st time with the razor and the blade. But after that the customer will change the cartridge of worth Rs. 10 for every shave (Basic model). Since customer invested 20 rupees for razor, he will change blades for that razor only than changing the brand. That causes working capital for the customer. Best example for captive pricing is Gillette Mach 3 blades, the razor may be cheap but the blades like twin blade or Mach 3 will be very high than the razor.
Geographical pricing: Prices are set considering locations in the mind. They take account of logistics, costs or even the ability of the market to pay.
This type of pricing we can encounter in the hill stations like Ooty, Munnar, etc., which is also a tourist place. Here logistics comes into the picture so mostly the consumables will be slightly higher than the surface area. And ability of market to pay also comes into the picture since it is a tourist place. A father will be ready to pay Rs. 200 for a toy which will only cost Rs. 100 at his own place, because people have a mindset to buy something in a tourist places and take it to their lovable ones. Not only in hill stations, we can encounter these pricing in the food stalls of beaches and parks also which will be on the higher side.
Types of Pricing strategies.
1. Penetration pricing - Example of Jio
2. Skimming pricing - Example of Apple and One plus
3. Economy pricing - Example of groceries like milk
4. Premium pricing - Example of Rolls-Royce
5. Psychological pricing - Example of Bata
6. Product line pricing - Example of Reckitt and Benckiser
7. Captive pricing - Example of Gillette
8. Geographical pricing - Example of hill stations, beaches and parks