Pricing strategies are a central part of marketing and looks at target market, market conditions, competitor action, ability to pay and other sets of variables. Broadly, there are four pricing strategies the majority of business uses.
Premium Pricing involves pitching your product or services at a higher price than your competition. This gives the impression that your offering is of a higher quality than the competition. This from of pricing generally works better with strong brand recognition.
Successful premium pricing can create barriers to entry for those thinking of entering the market. If done successfully, new and existing companies in the same market will need to tell their target market why their product is better than yours. This gives your product or service free exposure from the competition.
Conversely, a very clear USP (unique selling point) is needed to justify higher pricing. Also, your offering needs to be something with a high price elasticity.
Penetration pricing carries the objective of increasing sales volume and/or market share. This type of pricing policy is often employed with the launch of a new product where the product is gets the competitive edge with lower pricing. In the short term, this type or pricing policy often leads to lower profits. However, this can often be justified where a significant market share is up for grabs.
A drawback of this type of pricing strategy is that it may create an expectation of a permanently low price. It may also attract a more bargain orientated customer than you want for your business. These customers may move on quickly to the next bargain and brand loyalty may be less important to them.
This is keeping the prices as low as possible and is mainly based on high volume sales. Companies who engage in this pricing strategy include Costco, Ryanair, Lidl and generic manufacturer of medications.
Gaining new customers tends to be easier and quicker with this pricing strategy reducing your customer acquisition costs (CAC). However, this pricing model requires that you keep your prices low to continuously attract large volumes of new customer. Your brand will also be associated as a low cost brand, and so it will likely to be difficult to increase prices later.
This type of pricing strategy involves setting prices high prior to competitors entering the market. It is the “early adopter” or “first movers” model that has little competition. As competition enters the market, the price strategy may take a different direction depending on the nature of the product, the branding and it’s price elasticity. The aim of price skimming is to maximise profits in a short period of time early in the life of the product.
If your product can enter the market using this pricing strategy, it can help to increase the perceived quality and will generate a higher profit margin in the initial stages. However, you will need to decide on which other strategy to combine with price skimming as competition increases. Price skimming is not a viable long term option.