Pricing Strategy

The latest content to be added to mktg101.co.uk is a page about pricing, which can be found here: www.mktg101.co.uk/price.

Here is part of our explanation of pricing:

Price is defined as the amount of money charged for a product or service, and is one on the key elements of the marketing mix alongside product, place, and promotion. However, price is unique in that it is the only element of the marketing mix which generates revenue, where as the other elements incur costs. Price is not to be confused with value, which is the amount of money which is considered to be a fair equivalent for a product or service. In the modern marketing environment companies often have many competitors, therefore there a large emphasis placed on ensuring that a companies pricing strategy is right. The pricing matrix (below) suggests four basic pricing strategies:

Premium Pricing

This is where the product is of high quality, but a high price is charged in return. This pricing approach is often used if a product has a good unique selling point (USP) and therefore a competitive advantage. Premium pricing also tends to attract status conscious consumers who believe that high price indicates excellent quality, and is a sign of wealth, e.g Rolex, Rolls Royce, luxury cruises, etc.

Economy Pricing

Products are manufactured and lower quality and marketed cheaply, and in-turn sold at low prices. Products in this category are often ‘no-frills’ with minimal features and basic packaging. For example, many supermarkets sell their own brand products at a cheaper price than other well-known brands.

Penetration Pricing

The purpose of penetration pricing is to charge a low initial price to attract customers and build market share. This strategy is often used during new product releases in order to gain reputation and achieve economies of scale before allowing competition to build. Once significant market presence has been secured, the product price is often gradually increased to a more competitive rate.

Price Skimming

Price skimming involves charging a relatively high price for a short space of time in the attempt to ‘skim’ off customers who value the product highly and are willing to pay a greater price to get a product sooner. This often occurs when companies have a competitive advantage with products that are new, improved, and innovative. Price skimming benefits from high short-term profits and a image of high quality. However, once the ‘high end’ of the market is saturated and new competition enters the market, the price of the product is gradually reduced to attract customers who have less demand for the product. An example of price skimming is the sale of DVD players in the 1990’s. Prices were originally high due to the new technology, but this technology soon became common-place resulting in increased competition and falling prices.

To read more about factors which affect the pricing decision, as well as many other marketing topic guides, please visit our website at www.mktg101.co.uk