Explain Pricing Strategies.

When making price decisions, an organisation has to follow price strategies. Price strategies offer a set of guidelines and gives direction to the organisation for pricing decisions for the target markets. It determines the extent of pricing basis the region, price variability, price levels, price stability, use of price lining, and pricing according to stages of the product in the product life cycle.

1) Region based pricing (Geographical pricing) – This involves studying the region or country of the target market and setting the prices accordingly. Different regions have different set of prevalent systems for making payments. Also, the organisation may consider adding additional percentage to price basis the taxes, transportation and storage costs. Many companies are asked to invest back a percentage of their earnings in the target market country. The system in which the buyers want to payback in other forms other than money is known as countertrade. These can take place in different forms like barter, compensation deals, buyback agreements, and offset. (Source – Marketing Management; Prof. Kotler, Developing price strategies and programs, 2004, p.g. 489).Barter system involves exchange of goods instead of money and no third party involvement.Compensation deals involve seller receiving some percentage of payment in the form of products and the rest in money. In buyback agreement the seller sells the machinery, technology, etc. to buyers and agrees to buy the products developed by the buyer using that machinery, technology, etc. In Offset the seller receives the complete payment in money but needs to spend a large amount of that in the country of operation within a specified time. For example, many companies were not allowed to trade in India unless a substantial amount of earning was spent in India. There were bills passed in the parliament after a heated debate.

2) Pricing through Price variability/differentiation – When an offering is sold to buyers at two or more prices equal to each buyer’s perception of product value though they do not reflect proportional difference in marginal costs. These can be done in the following forms –

• Customer basis- one customer may pay one price and another a different price at one time and place. For example, different movie shows at different timings and different age groups, warehouse sales, etc.
• Product-form basis – different versions of the product are priced differently for buyers with different perceptions. For example, Motorola sells its Moto X series with a different back cover texture at different prices.
• Place basis – geographically separated target markets will have a different price of the same product though the cost of offering in each location is same.
• Time basis – the product price changes with time. For example, off-peak prices for theatre, movies, seasonal products, etc.

3) Pricing through Price levels – A border pricing is set with in which the price is set. For considering the general price, management considers competitive advantage, product line objectives, attractiveness of target market, current and desired image of the firm. A company like Maruti Suzuki has always targeted middle class and upper middle class customers. It maintained this image for a long time but has moved at changing it image in the last decade by moving into the premium segment of cars. Maruti Suzuki has cars for different income and lifestyle segments. They manufacture cars like Alto, Alto 800, A-star for lower middle class customers. They have moved into making SUV vehicles as well. But the image that the company has maintained is of reliability, affordability and fuel efficient vehicles for price sensitive Indian customers.

4) Pricing through Price lining – Price lining refers to setting price for products within a product line to meet the needs of customers. For example, Maruti Suzuki has cars for different income and lifestyle segments. WagonR, DeZire are targeted to middle class segments whereas Alto and A-star is to target lower middle class market. If it launches a new car in a certain product line, it will need to consider the price level close to the products in that product line.

5) Pricing according to stages of the product in the product life cycle – Some organisations plan in advance the pricing strategies of the product as it moves through the different stages of life cycle. As the competition becomes intense with the success of the product, the organisation has to change the price of the product or else customers will switch to new products from rival firms or substitute products. For example, after 5-6 months of its launch, a premium mobile phone has its price reduced with the launch of new models from rival companies. The firm tries to earn as much revenues possible before the product becomes obsolete in few years.

New product pricing –
There is great flexibility with the organisations in setting a price for a new product as compared to the product in other stages of life cycle. New product launch and its price are given lot of importance as these cover the overall marketing strategy of the organisation. The products in growth, maturity and decline stage face competition and give little choice in increasing the prices. New products on the other hand have little or no competition hence, can be utilised to generate high profits through Market skimming pricing strategy and Market penetration pricing strategy.

Skimming pricing strategy involves setting high profit margin relative to costs to “skim” as much profit as possible from the high demand in the market. Once the competitors enter the market with a similar or a substitute product, the organisation reduces the price of the product to make it available for price sensitive customers. Most of this strategy is directed towards the Innovators and Early adopters in the target market to “skim the cream” highlighting the unique product features, brand image, and quality. (Innovators – they are willing to try new ideas and are first to buy the new product. They help get the product exposure. Early adopters – these people adopt new ideas early but carefully. They serve as the opinion leaders. Early majority – these form around 34% of the market and adopt a new product earlier than an average consumer.)For example, Samsung mobile’s launch of a new note series handset is usually high priced. After few months the price is generally lowered amidst competition.

Penetration pricing strategy involves setting a low price of the new product relative to costs to increase the market share in a short period. This strategy keeps the competitors away as the profit margins are low. The organisations objective is to gain market share and maintain it for a longer period through economies of scale. This strategy is mostly successful if the market is not big. Competitors enter the market if the market is big and the demand is high. For example, Motorola entered the Indian market through the launch of it Moto G models. The price of this model was kept fairly low as compared to competitive products offering similar features. The launch was such a great success that all the handsets of this model were sold within 20 minutes of its launch through Flipkart, an ecommerce giant, which was given exclusive selling rights.

6) Psychological pricing – the law of demand is not always successful for making sales and profits. Customers are influenced via psychological pricing methods like odd-even pricing ($19.99), pricing the product highlighting the quality, etc. Customers usually estimate the price of a product based on their past experience or noticing the prices at some places or media channels. The sellers try to tab on these perceptions and manipulate these reference prices. They may display the product among prestige and expensive products, etc.