Pricing Strategies

There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations. See also eMarketing Price.

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

eMarketing Price.

Pricing tactics as part of the eMarketing Mix.

What is unique about pricing for the Internet?

The emarketing mix is simply an adaptation of the traditional marketing mix, and 'P' for price. However, the Internet has influenced how online businesses price in a number of ways.

·         International pricing and competition give consumers access to the lowest price for any generic good. For example, British consumers benefit when buying products from the United States since there are almost two Dollars to the Pound. Conversely this makes British goods more expensive to the American consumer. So it's cheap to buy spectacles from a US website and then to import them into the UK (even including transport costs and import taxes).

·         Online auctions are a popular and innovative way of pricing, for example eBay. Here you register with the online auction company as a seller and/or a buyer. You can place an item into auction where buyers bid against each other. The highest bidder wins. The auction website takes a commission. The commission is factored into the price you pay.

·         Greater access to pricing information, more quickly and in a format that makes pricing comparable and transparent. There are a number of sites that will compare and contrast prices for the same or similar goods and services e.g. prices on car insurance.

·         Pricing could also include the cost of an online advertising medium such as Google Adwords. Here an online supplier would buy a keyword located in a text or image based advert onto Google's own search engine or onto a website belonging to a Google publisher. For example you search for the term 'hair straighteners' on Google and you are directed to a site about hair dressing. On this site is plenty of information about hair straightening, placed next to some contextual adverts. You click on the advert and are taken to a site selling hair dressing supplies. You buy the hair straighteners, and your suppliers pay a small 'pay- per-click' fee which is split between Google and their publisher. This is factored into the price you pay.

How are traditional pricing tactics used in eMarketing?

Of course the Internet marketer still has a whole selection of other more traditional pricing approaches to choose from that can be adapted to eMarketing scenarios:

·         Premium pricing e.g. selling music via iTunes.

·         Penetration pricing e.g. giving away free subscriptions to land grab market share for new start-ups such as Youtube.com and Myspace.com.

·         Economy pricing e.g. selling basic products and services online like basic web design or paperclips.

·         Price skimming e.g. new product launches online such as albums or games.

·         Psychological pricing e.g. products and services sold at 99p or $99.99 (Price Point Perspective).

·         Product line pricing e.g. subscription 1 @ free, subscription 2 @ $10.00 (with added value) and subscription 3 @ $49.99 for 10 years.

·         Pricing variations e.g. budget airlines selling tickets online where the first tickets bought are the cheapest, and the last ones bought tend to be more expensive.

·         Optional product pricing e.g. selling a holiday online with travel insurance.

·         Captive product pricing e.g. once you buy virus software from one brand, your updates must also come from them.

·         Product bundle pricing e.g. buying Internet access which comes with free online phone calls.

·         Promotional pricing e.g. Betting incentives, such as free Dollars to gamble online for current customers that gamble on football games to tempt them to play online poker, or vouchers with codes sent by e-mail as rewards e.g. Amazon.com.

·         Geographical pricing e.g. Microsoft pricing in different currencies in different international markets.

EXERCISE

Listed below are a series of pricing strategies/polices. Place them onto the correct section of the matrix.

·         Wall-Mart launch a new range of own-label soups.

·         Cunard launch two new cruise ships.

·         A cable TV provider moves into a new area and needs to achieve a market share.

·         Holiday Inns try to fill hotels during winter weekends.

·         Burger King introduces a new range of value meals.

·         Nokia launch a new videophone.

ANSWER

Pricing Strategies - Answer.

Here is the 'Pricing Strategies Matrix' with the answers overlaid. Here are the more detailed explanations.

·         Wall-Mart launch a new range of own-label soups. This is an economy brand.

·         Cunard launch two new cruise ships. The service is high price and high quality with a premium price.

·         A cable TV provider moves into a new area and needs to achieve a market share. The company uses a penetration approach to gain market share. Prices could be increased at a later date.

·         Holiday Inns try to fill hotels during winter weekends. This is an example of 'off peak' pricing.

·         Burger King introduces a new range of value meals. There is a lot of price competition in the fast food market, hence the value approach.

·         Nokia launch a new videophone. This is a new, innovative product that can claim a higher price. Skimming is only an option in the short-term since competition will be inevitable.