Marketing & Sales – Pricing Influences
a) Market Skimming
This strategy is commonly used when businesses introduce new products that are unique in the market. At this point, if this was your product, you have the power to charge high prices for a period of time until competitors enter the market with similar products. The idea is to gain as much revenue (and profit) as possible while it remains unique.
Do not charge extremely high prices (putting off customers), just set one that gives you a higher profit than you would normally expect, say, if the product was facing immediate competition.
For example, when DVD players were first introduced, their prices were extremely high because it was a unique product made only by one company.
Now that competitors have caught onto the idea, the prices have dropt dramatically yet they still make a reasonable profit.
b) Penetration Pricing
This strategy is used for new products/services trying to penetrate the market, or existing products/services entering new markets, by offering initial low prices. Such low prices will attract the customer and through continued use and purchase, they may not be discouraged by any future price increases and remain loyal to the product/service.
In other words, the initial low price that you offer may not even cover all associated costs, but when you increase the price in the future, it will compensate for the loss you made or any profits you missed out on.
For example, the first two or three editions of a monthly magazine may be offered at, say, 99p, but after this the magazine price increases to, say, £3.00. Because most people will have found interest in the first editions of the magazine, they are inspired to continue buying the magazine in the future.
Price discrimination involves charging different prices for your product/service at certain times, or to different types of customers. The classic scenario is telephone services e.g. BT: off-peak hours are much cheaper than peak hours. This is because they know that their service is in high demand during peak time (around 8am – 6pm) as they coincide with business operating hours.
Another common discrimination is offering your service at higher prices during the weekend (Saturday and particularly Sunday) as customers may find it hard to find other alternative services during this time.
The above examples are all to do with timing, but the other price discrimination is aimed at the different types of customer. In this case, the best example would be offering students and OAPs a discount of, say, 10% for using your service or buying your product, You may even offer your service/product cheaper to loyal customers, say, those that have been trading with you for more than a year.
If using price discrimination, be aware that you are not offering prices that will be seen as sexist and/or racist in any way.
d) Pricing to Customer Expectations
This would involve extensive What is Market Research?, as the idea is to charge what customers are willing to pay (within reason). If your product/service is new or unf amili ar in the market, you can expect potential customers to give it a low price. Alternatively, if your product/service is popular or unique in the market, you can expect people to be more favourable towards its value.
If you adopt this strategy, you should review your research periodically, say, every six months as customers may develop a different attitude towards your product/service. Consequently, in time, customers may value your product/service differently and so you should change your price to correspond with customer expectations, whether they are higher or lower.
e) The Use of Sales and Discounts
Sales are common with businesses when their product/service is dated or seasonal. If your product/service is seasonal, for example, it is inspired by certain times of the year, you may introduce a sale to try to stimulate demand during the times when your product/ service is less popular.
If you have stock that is becoming outdated, you may also have a sale so that it can be cleared out before it has no use and customers have no intention of buying the product or using the service any longer.
Discounts can be used for a number of reasons and are commonly used to target different types of customers ( Price Discrimination). You can even try to stimulate bulk sales by offering discounts to customers that buy in large quantities.
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