Whatever pricing objectives are adopted, there are various pricing strategies which can be used to achieve those objectives. Pricing strategies involve not only method and level of price, but also how this works with the rest of the marketing mix.
Pricing strategies also depend on what is happening in the market and how the company wants to react to it. They can be defensive or aggressive, and appropriate options will vary throughout the life cycle of the product.
When a product is introduced into a market, companies tend to use either Skimming or Penetration Pricing Strategies.
In Skimming Pricing Strategies, products are introduced at a high price to skim off the cream of the customers who are price-insensitive. This is useful if the market is small and costs need to be recovered quickly.
A Rapid Skimming Strategy uses high price and extensive promotion to face competition and establish market share quickly. When no serious competition is expected, a Slow Skimming Strategy may be used – high price with low promotion.
Penetration Pricing Strategies are used for entering large markets at a low price. This enables a company to build up a major market share quickly. Marginal Pricing and Experience Curve effects provide long term profit and a defence against competition.
A Rapid Penetration Strategy uses low price and high promotion.
When the market is not expected to react to promotion, a Slow Penetration Strategy, with low price and low promotion, is used.
In the growth and maturity stages of the product life cycle, pricing strategies will vary according to market situations: customer reactions and price competition.
Psychological Pricing Strategies are immersed in the mind of the customer and what they think about prices. What are the thresholds beyond which they are less likely to buy? How do prices affect their perceptions, attitudes, intentions and actual purchasing behaviour?
Prestige pricing, or high prices, can confirm a product’s top quality status in the mind of some buyers. A price increase can sometimes be presented as a signal of quality and cause sales to go up.
Differential Pricing Strategies set different prices for different market segments. This might be in the form of a Geographical Pricing Strategy or Regional pricing, with different prices charged in different areas.
Product Line Pricing is another strategy used for lines of products or services, with prices stepping up from a basic standard product as options and extras are added to the product. This ‘price lining’ is typical of many consumer brands.
Finally, research reveals that most companies do not consider, in detail, all of these alternative pricing strategies throughout the life of a product or brand, despite the fact that the final price strategy directly affects long term profitability and market share.