There are different types of pricing strategies for different categories of products. New products, existing products and modifies products: all have their prices set through various strategies and theories. All these strategies design the ways in which the compensation and the cost of certain product is to be determined. There could never be a set formula for setting a price of a product as one could justify the pricing on various bases which could be the cost or the perception, the ROI or even the price of the competition.
The pricing decision is taken on the basis of the pricing objectives of the company. The company foremost has to decide on its pricing objectives though profit is always the prime motive of the company but still before pricing it’s decide on what does it want to achieve from its revenues. The various objectives may be either survival, profit maximization, target return on investment, market share goal or status-quo pricing. The various pricing methods identified below achieve one of the following objectives. The different pricing strategies are as follows:
• Competition-based Pricing This strategy is used for products having lasting, perishable or little distinctiveness from competitor’s products. In this pricing strategy the company’s price is kept at par with the competition’s price without any regards to the cost or the demand of the product. Such pricing is generally done by the small firms who try to follow the market leaders by keeping their prices at par with the leader’s price. (Jones, 2005) • Cost-plus Pricing It is used for most of the products in normal conditions and is the simplest method of calculating the price.
It considers the cost of product and adds a certain percentage of profit to give the product a selling price. This procedure is generally adopted by government contractors but it is criticized a lot as it is considered as a waste of resources. The process is known for its various advantages which includes its simplicity and easy to understand feature. This method is considered as a just and fair way of pricing the products. • Target Return Pricing The price is set according to achieving a particular return on the Return on Investment (ROI).
In this strategy the company has its defined return according to which the prices are set to get that ROI. • Skimming Pricing In this strategy, the prices are set high so as to obtain the highest profits from the top segment of potential customers who can afford to pay. This is done to reimburse all the cost that has been invested in research and marketing the product. The purpose of this strategy is to reach a particular segment or a niche on the market. That’s the reason why the company sets a higher price as it wants to sell to only a particular segment of the market. • Limit Pricing
A monopolist sets limit pricing as a threat to the new entrants in the markets. The company sets up a lower limit of price to make sure that smaller firms may not be able to survive with such low prices as they do not enjoy the economies of scale. This strategy often lowers the profits of the new entrant and forces him to leave the market by creating the barrier of lower profits. • Market-oriented Pricing This strategy is linked to the cost of market research. It involves setting the prices which are based upon the results obtained from the research and analyses of the target market.
The aim of this process is to understand the customer’s insight on the perceived quality of the product and then set the price according to what the consumers think the price should be. • Penetration Pricing This type of pricing is applied to those products which have not yet seen any growth in the market. It refers to deliberately setting such a price which is at a low-level in order to capture the customers’ interest. It also helps the new and infamous products in establishing a foothold and creating their image in the market.
• Price Discrimination This refers to setting and charging different prices for the same type of products in different market segments. This discrimination can be based on the categories of people according to age, income, occupation, etc. (Keegan, 2003) • Psychological Pricing This type of pricing is designed to alter the psychology of the consumers about certain price category. It tends to have a positive psychological impact on the minds of consumers. For example, a company sells its product at $4. 99 instead of $5.