Once a firm develops a product or service, what remains to be done and which also happens to be the crucial step is pricing the product. The entire profits of the organization depend on this single step and thus the importance of pricing is self-established.
Pricing is one of the P in 4Ps of Marketing and proper pricing could make or break the product and in turn, the company since it controls the single most crucial factor about the organization that is profit. The various pricing strategy has been followed by organizations time and time again in order to push their products in the market and the strategies have been revised and changed in order to adapt the customer, their needs and market demands.
Types of Pricing Structure :
1) Market Penetration
Pricing the products lowest compared to other competitors to gain a penetration and anchoring in the market. This attracts a large section of the market specifically the cost-conscious segment and helps the company to make large profits. The pricing is low and so is the profit percentage per product but mass sales are what brings in mass profits.
2) Price Skimming
Introducing a product or service with the highest possible price and slowly reducing the prices over time. This targets almost every segment over a period of time. Sales are generally lower but fixed and same goes with profits. Price skimming is employed by companies which have a strong research base and have invested a big time in their products.
3) Psychology pricing
Marking a $300 product as $299 is psychology pricing. The feel of the price is lower with a lower starting number is the technique used. This gives the customer a feel of the product being priced at low than the others. Another variation of the same technique is to run Discount pricing. To offer seasonal discounts on limited products for a limited period of time. This boosts the sales of not only the discounted product but other products as well since the customer who has come with an intention to buy the discounted products buys other products as well. Giving one free with another is also another variation of this structure.
4) Premium Pricing
The price tag for the product is highest amongst all the competitors. The elite pricing is owing to the superior and unique quality of the product. Premium pricing generates assured profits and generally the first one to create a demand in the market since either they have unique products or are first in the market.
5) Economy pricing
These products are priced at an affordable rate compared to other competitor products. The target for these products is the lower economic segment. The quality may or may not be compromised in case of these products. Some companies have variations of products under the same portfolio.
For example, Volkswagen group has many subsidiaries under it such as premium-priced Porsche, Bentley, and at the same time economic priced products of Audi, Volkswagen and Seat. Other companies may have a cheaper variation of the same product without compromising on the quality. For example, Dove shampoo is available in large 500 ml bottles as well as one-time use sachets.
Building a pricing structure :
1) Business objectives
Outlining the business objectives which align with the vision and mission of the company is important. This will give an overall direction that is to be followed in order to achieve and that will help you determine the profits required which in turn will determine the pricing of the product. Examples of objectives could be increasing the cash flow or Larger market share. Such objectives need to be time-bound in order to plan.
2) Market Research
Conduct thorough market research to understand the market and industry. There could be competitors working on low or possibly lowest cost and there could be competitors based on quality. To understand the market clearly, a detailed analysis of the pricing of other products is required.
3) Know thy customers
The customer is the most important as well as the most volatile factor in the industry. The nature of customer, likes and dislikes, the seasonal variations that affect business are to be understood. The most important of all is if the customers are having any difficulties with the current offerings in the market and how can our product answer those difficulties. A part of knowing customer preferences is also knowing the law of the land. There could be some policies which may affect in the way the business is to be done. Knowing such factors are also important.
4) Demand-Supply relation
Part of knowing the market is knowing the industry wherein establishing demand-supply relation is important. If the demand for a product is very less and already there are numerous players in the market, it makes no sense for the company to invest in the product. On the contrary, if the demand is more and the supply is less, the company should aggressively jump forward without wasting time.
5) Know thy competitors
The company has to know its competitors in the markets and their pricing structure. Knowing the nature of the offerings by competitors and if their pricing justifies it is also of crucial importance. The drawbacks of competitors are where the business will be. Knowing the pricing structure of competitors helps to price the own product accordingly.
6) Creation and execution of pricing structure
This will be the final step wherein the company will decide which pricing structure to go ahead with. It has to make its decision based on the above factors and decide if it wants to go ahead with Skimming pricing, Penetration pricing, premium pricing or psychological pricing. Some other methods which may be chosen are Discount pricing, Value-based pricing, promotional pricing etc.
Pricing Structures employed by various companies :
- Google launched a new series called Pixel mobile phones with the best of industries configuration. In the case of the Android Operating system, it has arguably created one of the best product. It is one of the competitors as a premium product and it follows a premium pricing strategy. As a standalone, it follows premium pricing structure but if compared with Apple, it follows competitor based pricing structure.
- Walmart follows a penetration pricing structure wherein it prices its products at the cheapest possible price and tries to offer the best it can. While the profits per product are low, the sales are targeted towards the volume of people which brings in volume profits.
- E-commerce giants like Amazon have always used psychological pricing. The products are bought at bulk and prices are presented as discounted. Although the prices are discounted, they cover the cost plus profit of the company. During a special sale, the prices may be further reduced but the profits are never compromised upon.