Pricing strategies / types of pricing

 Pricing strategies or methods will depend on the pricing objectives of the company. The strategy must be suitable for achieving the desired objectives. Some categories of pricing methods are given below :

  1. Cost based pricing / cost plus pricing
  2. Demand based pricing - Skimming & penetration pricing
  3. Competition based pricing
  4. psychological pricing / odd number pricing
  5. Regulated pricing
  6. predatory pricing / under cutting


1. Cost based pricing :   The commonly used methods under this category are cost plus pricing /mark-up pricing / full cost pricing. Cost -plus pricing / mark up pricing  is a pricing strategy in which the selling price is determined by adding a specific markup to a products unit cost. The cost plus price will be different for different products. Full cost pricing is based on the estimated unit cost of the product at normal level of production & sales. Variable and fixed costs of production , selling & administration costs are all added to get the total cost. By adding the required margin to the total cost, selling price is arrived at.

2. Demand based pricing : The common methods under this category are " What the market can bear" pricing,, Skimming pricing & Penetration pricing. In these methods , the basic assumption is that sales & profits are independent of costs ,but are dependent on the demand. In " what the market can bear " pricing , highest price that the customers are willing to pay for the product under a specified situation is fixed. This method brings in high profits in the short term.
                         Skimming  and penetration pricing methods are used for new products. Skimming method skims the market initially with a high price and high profits, and later settle down for a lower price. This is suitable for luxury / Specialty products.
                            Penetration pricing seeks to achieve greater market penetration through low prices. This method is suitable for non luxury products purchased by ordinary consumers. It ensures high sales volume at reasonable price.

3. Competition oriented pricing :  In a competitive market situation , companies opt for competition based pricing. They follow three alternative courses - premium pricing , discount / going rate pricing. A given competitors price will serve as the benchmark in these options. Premium pricing involves pricing above the competitors price. Discount pricing is pricing below such level. Going rate pricing is matching the price of competitors.

4. Psychological pricing / odd number pricing :  Consumer buying decisions are influenced mostly by psychological factors. Many marketers take this in to account and try to avoid the psychological barrier in respect to price with psychological pricing. Instead of fixing  the price at RS. 200/500 , they fix it at RS. 199/ 499/-. Bata shoe company is the best example for this pricing method. It is also followed by many marketers of consumer durables like T.V, P.C, Washing machine etc. 

5. Regulated pricing :  Price regulation refers to the policy of setting prices by a government agency, legal statute / regulatory authority. Under this policy, minimum and/ or maximum prices may be set. For instance , in India we have drug price control etc. 

6. Predatory pricing / under cutting :     Predatory pricing occurs when a firm sells a good / service at a price below cost with the intention of forcing rival (competitor) firms out of business.
         Predatory pricing  could be a method to deal with new firms who enter an industry. If a monopoly is enjoying super normal profits, it will attract new firms into the industry.
            However , in response to a new firm entering the market, the incumbent( the current holder) Monopoly could cut price and make a temporary loss. However , faced with a low price, the new firm may be unable to make profit and so be forced to leave the market. The monopoly firm regains its monopoly power , but  also its action to predatory pricing discourages other firms from trying to enter.
                        


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