Definition, Types, Strategies and Examples (2024)

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• 9 minutes reading time

• Checked by StudySmarter Editorial Team

Pricing Definition

To understand pricing strategies, we first need to look at the definition of pricing.

Price is the amount of money expected and given in exchange for a good or service.

Pricing can also be defined as the value customers sacrifice to benefit from receiving and using a good or service. Price is, therefore, the element of the marketing mix that leads to revenues, unlike the other elements which incur costs. Pricing is also important as a strategic tool as it creates customer value.

Different Types of Pricing Objectives

Before deciding on a pricing strategy, the company needs to consider its pricing objectives. Pricing objectives should be aligned with the company's overall marketing and corporate objectives. Some of the different types of pricing objectives may include:

• Attracting new customers to increase revenues,

• Retaining existing customers,

• Preventing competitors from entering the market,

• Preventing competitors from gaining market share,

• Attracting customer attention to the release of a new product or brand,

• Increasing sales of a specific product line.

Fig. 1 - Pricing Objectives

Pricing Strategies

Now that we have defined pricing, let's look at the three key pricing strategies: customer value-based pricing, cost-based pricing, and competition-based pricing.

Customer Value-Based Pricing

The idea behind customer value-based pricing is to price a product based on the value it brings to customers rather than the cost of producing it. Thus, the pricing decision starts by examining customer value - how much the product is worth to customers. The steps of value-based pricing are as follows:

1. Understand customer value perception and needs.

2. Set target price to match perceived value.

3. Analyse costs.

   See Also

   How to Present Pricing the Right Way

4. Create a product that matches the target value at the target price.

Within value-based pricing, there are two further pricing approaches.

The first is good-value pricing.

Good-value pricing involves offering a quality product and good service at a reasonable price.

The other approach is value-based pricing, which includes adding value through product features and services to justify the higher prices.

Cost-Based Pricing

The second main pricing strategy is cost-based pricing. Cost-based pricing involves setting prices based on the costs incurred by producing and marketing the product. This pricing method sets a floor price - a minimum price a company should charge to recover costs. Three types of costs considered for this approach are:

• Fixed costs (overhead),

• Variable costs,

• Total costs.

One common cost-based pricing method is cost-plus pricing.

Cost-plus pricing involves adding a pre-set mark-up to the cost of producing a product (e.g. adding a 20% mark-up).

Another approach to cost-based pricing is break-even pricing. This pricing method is based on finding the break-even point whereby the firm recovers all production and marketing costs.

Competition-Based Pricing

The final primary pricing strategy is competition-based pricing.

Competition-based pricing involves setting prices based on competitors' pricing strategies.

To use this approach, a company has to examine its competitors and their strategies, including:

• Competitors' market offering,

• Customers' value perception of competitors' offerings,

• Competitors' current pricing strategies,

• How strong/weak competitors are,

• Whether there is a niche/underserved market.

Types of Pricing

Beyond the three main strategies outlined previously, there are other types of pricing. One important thing to note is that pricing strategies often change. The change can be brought about by a product's life cycle, new product mixes, or changing environments and situations. Let's now take a look at some additional pricing strategies.

New product pricing strategies

New product pricing strategies are related to the product life cycle. New product developments can put companies in challenging situations when it comes to pricing. As a result, companies have to choose from the two pain new product strategies:

1. Price skimming - involves setting a high price initially as the product is introduced to the market to maximise revenues. Due to the high price, the company makes fewer sales at a higher profit margin. Eventually, as new product variations and models are introduced, the company will decrease the original product's price.

2. Penetration pricing - involves setting a low initial price to attract many buyers and increase market share. As prices are low, profit margins may also be lower, but due to the high number of sales, the company's costs will fall, allowing it to decrease its prices even further.

Product Mix Pricing Strategies

On the other hand, product mix strategies are used as sometimes companies have to change their pricing when a product is part of a product mix. The five product mix pricing types are as follows (see Figure 2 below):

1. Product line pricing - involves determining the price steps to be set between different products in a product line. These price steps should be determined based on cost and value differences.

2. Optional product pricing - involves setting prices for optional or additional products that come with the original product, also known as add-ons and accessories. Examples include specific types of rims when purchasing a car.

3. Captive product pricing - is similar to optional-product pricing, except the products are accompanied by another product—for example, ink cartridges for a printer or filters for a water filtering jug.

4. Byproduct pricing - involves determining a price for the byproducts derived from the production of the main product. This can help the company recover costs and even make extra profits. For example, farmers can turn their vegetable resin into biodegradable plastic.¹

5. Product bundle pricing - involves combining various products into a product bundle and setting the bundle price lower than what the price would be for buying each product individually.

Fig. 2 - Product Mix Strategies

Price Adjustment strategies

Companies often have to adjust their pricing strategies with situational and environmental changes. However, this is not a simple task as there are seven different types of price adjustment strategies:

1. Discount/allowance pricing - including cash discounts (e.g. 5% discount if the bill is paid within the first ten days) or trade allowances (e.g. a discount if you return your old machine when buying a new one).

2. Promotional pricing - adding a discount to a product to increase sales volume (e.g. a 20% discount limited time offer).

3. Segmented pricing - charging different prices for different geographical, product, or customer segments (e.g. students get 20% off).

4. Geographical pricing - setting different prices for customers in different countries or cities. For example, a standard Netflix subscription in the UK is £10.99; in Egypt, it is EGP 165 (around £7.20).²

5. Psychological pricing - involves considering the psychology behind pricing. Customers may be willing to pay a higher price for a product perceived as good quality.

6. Dynamic pricing - constantly monitoring and adjusting prices to match customer demand and needs.

7. International pricing - setting prices in different countries based on market factors such as economic conditions, political conditions, legislation, etc.

Examples Pricing Strategies

Let's now take a closer look at some examples of pricing strategies. For instance, let's consider how Apple adjusts its pricing. When the iPhone 12 first came out, its price was around £800-£1,000. After several months, Apple released newer models - the iPhone 13 and iPhone 13 Pro - and the price of the iPhone 12 dropped to around £600. This is an example of price skimming. Apple sets a high price when a new product is first introduced. Later on, as more recent models of the iPhone are developed and launched, the company gradually decreases the price of its older models.

Another example of pricing strategies can be observed through museum ticket prices. For example, to enter the Van Gogh Museum in Amsterdam, you must pay €19; however, if you have a valid student card, you only pay €10 to enter. On the other hand, if you are under 18 or have a museum card, other museum passes, or memberships, you can join for free. This is an example of segmented pricing as different customer groups (segments) are charged different entry prices. Therefore, depending on the company's industry, it can use various pricing strategies to encourage customers to purchase its product.

What is the pricing in marketing?

Pricing can be defined as the value customers sacrifice to benefit from receiving and using a good or service. Price is, therefore, the element of the marketing mix that leads to revenues, unlike the other elements which incur costs

What are the 4 types of pricing?

The four main types of pricing include customer value-based pricing, cost-based pricing, competition-based pricing, and new product pricing strategies.

What is an example of pricing?

For example, when Apple released the iPhone 12, its price was around £800-£1,000. After several months, Apple released newer models - the iPhone 13 and iPhone 13 Pro - and the price of the iPhone 12 dropped to around £600. This is an example of price skimming.

What factors affect pricing?

Numerous factors may affect pricing. Examples include the stage at which a product is in its life cycle, the customer segment that is being targeted, the geographical location of the product, how competitors price the product, etc.

What is the importance of pricing?

Pricing is important for business as 'price' is the only element of the marketing mix that leads to revenues, as opposed to the other elements which incur costs. Pricing is also important as it is a strategic tool businesses can use to create customer value.

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• 9 minutes reading time

• Checked by StudySmarter Editorial Team