In addition to cost-based pricing, competitive pricing, and value-based pricing, businesses often explore more advanced pricing strategies to gain a competitive advantage and respond to more dynamic market conditions. Companies can take advantage of multiple different strategies at once or separately. The ability to fluctuate and adjust between different strategies is a necessity for a business. The strategies we’ll be exploring in this essay include dynamic pricing, penetration pricing, skimming and freemium pricing.

Dynamic Pricing

Dynamic pricing, often also referred to as surge pricing or peak pricing, represents a strategic departure from a fixed pricing model. In this approach, businesses adjust their prices in real time, depending on different factors, such as demand, supply, and competition. This method offers businesses the opportunity to maximize their potential gain in real time by utilizing algorithms and data-analytics to align with the market conditions. Businesses can use this pricing strategy to offer competitive prices during low-demand periods to attract price sensitive customers. However, on the flip side, during high-demand periods, dynamic pricing offers the opportunity to adjust prices based on the increased value of the service or product.

An industry where dynamic pricing has become vastly popular is the transportation sector, such as cabs or Ubers. During peak hours, when the demand surpasses the supply, prices automatically surge upwards. Consequently, this pricing strategy also helps the sector to manage rush hours, since it gives the employees more incentive to be available at those times. And once the demand decreases, so will the prices. This allows companies to capitalize on the highs as well as the lows of the fluctuating market.

However, striking the right balance with price fluctuations is crucial for dynamic pricing. Understanding the market, consumers and their behavior should be a major priority when considering the use of this strategy. From a consumer perspective, dynamic pricing might raise the question of fairness, therefore businesses should be able to communicate their pricing strategies clearly and effectively.

Penetration Pricing

Penetration pricing is a strategy which involves initially setting low prices to gain a rapid market entry and to captivate a strong customer base. A lower price point can act as an incentive for consumers to try something new. This strategy can be especially useful in fields where the competition is fierce, and consumers have plenty of options to choose from. Penetration pricing can also help a business stand out from the competition by challenging the current norms of the industry. This can lead to an increased buzz in the market, which in return can generate curiosity and interest in the business. Moreover, as new customers are introduced to the product or service at an affordable price, positive experiences are bound to happen, and this initial experience can lead to long-term brand loyalty.

OnePlus, a Chinese smartphone manufacturer, is a notable example of a company that effectively employed penetration pricing as part of its market entry strategy. When OnePlus entered the smartphone market, it aimed to disrupt the industry dominated by established brands by offering high-quality devices at remarkably competitive prices. They offered premium features that could only be found in premium brands, such as Apple and Samsung, but with significantly lower prices. OnePlus successfully gained a foothold in the highly competitive market of smartphones and built itself a solid customer base.

Skimming

Unlike previously mentioned penetration pricing, skimming is a pricing strategy that benefits from setting initially high prices for innovative or premium products. Over time, businesses who use skimming as a strategy tend to adjust their prices downwards to attract a broader range of customers. Initially the goal for skimming is to target the early adopters, who are willing to pay a premium price for a brand-new product or service. By setting a high initial price, companies can capitalize on the willingness to pay a premium price, therefore generating early revenue from the newly launched product or service. Skimming also contributes to building a brand image associated with exclusivity and prestige. Premium pricing reinforces the idea that the product is of superior quality and only accessible to those who are willing to invest in the latest and best.

One of the most common examples of skimming is the release of new smartphones, particularly those from companies like previously mentioned Apple and Samsung. When a new flagship model is launched, it often comes with a premium price tag, attracting early adopters eager to experience the latest features and technology. Over time, as time goes by and newer models are introduced, the price of the initial flagship device gradually decreases, making it accessible to a broader consumer base.

Freemium Pricing

The term “freemium” comes from the words “free” and “premium”, capturing the essential strategy of the approach. This concept is founded on the principle of offering the consumers a taste of the value a product or service can bring to the table by giving them access to a basic version for free, while providing advanced features or enhancements at a premium cost. These premium features often cater to a more specific need and appeal to a segment of users that are willing to pay more for a more comprehensive experience. Freemium models excel at customer acquisition by lowering the barrier of entry to a bare minimum. Users are more likely to try out a new product if there’s no upfront cost to it and additionally, the free tier serves as a retention mechanism, keeping users engaged and interested in the platform. The primary source of revenue in freemium pricing comes from users who choose to upgrade to the premium version. This can be a one-time payment, a subscription model, or the purchase of additional features or content within the platform. The success of a freemium model lies in the ability to find a balance between providing value with the free model, while offering incentive to experience the benefits of the premium model.

Freemium models have become vastly popular amongst many service providers, such as Spotify, YouTube and Canva. The free tier of these applications offers a range of entertainment, while having occasional advertisements or elements that are locked behind a paywall.

Conclusion

The advanced pricing approaches explored in this essay showcase the versatility and adaptability businesses require to thrive in different industries and respond to ever-changing market conditions. The businesses and entrepreneurs who master the ability to seamlessly switch between different pricing strategies, while combining different elements from dynamic pricing, penetration pricing, skimming and freemium pricing, are the ones who will ensure themselves long-term success in the business world.

References

Kenton, W. (2023, May 13). Penetration Pricing definition, examples, and how to use it. Investopedia. https://www.investopedia.com/terms/p/penetration-pricing.asp

Hayes, A. (2022, May 22). Price Skimming Definition: How it works and its Limitations. Investopedia. https://www.investopedia.com/terms/p/priceskimming.asp

Hayes, A. (2022, December 20). Peak Pricing: definition, how it works, examples. Investopedia. https://www.investopedia.com/terms/p/peak-pricing.asp

Segal, T. (2022, December 26). Freemium: Definition, Examples, Pros & Cons for Business. Investopedia. https://www.investopedia.com/terms/f/freemium.asp