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Pricing strategy



Kirjoittanut: Lucas Pääkkönen Alvim - tiimistä SYNTRE.

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Pricing

Pricing is the action of defining the prices that your business will be utilizing in the sales of its product or service.

The setting of the price of your products or services is very important as if set prices that are way to high, you will miss on valuable sales and if you set your prices to low you will be missing valuable profit that could come from a better priced product or service.

Setting the price for your product or service doesn’t need to be at completely random, there exist pricing strategies to help you do the pricing according to your own goals and product or service. (Deland, 2022)

 

Pricing strategy

The best pricing strategy is the one that maximizes your profits.

Pricing strategy is the model that you use to define the optimal price for your product or service, where you maximize profits while acknowledging in the price the market demand and the consumers.

While pricing, using a pricing strategy you must consider profit goals, marketing objectives, brand positioning, target audience and the attributes of your product or service, also some external factors as market and economical trends, your competitor’s prices and the demand for your product or service.

It happens often that businesses when doing the pricing only look at how much does it cost to do their product or service and look at their competitor´s prices and change a few euros from theirs. (Decker, 2022)

 

Types of pricing strategies

There are many different pricing strategies, used to achieve different things. In this essay I will go throw: competition based pricing, cost plus pricing, dynamic pricing, freemium pricing, skimming pricing and penetration pricing.

Competition based pricing strategy. It is also known as competitive pricing. This pricing strategy focuses on the existing market. When utilizing this strategy you shouldn’t focus on your costs or in the market’s demand but focus on the price of your competitor. This strategy uses your competitor’s prices as a benchmark. A scenario to use this strategy may be for example when your business is competing in a highly saturated market, as then the slight price difference may swift their buying decision from one brand to another. An example of competition based pricing is if in your community there are 2 barbershops already and you open a new one, the prices on the other barbershops are 14euros for a haircut and 16euros, and you utilizing this strategy would price getting a haircut at 13euros, attracting customers by having the cheapest haircuts in your community, of course the price is not everything, you have to be able to offer such a good service as your competitors, but the price would be the decision maker for the customer of going to one of the other barbershops or yours.

Cost plus pricing strategy. This pricing strategy is also known as the markup strategy, as it bases solely on the cost of production and the desired profit. So the business would calculate how much does it cost to them to make the product or service and what is the percentage of the final price that they want to have as profit. For example, if your business’s focus is on selling pens, you would calculate that it costs you one euro to make the pen, and you wish to have fifty cents of profit by sold pen, so you would set the price at one euro and fifty cents.

Dynamic pricing strategy. This pricing strategy is also known as demand pricing or time based pricing. This strategy is flexible as it adjusts your product or services prices according to the customer’s demand. Some good examples of businesses that use this pricing strategy are hotels and airlines, as they don’t have the same demand all year around, as not so many people travel in the off season, so the price is lower then, to try to incentivize customers, and during high season, these companies up the price to the point of what the customer is willing to pay.

Freemium pricing strategy. This strategy is when companies offer a simple and basic version of their product or service to customers, with the plan that customers will see value on it and want to upgrade into a paid and completer and more upgraded version. This strategy works as free trials or limited access give to the customer a glimpse of the value provided by the service for example, it also builds trust from the customers’ side to the business, so that the customer would eventually buy the more complete version

Skimming pricing strategy. This pricing strategy consists of pricing the highest price for a product when it comes out and lowering the price over time as the product gets less popular. The lowering of the prices depends on the life cycle of the product or service, if it is a product or service that remains popular for a long time, then the prices can remain high for longer, if it becomes less popular quickly, then the price is also going to fall quickly.  A good example of industries where you can see this type of pricing strategy is the cell phone industry, as when a new cellphone comes out it is at its maximum price, and over the time that prize will drop as it becomes less and less popular with the introduction of newer cellphones.

Penetration pricing strategy. This strategy consists of a business entering the market with an extremely low price, with the objective of attracting the customers from more high priced competitors. This strategy is not sustainable on a long timeframe, that’s why usually it is applied on a short time. The strategy is about disrupting the market and making temporary loss, with the objective of keeping the initial customers once the prices rise.

 

Conclusion

In conclusion, pricing is very important in your business, if you set the price to high you will lose sales and if you set it too low you will lose profits. The pricing strategy helps you to make a more conscious decision about the prices of your product or service, by taking to account the goals of your business and external factors. If you have set your prices at the optimal point, you will maximize your profits.

 

References

Decker, A. (2022) The Ultimate Guide to Pricing Strategies, HubSpot Blog. HubSpot. Available at: https://blog.hubspot.com/sales/pricing-strategy (Accessed: May 5, 2023).

Deland, A. (2022) Council post: Understanding pricing strategies, price points and maximizing revenue, Forbes. Forbes Magazine. Available at: https://www.forbes.com/sites/forbesbusinesscouncil/2022/08/22/understanding-pricing-strategies-price-points-and-maximizing-revenue/?sh=7f1032147e96 (Accessed: May 5, 2023).

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