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The Basics of Pricing Strategy

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Have you ever looked at a price tag and wondered how the company decided to charge that much? Perhaps you have shopped a particularly great sale and pondered how the company even makes money on such a transaction. If this sounds like you, your curiosity may indicate an interest in marketing that makes you a good fit for the online Master of Business Administration program with a Concentration in Marketing from Southern Oregon University.

In this program, students learn about the many aspects of marketing and business management. One of the courses in the program, Marketing Channels Management and Pricing Strategy, covers pricing strategies. In this class, you will learn ways to price products and services for companies and theories that guide these strategies. Below are some of the basic pricing strategies companies use.

Penetration Pricing

Penetration pricing is a strategy in which a company offers a new product at a low price point to encourage trial purchases and form buying habits. The initial low price is typically increased as the demand for the product increases. While the company has a reduced margin at the outset of this pricing strategy, it can gain market share and increased sales volume in the longer term.

Skimming

A skimming price strategy is the exact opposite of penetration pricing. Where penetration pricing allows a brand to establish itself as a bargain, a skimming approach establishes the brand as premium.

With this strategy, a company sells the same product at a higher-than-average price. This allows the business to profit more on each product sold, but fewer customers may buy. Price-skimming strategies enable a company to:

  • Exude an air of quality.
  • Establish itself as a premium brand.
  • Lure customers who value social status.
  • Make brand evangelists of early customers.
  • Recover development costs quickly.
  • This pricing strategy is commonly used for new innovations and technology.

Competition Pricing

You have seen what it means for a retailer to price the exact same product higher and lower than the competition. However, companies have another option: price products the same as the competition. This strategy allow a retailer to avoid some of the downfalls of other approaches

For example, some retailers offer price matching on all products sold. This policy allows customers to feel like they are getting a great deal without a company having to resort to penetration pricing.

Bundled Pricing

If you have a landline along with your cable and internet service, you know that bundled pricing can be effective. Even though you may not want or need a landline phone service, you buy it as part of a bundle because it’s a perceived as a better value – you get more services for just a little more money. Bundled pricing entices customers to buy more than they otherwise would. Value meals, TV and internet packages, and insurance bundles all utilize this strategy.

While bundled pricing can be an efficient strategy for pricing, Forbes warns of the downsides. Bundling does not work well in all industries. Also, it’s important to offer consumers the choice of whether or not to bundle.

Psychological Pricing

Have you ever noticed that very few companies sell products priced in round numbers? That’s not a coincidence. For example, a retailer prices a product at $4.99 instead of $5. Though the price difference is, by rational thought, only a penny, the “4” in the lower price makes it seem much lower. A seemingly lower price could mean that customers are more inclined to buy the product. The retailer then gets more business while only sacrificing one cent per sale.

This even works on big-ticket purchases like cars. A dealership may price a $30,000-dollar vehicle for $29,999 and attract more sales that way.

Cost-Plus Pricing

Cost-plus pricing, which is also called markup pricing, starts with a company determining how much it costs to produce the product. To complete this step, the business calculates the cost per unit, which includes adding the fixed costs and variable costs together and then dividing by number of units produced.

To employ cost-plus strategies, managers determine the desired profit margin. Finally, they multiply the cost per unit by the desired markup percentage to arrive at the selling price per unit.

Each type of pricing strategy has pros and cons. Through the coursework in a marketing-focused MBA, you can gain the tools and skills that will enable you to make the right pricing decisions for your company.

Learn more about the SOU online MBA program with a Concentration in Marketing.


Sources:

LearnMarketing.net: Price and Pricing Strategies

Investopedia: Penetration Pricing

Chron: What Are the Benefits of Skimming Pricing Strategy?

The Balance: Defining and Calculating Cost-Plus Pricing

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