Before we start, I must say that The Beatles ‘Ticket to Ride’ has the greatest drum line in the history of music. There is no argument here, so play that and read this…
A good pricing strategy should consider the company’s business plan, mission statement and what market they targeted, segmented and decided to market too. The ultimate goal for an aggressive business should be to maximize profits and gain as much market share as possible, while a less aggressive company should look to increase revenue and cut costs (maximize profit) while working within a market that is comfortable for them. Every business plan is different and every company will be run differently, but the ultimate goal should be to generate as much profit as possible.
When a company decides to bring a new product or service to market the first thing that a marketing manager should do is analyze their surrounds and see where the company fits in. A scavenger hunt of similar companies and possible substitute companies should be done before working on a pricing strategy. Is your product or service going to be a market setter and bring about something revolutionary like an iPod was in 2001 or is your company sitting back and take a more reactionary or second mover approach like Microsoft did with the Zune in 2006? Not every company is going to be an Apple or a Microsoft, market makers can be any company that introduces something new and unique to a market while spending a lot of money in research and development while a second mover simply waits to see what’s out there, gets an understanding of how it’s made and then proceeds with caution and a lot less money spent to bring an identical item to the market.
A pricing strategy is going to set the table (good or bad) on how people are going to perceive your product or service. There are numerous different pricing strategies out there today, but we are only going to cover four that are utilized the most and have a traditional use in business. Not every pricing strategy is the same, much like every economic decision and strategy is different. Side bar research topic: Asian Dragons (or Asian Tigers). See how they used different economic strategies to further their countries development and growth into being some of the world’s largest and strongest economies today.
So how does pricing strategy play into Asian economics and iPods? They are two separate items going out into a global market that is connected via trade, politics and PRICING. A lot of products are made in various different countries, not just the finished product, but the products to make the products to make the products or simply the supply chain, encompasses the globe. And when government regulations and tariffs get involved the cost can go up, up, up and some items can get down right weird, like women’s clothing with nurses pockets. This is actually a great article, so to entice a read here is a snippet, “certain women’s garments with “pockets below the waist” get lower duty rates than those without. Because of that, a number of the women’s shirts Columbia Sportswear makes are intentionally designed with tiny pockets near the waistline, which lowers the cost of importing them. One of the company’s shorthand for “pockets below the waist” is “nurse’s pocket.””
As we can start to gather, pricing comes in all sorts of shapes and sizes and it all adds up. Like the engineers who built a $2,000,000 x-ray machine for the salesman who sold it for $6,050,000 (because — commission) and the hospital who needs to make money off of their purchase so they bill you $20,000 to check for a hairline fracture to pay the doctor an annual salary of $300,000 and each nurse $63,000 to help you get better before you get sick again after the sticker shock of a $45,000 bill (that the insurance company gets and the hospital gives them a 90% discount) for a one day hospital visit, to which… sorry… pricing. Let’s talk business pricing…
A company has their choice of many different pricing strategies. The company could choose to come to the market at the lowest possible cost which might hurt their margins, but will have a better chance of giving them a bigger market share. They could choose to price their products the same as their competition, but with no on knowing who they are they may not sell as many products. A company could choose to price their products at a premium which would eliminate a lot of potential customers, but give the product a little mystique and be viewed as a good product from pricing alone. The company could get lucky and be an Apple with high price and high sales or like some throwaway product on the bottom shelf of a Dollar General with low prices and low sales. This is where a good pricing strategy comes into play.
“Price is What You Pay; Value is What You Get” – Warren Buffett
So lets take a quick look at four of the most common pricing strategies that a business will have at their disposal. We’ll be discussing premium pricing, penetration pricing, psychological pricing and product line pricing.
Premium pricing is the essence of style and grace, or at least you would be lead to believe because of the high price associated with the product. One cannot help but to believe that the product they are purchasing is top of the line because of the price they paying. Apple is a great example of premium pricing. Unless you’re Amazon and selling the iWatch 4 series for $50 less than anyone else, you don’t see much competition in terms of pricing. Apple rarely gives discounts and if you do see a price drop, it’s slight and a newer model is coming to market soon. Premium pricing is a great strategy to gain trust and confidence with consumers that the product or service they are buying is a premium product or service. This strategy is best when you are trying to distinguish yourself from the crowd and can provide a good product. Apple has their lovers and haters and a lot of competition, but they stay true to their business model and set the market price instead of following it. A drawback to this pricing structure is the inability for potential customers to not be able to afford the product or service. You will enter the market already down a significant amount of customers due to the lack of financial resources from certain demographics. This will hold up the products brand value and product lines, but could lead to potential lost revenue and in Apple’s case, customers who can no longer keep up with the escalating prices associated with the product lines. These can be thought of as the Rolex wearing, Ferrari driving thousands of dollars suit person, it looks nice and it’s high quality, but you can’t bring a Rolex underwater, a Ferrari isn’t a daily driving vehicle and a $10,000 suit gets the same stains as a $20 suit. Sometimes it’s just flash, or a college kid spending their student loan money to look cool. Like Beats by Dre.
On the other side of the pricing strategy profits and market share line is the penetration pricing strategy. This is a great strategy for a company that is getting into a crowded market (soda, shoes, candy, clothing, etc.) and wants to gain as much market share as possible in as little amount of time. Penetration pricing is used so that a new product can catch the eyes of the consumer by offering lower prices than the competitors and gives as many consumers as possible the ability to afford the product. Some companies will use this strategy and then gradually start to increase prices. Kia and Hyundai are popular car brands that used this strategy to gain market share in the United States. Both companies came into the U.S. market having to compete with Ford, Chevy, Dodge, GMC and others back in 1992 and 1986 respectively. Both used a penetration pricing strategy to gain market share against companies who have a strong brand recognition and would be impossible to compete against on their terms. Now i’ll leave it to you (the reader) to research the outcome, but we can see today in 2019 that both companies are still around and both are psychologically considered a cheaper alternative to other car manufacturers. With penetration pricing, another draw back is the lost revenue that can never be recuperated. This strategy shrinks margins to expand market share, so every penny lost is gone forever. Even if your brand grows a thousand times over and is immensely popular, you still cannot make up the revenue lost in the beginning.
Psychological Pricing personally bothers me. If your a company using a psychological pricing structure you are not alone, actually your not even creative anymore. Behavioral economics and psychology tells a consumer that they are getting a good price when it’s not a rounded off number and that it’s even better if it’s a little odd. Target may sell a product for $7.99 and Wal-Mart may have the same for $7.94, in reality the W is .05 cheaper, but theoretically they are both $8.00. It’s just the same when you purchase gas, that is unless the attendant can somehow give you 1/10 of a penny back. If gas prices are $2.59 AND 9/10 you are actually paying $2.60, yet everyone quotes the price as $2.59. It’s like buying the $800 television that is discounted 20% (original price: $1000). You didn’t save $200, you spent $800. This is a
great AMAZING topic to discuss in behavioral economics. It’s so fascinating just because the entire nation falls for these pricing tricks. A medical doctor has the same mindset as a person with a Harvard MBA and a seven year old child. Everyone falls for this trick, which is why it’s so popular. You also can’t just bring $8 to the store for our earlier example. Tax is also included and at seven percent on every dollar for a product costing $7.99 you’ll be paying $8.55 so if you round that it’s actually closer to $9. Boom!!! Psychology pricing in a bag *drops mic*.
Last but not least we have product line pricing. Digital marketing is an amazing service to provide businesses around the globe and you should definitely check out our site, Mark Marketing SB if you are interested in digital marketing. One of the biggest marketing trends over the past decade has been the rise of SaaS (Software as a Service) marketing. A brand is a name (Nike, Adidas, Publix) that offers products or services (Air Jordans, Predator cleats, Cheese). Product line pricing allows the brand to set different prices for their products. Adidas may sell a replica soccer kit for $80, an authentic kit for $180 and an authentic kit with a personalized name for $250. Same jersey, same material, but now it’s been personalized with different pricing structures. The same goes for software. Let’s take Intuit’s Quickbooks as an example. A couple of years ago you would purchase the software and license that was good for a set amount of time. Today you purchase access to their cloud server for various amounts that offer various different services. Most SaaS marketing plans will be broken down into two categories; pay it all up front for a discount or pay monthly. After you decide if you can afford to pay it all up front or not, than you’ll choose your option dependent on the level of service you personally need. Product line pricing is great if your company has a few different products or services to offer and can be customized to help gain customers at all pricing levels. But before you get to this step the software companies will typically offer you a free month to try out their platform, which is very nice.
These are just a few of the many different types of pricing strategies that a new business should consider when putting together a strategy and their marketing mix. Like all of our other blog posts, please use this as a guide and a base to further your education. Please feel free to leave a comment below, like us on social media and have fun. Also, please visit us at Mark Marketing SB and let us know… ya know…