How A Poor Pricing Strategy Will Affect Your Marketing Campaign

Pricing strategy is a term within the 4P’s of the marketing mix and refers to the setting of a monetary value, or financial charge that must be paid by the customer in order to secure possession of your offering.

Once you have chosen a target market you must try to attract customers in that target Market, and you will achieve this by adopting the right marketing mix, which can appeal tocustomers in that target market:

Price

The Pricing strategy of a product will mainly depend on the following:

• The costs of production


• The price of substitute products


• The scarcity value of the product


• The prices offered by the competition


• The stage in the product’s life cycle

Price will be particularly important when:

When competitors change their prices
If a competitor reduces its price and you have a similar product, there may be no option but for you also to reduce price. If you offer certain advantages over the other product it may bepossible to hold your price firm.

When competitors change other elements in their marketing mix
Competitors may improve the packaging of their product. You may counter this by reducing your price. It all depends on what the customer wants. Sometimes a customer will prefer a reduction in price to an increase in quality.

When costs of production are rising
When production costs are rising, it is important that you decide how much of the price increase you will pass on to the customers without turning them to the competition.

Pricing Strategies:

It might reasonably be argued that price is one of the more potent strategic tools in the marketing mix that you may use to forester your company’s wider objectives.

There are two commonly used types of pricing strategy, namely skimming and penetration:

Skimming

The practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or highly improved product hits the market.

The success of price-skimming strategies is largely dependent on the inelasticity of demand for the offering either by the market as a whole, or by segments of it.
High prices can be enjoyed in the short term where demand is relatively inelastic.

The objective of employing a skimming pricing strategy would be to enable you to benefit from high profits available in the short term (due to the newness of your innovated product) and from your effectively segmented market.

Advantages of price-skimming:

In the event that your highly innovative product is launched, research and development costs are likely to be high, as are the costs of introducing the product to the market via promotion, advertising etc. In such cases, this practice of pricing highly allows for some return on the set-up costs.

By charging high prices initially, your company could build a high-quality image for its product. Charging initial high prices may allow you the luxury of reducing them when the threat of competition arrives – a lower initial price is difficult to raise without losing volume.

Skimming can be an effective pricing strategy in segmenting your market. You get to divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment.

Where an offering reaches the market via dealers, the practice of price-skimming is very popular, since high prices for the supplier are translated into high markups for the dealer.

For prestige goods, the practice of price skimming can be particularly successful, since the buyer tends to be more ‘prestige’ conscious than price conscious.

Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming pricing strategy can work well.

An example of branding differences is among manufacturers of ‘designer-label’ clothing.

Penetration pricing

Penetration pricing strategy involves the setting of lower, rather than higher prices by the supplier, in order to achieve a large, if not dominant market share. This will only be possible where demand for the product is believed to be highly elastic, i.e. demand is price-sensitive and either new buyers will be attracted, or existing buyers will buy more of the product as a result of a low price.

If implemented successfully, the penetration strategy may lead to large sales volumes/market shares and therefore lower costs per unit.

The effects of economies of both scale and experience lead to greatly reduced costs, which justify the use of the penetration pricing strategy to gain increased market share.

Before implementing a penetrative price strategy, you must be certain that your company has the production and distribution capabilities to meet the anticipated increase in demand.

Disadvantages

Implementing a penetration pricing strategy for your product has the likelihood of forcing competing suppliers to follow suit and reduce their prices, thus probably nullifying any benefits of the reduced price.

A second potential disadvantage is the impact of the reduced price on the image of the offering, particularly where buyers associate price with quality.

Other pricing options

You may also consider the following pricing options when attempting to attract customers in your target market.

• Off peak pricing


• Discount policy (particularly important in the industrial market where bulk buying discounts are common)


• Child fares or prices for old people

Pricing and the Internet

The length of the supply chain, from manufacturer to customer, via wholesalers/distributors and agents/ retailers has become shortened, with customers now increasingly able to deal directly with the manufacturer.

Through the use of search engines and dedicated price comparison sites, both customers and potential competitors can benefit from increased price transparency and comparability.

Where there are low barriers to market entry, the speed of price changes (reductions) is likely to increase.

Although these observations might be perceived as a threat to the effectiveness of price as a strategic tool, such disadvantages are more than off-set by the information based advantages (relating, for example to customer buying patterns, consumer price sensitivity, competitor pricing strategy) that e-commerce can offer.