Five Pricing Strategies for Special Products and Services
02.05.2016 / Posted in Articles, Budget, Strategy
By now you should be familiar with when and why to use skimming and penetration pricing strategies (if not, read the first article in our series on pricing strategies).
Skimming pricing and penetration pricing, however, aren’t the only pricing strategies out there, nor are they the optimal strategies for every product. Special cases exist in which additional factors, such as a product’s relationship to other goods produced by the company, should be considered before establishing a product’s price. Some of the most popular specialized pricing strategies include:
Product Line Pricing
This strategy is ideal for companies who sell multiple products under the same line(s). In this situation, companies should consider the relationships between products before a price is set. If Pepsi, for example, decides to introduce a new brand of soda, they need to price their new product similarly to the soda brands that they already sell. If the prices are wildly different, customers will most likely select a lower-priced substitute in the long-term, which could mean the failure of the new product or a substantial shift away from an existing product.
It is important to note that this strategy aims to maximize the profitability of the company as a whole instead of maximizing the profitability of any one particular product. Car manufacturers provide a great example of this concept: they can make up for low margins on competitively-priced economic models with large margins on their luxury models.
When companies sell their products or services together for one price, they are employing a bundling pricing strategy. You’ve no doubt run into bundled prices when you purchase a suite of computer software or a fast food value meal.
One reason to offer bundled pricing is to increase margins by including items that customers won’t use often with the items that they want. Microsoft Office Professional, for example, includes Publisher, OneNote, and Access, which are less popular programs than Excel or Word and likely wouldn’t be purchased often on their own.
Bundled pricing is also a way for companies to allocate for anticipated future costs. Many tech companies markup the price of their products to cover technical support services they will likely provide to customers over the product’s lifetime.
Flexible Pricing Strategy
This strategy allows for the sale of the same products in the same quantities at different prices to different customers. Cars are often sold in this fashion—depending on the price you negotiate, you could pay less than someone else who purchased the same vehicle.
A major benefit to this strategy is that it maximizes value by charging customers exactly what they’re willing to pay for a product. This strategy also benefits sales personnel, who have room to adjust the price of the product if the customer thinks it is too high instead of turning away business. One thing to note with this strategy, however, is that it has a definite focus on profit and margins instead of on volume of sales.
One Price Strategy
The alternative to flexible pricing is a one-price strategy where there is one set price for a given product that all customers must pay. This strategy is best used when the company’s goal is to sell large quantities of their product.
An obvious advantage is that it is easy to maintain—you don’t need to worry about who gets what price. However, the lack of flexibility means that prices should be reviewed regularly to adjust to any changes in the market landscape. An additional downside to this type of pricing is that competitors can see what products you’re offering at which prices and may use that information to better price their own product(s).
Price Leadership Strategy
Price leadership occurs when one firm who is seen as the industry leader, usually due to market size, sets the price for a given product or service and their competitors mirror that price. This type of strategy is best suited for oligopolistic markets where there are only a few providers of a product/service. The airline industry is one such example.
One advantage to price leadership is that it allows firms to focus on growth instead of wasting resources on engaging in price wars. The leading firm, however, must exercise caution whenever it sets the price. One poor decision could make other firms to stop following, thereby causing them to lose their leadership status.
Strategy is Key
Choosing the right pricing strategy is a challenge even for experienced marketers. But, as with any marketing decision, it is important to make sure that it aligns with your global marketing strategy. Don’t have one of those yet? Call FrogDog—strategy is what we do best!
Needing to adjust the price of a product or service? Read the third article in this series, When and How to Adjust the Price of Your Product or Service
Note: This is the second article in our series on pricing strategies. To start at the beginning, click here.