Penetration pricing strategy, let us start with the most aggressive kind of pricing strategy, which believes in the vast majority, which results in the pricing being low as they can attract the consumer or customer with the idea of making them seen and fascinating them away from the competitors.
Initially, it starts with launching the new product and giving it discounts and promotions at a much lower price than the retail price to create a brand identity. Once the product receives the amount of demand in the market and then the prices are back to normal, the other way to keep the new customers intact towards the brand it offers is to keep a loyalty program or subscription to avail the discounts and offers at a nominal percentage of the launch price.
What are the risks the pricing strategies go through?
Pricing strategies go through many risks, including market fluctuations, such as changes in demand or competitor actions, and rising costs that can run over profitability. Customer insight risks arise when prices do not align with recognized value, potentially harming brand reputation and loyalty. Legal and regulatory risks can occur if pricing practices violate laws or regulations. Internal risks, like implementation errors or data inaccuracies, can lead to inconsistent pricing. Technology risks, such as algorithm errors or cybersecurity threats, can also disrupt pricing plans. Macroeconomic factors, such as inflation and currency fluctuations, can also impact the effectiveness of pricing strategies.
Method to create an effective pricing strategy.
Recognizing Markets and Customers: Do the market condition analysis while understanding customer divisions and competitors.
Having a Clear Goal: Defining goals like increasing profits, market share growth, or typically aiming to have a higher quality and exclusivity for your product.
Calculating the Cost: Calculating the total cost while considering the fixed cost and variables.
Choose a Cost Method: Opting a method from the three pillars of the pricing strategy that will match your brand objective and goal.
Test and Adjust: Analyze the brand performance and demand while having the feedback for the product and adjust the pricing for it.
Communicate Value: Convey the brand’s value concept and goals to customers to justify pricing.
The Three Pillars of Pricing Strategy
Cost-Based Pricing:
Cost-based pricing is kept by adding a fixed amount to the total cost of production of a product or service, ensuring all costs are covered while achieving a desired profit margin. It involves calculating direct costs (like materials and labor) and indirect costs (such as overhead) and then adding a predetermined profit margin. This method is simple and guarantees cost recovery but may overlook market demand and competitor prices, potentially leading to overpricing or underpricing.
For Example, A cost-based pricing strategy applies to the retail industry, which goes with the variation in the item’s price being sold and has different cost percentages.
Value-Based Pricing:
Primarily with value-based pricing, which has the perceived value of a product to the customer rather than the cost of production. This strategy involves understanding what customers are willing to pay by analyzing their needs, preferences, and benefits from the offering. Value-based pricing can lead to higher profitability by capturing more of the customer’s willingness to pay but requires deep customer understanding and a strong value proposal to be effective.
For example, Apple is one of the examples that creates new features, and that too with higher quality than the competitors.
Competition-Based Pricing:
Competition-based pricing is based on the pricing strategies of competitors rather than focusing on costs or customer value. This way it involves analyzing competitor prices and positioning the product slightly higher, lower, or equal, depending on the desired market strategy (e.g., premium positioning, penetration pricing). It helps businesses remain competitive in the market but can lead to price wars and may not always reflect the true value of the product to customers.
For example, companies like Coca-Cola and Pepsi have this constant rivalry in terms of their advertising and pricing.
