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PRICING STRATEGY
John Paul C. Magbitang

Chapter 1
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AN OVERVIEW ON PRICING STRATEGY

Learning Objectives

At the end of this unit, you are expected to:

1. Define Price and Pricing Defined
2. Familiarized with the Approaches in setting price
3. Solved what is pricing strategy.

Overview

The focus of this module is to present concepts, principles, and techniques that provide
guidance to help a seller set the best price. Our study of how to set the best prices will take the
marketing approach. In this chapter, we will describe the business context for pricing and
provide an overview of how the basic principles of marketing can guide effective price
setting.
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1
Lesson Proper

WHAT IS A PRICE?
Price is the value that is put to a product or service and is the result of a complex set of
calculations, research and understanding and risk-taking ability. A pricing strategy takes into
account segments, ability to pay, market conditions, competitor actions, trade margins and
input costs, amongst others. It is targeted at the defined customers and against competitors.
From this understanding of the commercial exchange, we are now able to give a formal
definition of a price: that which is given in return for a product in a commercial exchange.
This essential role of price in commerce is sometimes disguised by the use of traditional
terms. If the product in the commercial exchange is a good, then the product’s price will most
likely be called ―price.‖ However, if the product is a service, then the product’s price
may well go by one of a variety of other possible names (see Figure 1.2).

Figure 1.2 Some Terms Used to Mean “Price”

“PRICE” VERSUS “COST”

Although a price may go by many names, one name it should not go by is cost. This is
because, in this book, we will usually be taking the viewpoint of the seller.
If we were taking the viewpoint of the buyer, this would not be an issue. Buyers, particularly
consumers, will typically use the terms price and cost synonymously. For example, a woman
could tell her friend, ―The price of this sweater was only $30.‖ Or she could just as easily
say,
―This sweater cost me only $30.‖
However, from the viewpoint of the seller, the difference between prices and costs is quite
important. A price is what a business charges, and a cost is what a business pays. Thus, a
grocery manager may set a price of$3.79 for a 17-ounce box of Honey Nut Cheerios, may
price large navel oranges at 3 for $1.99, or may sell ground chuck at the price of $3.49 per
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pound. But the manager must also attend to his costs. These costs include, for example, what
he pays the wholesaler per case of Cheerios, what he pays employees to stock it on the
shelves, what he pays for the building, for heat and lights, for advertising, and so on.
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PRICING STRATEGIES:

Premium pricing: high price is used as a defining criterion. Such pricing strategies work in
segments and industries where a strong competitive advantage exists for the company.
Example: Porche in cars and Gillette in blades.

Penetration pricing: price is set artificially low to gain market share quickly. This is done
when a new product is being launched. It is understood that prices will be raised once the
promotion period is over and market share objectives are achieved.
Example: Mobile phone rates in India; housing loans etc.

Economy pricing: no-frills price. Margins are wafer thin; overheads like marketing and
advertising costs are very low. Targets the mass market and high market share.
Example: Friendly wash detergents; Nirma; local tea producers.

Skimming strategy: high price is charged for a product till such time as competitors allow
after which prices can be dropped. The idea is to recover maximum money before the product
or segment attracts more competitors who will lower profits for all concerned. Example: the
earliest prices for mobile phones, VCRs and other electronic items where a few players ruled
attracted lower cost Asian players.

PRICING AS A MARKETING ACTIVITY

Marketing activities are those actions an organization can take for the purpose of facilitating
commercial exchanges. There are four categories of marketing activities that are particularly
important, which are traditionally known as the four elements of the marketing mix: Product
—designing, naming, and packaging goods and/or services that satisfy customer needs
Distribution—efforts to make the product available at the times and places that customers
want Promotion—communicating about the product and/or the organization that produces it
Pricing—determining what must be provided by a customer in return for the product

If you use the term place for the activities of distribution, the four elements of the marketing
mix can be referred to as ―the four Ps,‖ a mnemonic that has proved useful to generations
of marketing students.
Note that there is an important way in which pricing differs from the other three elements of
the marketing mix. This is illustrated in Figure 1.3. Product, distribution, and promotion are
all part of the process of providing something satisfying to the customer. Product activities
concern the design and packaging of the good or service itself, distribution involves getting
the product to the customer, and promotion involves communicating the product’s existence
and benefits to customers and potential customers. All three of these types of marketing
activities contribute to the product being of value to customers. In this book, the term value
will refer to the benefits, or the satisfactions of needs and wants, that a product provides to
customers.
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Figure 1.3 Pricing Harvests the Value Created by the Other Three Marketing Mix
Elements

Pricing, on the other hand, is not primarily concerned with creating value. Rather, it could be
said to be the marketing activity involved with capturing, or ―harvesting,‖ the value created
by the other types of marketing activities.1 In the words of Philip Kotler, ―Price is the
marketing- mix element that produces revenue; the others produce costs.‖2 Because it is a
marketing activity fundamentally different than the others, it is important that the implications
of pricing’s uniqueness be fully understood. This is one of the reasons that a course in pricing
is an important part of a business education.

THE MARKETING CONCEPT

The marketing approach to business involves not only engaging in a variety of marketing
activities but also having these marketing activities be guided by the marketing concept. The
marketing concept can be expressed as follows: The key to business success is to focus on
satisfying customer needs.
What this means is that an organization that works toward satisfying customer needs in every
feasible way when carrying out marketing activities is likely to see more long-run success
than a company that does not have such a customer focus. Sellers who rely only on their own
opinions and ignore those of their customers or sellers who view their customers as ―marks‖
to be tricked or manipulated may do well at a particular time but are unlikely to be able to
sustain whatever short-term success they may have. The marketing concept is a modern form
of the philosophical viewpoint known as ―enlightened self-interest‖: One’s self-interest is best
served by focusing one’s attention on the needs of others.

PRICING AND THE MARKETING CONCEPT

It is clear how product, distribution, and promotional activities can be guided by the
marketing concept. Through marketing research (which, by the way, is a fifth important
category of marketing activities), a personal computer manufacturer can learn, for example,
the features and styling consumers want and then build machines to satisfy consumer
preferences. A bank could determine the hours consumers would prefer walk-in service and
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could arrange to have those services available during those hours. A cell phone service
provider may find out that many consumers are unaware of all of the convenient features of
their service and may design a promotional program to communicate this information.
However, it is less clear how pricing activities can be guided by the marketing concept.
Certainly, customers would prefer paying less. In fact, paying nothing at all might well be
their first choice! But it is simply not feasible to ―give away the store.‖ An organization that
gives away the value it creates will soon cease to exist, and thus the value it creates will
disappear. This does not serve customers well. Rather, it is in the customer’s interest for an
organization that creates customer value to set prices that maximize the organization’s
profitability, since that would give the organization the greatest possible chance of continuing
to create that value.
EARLY PRICING PRACTICES
In the earliest commercial exchanges, goods or services were exchanged for other goods or
services. For example, the price that a farmer might pay for a bolt of cloth could be a bushel
of corn. This practice, termed barter, still goes on today, especially in less developed
countries. Barter occurred in recent years when Shell Oil purchased sugar from a Caribbean
country by giving in return one million pest control devices.4 Although barter is still used, it
can make exchange difficult. For example, what if the seller of the bolt of cloth had no need
for the farmer’s bushel of corn? Because of such inefficiencies of barter, almost all modern
commercial transactions use a medium of exchange—something that is widely accepted in
exchange for goods and services in a market.5
A medium of exchange could be anything that the buyers and sellers in a society agree upon.
In the past, items such as cattle, seashells, dried cod, and tobacco have been used as a medium
of exchange. However, many of these presented certain difficulties. In his book The Wealth of
Nations, Adam Smith gives an example of this: The man who wanted to buy salt, for example,
and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the
value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because
what he was to give for it could seldom be divided without loss.
Over time, it became clear that the best medium of exchange is one that is finely divisible,
such as the metals of various weights used in coins. This use of coins and notes to represent
them led to national systems of money, such as dollars, yen, or euros. It is prices expressed in
such monetary terms that will be considered in this book.

THREE CATEGORIES OF PRICING ISSUES

As the use of prices in monetary terms proliferated among human societies, various questions
that required pricing decisions began to arise. Most of these issues fall into one of the
following three categories: (1) buyer– seller interactivity, (2) price structure, and (3) price
format.
Price Structure
Although there are benefits to moving from negotiated prices to fixed prices, there are also
disadvantages. One strength of interactive pricing is that it makes it easy for the seller to
charge different prices to different buyers. For example, when prices are negotiated
individually, a customer willing to pay a particularly high price could be charged, say, $200
for an item without interfering with the seller’s ability to charge more typical customers a
lower price, say, $125 for the same item. The practice of charging different customers
different prices for the same item is known as price segmentation.
In order to accomplish price segmentation with fixed prices, it is necessary to have more than
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one price for a single product. For example, a product may have one price when purchased
alone and another price when purchased in large quantity or when purchased along with other
items. The product may have one price when purchased during the week and another when
purchased on a weekend. It may have one price when purchased in the city and another when
purchased in a rural area. These numerous prices for an item are part of the pattern of the
seller’s prices. In general, the pattern of an organization’s prices is known as its price
structure.
The price structure of a seller involves more than the array of prices that can be charged for
the same item. Most organizations sell more than one product, and the pattern of prices across
these different products is another component of the organization’s price structure. Often the
various products are interrelated such that the price charged for one item should take into
account the prices charged for other items sold by the organization.

Price Format
The third category of pricing issues involves how a price is expressed when it is
communicated to potential customers. For example, early fixed prices tended to be round
numbers, such as $1.00, $5.00, or $2.50. However, by 1880 retail advertisements began to
appear showing items priced at a penny or two below the round number (see Figure 1.4). The
practice of pricing an item just below a round number does not substantially affect the level of
a price, but it does affect how that price level is expressed. The form of expression of a price
is known as the price format.
Expressing a price in a ―just-below‖ format often has the effect of lowering the
price’s leftmost digit. This may make the price level appear lower than it actually is and have
a positive effect on sales. It is sometimes suggested that early retailers used this technique as a
means of reducing dishonesty among clerks. For example, a price such as $1.99 would oblige
employees to use the cash register to make change and thus reduce their opportunity to pocket
the payment. However, research on early price advertising has indicated that just-below prices
were more likely to be used when the advertised item was claimed to be a discount or an
otherwise low price. This suggests that the use of the just-below price format was, from the
start, motivated by managerial intuitions about its effects on the perceptions of the consumer.

Figure 1.4 Macy’s Ad From 1880, Showing 9-Ending Prices

Price format also involves the question of how many numbers are required to express an
item’s price. For example, a price advertisement could directly show the price of a mushroom
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and pepperoni pizza, or it could express that price as a base price plus an additional amount
for the two toppings (see Figure 1.5). The price of a lamp in a home furnishings catalog might
be expressed as a price for the lamp that includes shipping or as a price for the lamp alone
along with a separate price for the shipping of the lamp to the purchaser. The question of
whether a price should be expressed as a single number or as the sum of more than one
number is the issue of price partitioning.

Figure 1.5 Alternative Price Formats for a Mushroom and Pepperoni Pizza

THE FUTURE OF PRICING

For too long, pricing decisions have been dominated by economists, discounters, and financial
analysts. While making a reasonable profit remains a necessity, pricing must become a more
strategic element of marketing. Smarter pricing, as portrayed by the value-based strategy,
appears to represent the future. A case in point is the Ford Motor Company, which managed
to earn USD 7.2 billion in 2000, more than any automaker in history. Despite a loss of market
share, the key to their success was a 420,000-unit decrease in sales of low-margin vehicles
such as Escorts and Aspires, and a 600,000-unit increase in sales of high-margin vehicles such
as Crown Victorias and Explorers. Ford cut prices on its most profitable vehicles enough to
spur demand, but not so much that they ceased to have attractive margins.

Pricing objectives are the goals that guide your business in setting the cost of a product or
service to your existing or potential consumers.
A pricing objective underpins the pricing process for a product and it should reflect your
company's marketing, financial, strategic and product goals, as well as consumer price
expectations and the levels of your available stock and production resources.
Some examples of pricing objectives include maximizing profits, increasing sales volume,
matching competitors' prices, deterring competitors – or just pure survival.
Each pricing objective requires a different price-setting strategy in order to successfully
achieve your business goals. It requires you to have a firm understanding of both your product
attributes and the market.
Your choice of a pricing objective does not have to last forever. As business and market
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conditions change, adjusting your pricing objective may become necessary or appropriate.

HOW TO CHOOSE A PRICING OBJECTIVE

Pricing objectives are selected with your business and financial goals in mind. Elements of
your business plan can guide your choice of a pricing objective and the strategies that go with
it.

Give due consideration to your business’s mission statement and plans for the future. If one of
your overall business goals is to become market leader then you’ll want to consider the
quantity maximization pricing objective as opposed to the survival pricing objective.

If your business mission is to be a leader in your industry, you may want to consider a quality
leadership pricing objective. On the other hand, profit margin maximization may be most
appropriate if your business plan calls for growth in production in the near future, since you
will need funding for facilities and labor.

Some objectives, such as survival and price stability will be used when market conditions are
poor or shaky, when first entering a market, or when a business is experiencing hard times and
needs to restructure.

PRICING FOR PROFIT

This objective is aimed, simply, at making as much money as possible for your business – and
to maximize price for long-term profitability.

Price has both a direct and indirect effect on your profits - the direct effect relates to whether
the price actually covers the cost of producing the product. Price affects profit indirectly by
influencing how many units sell. The number of products sold also influences profit through
economies of scale, i.e., the relative benefit of selling more units.

Profit margin maximization: seeks to maximize the per-unit profit margin of a product. This
objective is typically applied when the total number of units sold is expected to be low.
Profit maximization: seeks to earn the greatest pound amount in profits. This objective is not
necessarily tied to the objective of profit margin maximization.
SALES-RELATED OBJECTIVES
Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is
measured against a company's own sales across specific time periods.

A company's market share measures its sales against the sales of other companies in the
industry. Volume and market share are independent of each other, as a change in one doesn't
necessarily activate a change in the other.
THE MAIN SALES-RELATED PRICING OBJECTIVES INCLUDE:

Sales growth: It is assumed that sales growth has a direct positive impact on profits so pricing
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decisions are taken in way that sales volume can be raised. Setting a price, altering or
modifying policies are targeted to improve sales.
Targeting market share: Pricing decisions are taken in such a way that enable your company
to achieve targeted market share. Market share is a specific volume of sales determined in the
light of total sales in an industry. For example, your company may try to achieve a 25%
market share in the relevant industry.
Increase in market share: Sometimes, price and pricing are taken as the tools to increase
market share. When you realize that your market share is lower than expected it can be raised
by appropriate pricing; pricing is aimed at improving market share.
WHAT ARE PRICING STRATEGIES?
Pricing strategies refer to the processes and methodologies businesses use to set prices for
their products and services. If pricing is how much you charge for your products, then pricing
strategy is how you determine what that amount should be. Some of the more common pricing
strategies include:
o Value-based pricing

o Competitive pricing
o Price skimming
o Cost-plus pricing
o Penetration pricing
o Economy pricing
o Dynamic pricing
A WINNING PRICING STRATEGY
Portrays value
The word cheap has two meanings. It can mean a lower price, but it can also mean poorly
made. There's a reason people associate cheaply priced products with cheaply made ones.
Built into the higher price of a product is the assumption that it's of higher value.
Convinces customers to buy
A price that's too high may convey value, but if that price is more than a potential customer is
willing to pay, it won't matter. A price too low will seem cheap and get your product passed
over. The ideal price is one that convinces people to purchase your offering over that of your
competitors.
Gives your customers confidence in your product
If higher priced products portray value, then the opposite follows as well. Prices that are too
low will make it seem as though your product isn't well made.
A WEAK PRICING STRATEGY
Doesn't accurately portray value
If you believe you have a winning product, and you should if you are selling it, then you need
to convince customers of that. Pricing too low sends the opposite message.
Makes customers feel uncertain about buying
Just as the ideal price is one that customer will pull the trigger on quickly, a price that's too
high or too low will cause hesitation.
Targets the wrong customers
Some customers prefer value, and some prefer luxury. You have to price your product to
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match the type of customer it is targeted towards.

Top 7 pricing strategies

Let's now take a closer look at the seven pricing strategies that were outlined above. Click on
any of the links below for a more in-depth guide to that particular pricing strategy.

1. Value-based pricing
With value-based pricing, you set your prices according to what consumers think your product
is worth. We're big fans of this pricing strategy for SaaS businesses.
2. Competitive pricing
When you use a competitive pricing strategy, you're setting your prices based on what the
competition is charging. This can be a good strategy in the right circumstances, such as a
business just starting out, but it doesn't leave a lot of room for growth.
3. Price skimming
If you set your prices as high as the market will possibly tolerate and then lower them over
time, you'll be using the price skimming strategy. The goal is to skim the top off the market
and the lower prices to reach everyone else. With the right product it can work, but you
should be very cautious using it.

4. Cost-plus pricing
This is one of the simplest pricing strategies. You just take the cost of creating your product
and add a certain percentage to it. While simple, it is less than ideal for anything but physical
products.

5. Penetration pricing
In highly competitive markets, it can be hard for new companies to get a foothold. One way
some companies attempt to do so is by offering prices that are much lower than the
competition. This is penetration pricing. While it may get you customers, you'll need a lot of
them and you'll need them to be very loyal to stick around when you need to raise prices in
the future.

6. Economy pricing
This strategy is popular in the commodity goods sector. The goal is to price a product cheaper
than the competition and make the money back with increased volume. While it's a good
method to get people to buy your generic soda, it's not a great fit for SaaS and subscription
businesses.

7. Dynamic pricing
In some industries, you can get away with constantly changing your prices to match the
current demand for the item. This doesn't work well for subscription and SaaS business,
because customers expect consistent monthly or yearly expenses.

3 Pricing strategy examples

Real-world pricing strategy examples are the best way for a business to better understand the
above-listed pricing strategies. Evaluating other businesses' approaches can be a good starting
point but keep in mind that your strategy should be based on math, market research, and
consumer insights. For now, let’s look at the pricing strategy examples of some of the biggest
brands of today:
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1. Streaming services
Have you noticed that you pay roughly the same amount for Netflix, Amazon Prime Video,
Disney+, Hulu, and other streaming services? That's because these companies have adopted
competitive pricing, or at least a form of it, called market-based pricing.

2. Salesforce
When Salesforce first came out, they were the only CRM in the cloud. (It wasn't even called
'the cloud' back then!) Armed with ground-breaking deployment and a target customer of
large enterprise, Salesforce could charge what they wanted. Later, after they'd grown, they
were able to lower prices so smaller businesses could sign up. This is a classic example of
price skimming.

3. Dollar Shave Club

At one time, you couldn't turn on your TV without an ad for Dollar Shave Club telling you
how much cheaper they were than razors at the store. Although that level of marketing and
advertising is unusual for the pricing model, they were nevertheless employing economy
pricing. It worked out well for them. They were acquired by Unilever in 2016 for a reported
$1 billion.
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Unit II
Types of Pricing Strategy
Overview

This unit gives you the idea of different pricing strategy. Furthermore,
wherein the different perspective were developed.

Learning Objectives
At the end of the unit , I am able to:
1. define economy pricing;
2. discuss the product pricing strategy;
3. discuss the new product pricing strategy;
4. state the status quo pricing; and
5. differentiate start up and e –commerce strategy.
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Lesson Proper

Introduction

Setting the right prices for your products is a balancing act. A low price isn’t always
ideal, as the product might see a healthy stream of sales without turning any profit (and
we all like to eat and pay our bills, right?). Similarly, when a product has a high price, a
retailer may see fewer sales and ―price out‖ more budget-conscious customers,
losing market positioning.

Ultimately, every small business will have to do their homework. Retailers have to
consider factors like production and business costs, consumer trends, revenue goals, and
competitor pricing. Even then, setting a price for a new product, or even an existing
product line, isn’t just pure math. In fact, that may be the most straightforward step of the
process.

That’s because numbers behave in a logical way. Humans, on the other hand—well, we
can be way more complex. Yes, you need to do the math. But you also need to take a
second step that goes beyond hard data and number crunching.

The art of pricing requires you to also calculate how much human behavior impacts the
way we perceive price.

To do so, you’ll need to examine different pricing strategy examples, their psychological
impact on your customers, and how to price your product.

What is economy pricing?

Economy pricing is a volume-based pricing strategy wherein you price goods low and
gain revenue based on the number of customers who purchase your product. It's typically
used for commodity goods, like generic-brand groceries or medications, that don't have
the marketing and advertising costs of their name-brand counterparts. Whether you know
it or not, you've encountered the economy pricing model. It’s a pricing strategy employed
by businesses to make generic and commodity goods appealing. In other words, it makes
customers feel like they’re getting a deal.

How do you execute economy pricing?

At its core, an economy pricing strategy is similar to a cost-plus pricing strategy. You
take a product with relatively low production costs and set a price for it that provides you
with a small profit.
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With such a low price, economy pricing is very much a volume play. The only way
you’ll make a profit is if you bring in a large amount of customers on a consistent basis.
That makes acquisition incredibly important because you won’t be able to rely on
existing customers to drive revenue over time.

Common products that use economy pricing

Economy pricing is used a lot in the commodity goods market. It’s a great strategy for
companies that have low overhead costs and the ability to sell a larger number of
products to new customers on a regular basis. Here are a few examples of economy
pricing in today’s market:

Supermarket store brands

Every grocery store you go into has their own version of popular brands. Companies like
Trader Joe’s and ALDI are two examples that capitalize on economy pricing to drive
their growth.

Generic drugs and medications

Much like supermarket store brands, there are lots of different types of generic over-the-
counter medications available through companies like CVS and Rite-Aid.

Big box stores

Companies like Costco and BJ’s take the economy pricing model to the next level by
selling primarily their own brands. While name brands are still available, the major draw
of these types of stores is the quality-to-price ratio of their generic brands.

Budget airlines
Many airlines will provide economy pricing to fill seats in their planes, offering much
lower prices for the first seats that are purchased and scaling up the price as availability
decreases (which incorporates premium pricing as well).
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Pros and cons of economy pricing

Economy pricing can be a valuable acquisition strategy for SaaS and subscription
businesses. But as subscriptions are built on recurring customer relationships, the unit
economics of selling at such a low price makes it difficult to build a revenue base over
time.

Pros of economy pricing

Economy pricing presents some interesting
benefits for larger, more established
companies. It’s easy to implement, keeps costs
low, and makes your product or service
appealing to buyer personas who are
particularly interested in ―getting a deal.‖
There tend to be lower customer acquisition
costs (CAC) than other pricing strategies,
coupled with the fact that you can acquire
customers faster.
Being able to enter a market quicker and
cheaper can help new entrants find their
foothold as well, but the tradeoff is a decrease
in pricing power. Economy pricing is more of
an acquisition strategy than a pricing one.

Cons of economy pricing

When you’re considering economy pricing, it’s important to understand that it only
works in very specific market conditions. Companies that have no market share or brand
awareness won’t be able to keep their operational costs low enough to make this pricing
model work. And if you’re just starting out, economy pricing can negatively impact the
customers’ perception of value for your brand.
The model relies on thin profit margins to keep prices low and requires a consistent
volume of new customers to maintain revenue. Pricing your product or service so low
makes it hard for potential customers to connect the value of the product with its price
and makes it difficult to raise prices or capture expansion revenue in the future.
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What is Product Pricing Methods

Product Pricing is a pricing strategy in which the by products of a process are also sold
separately at a specific price so as to earn additional revenue from the same infrastructure
and setup. By product is something which is produced as a result of producing something
else ( the main product).

There are many different pricing strategies, but Competitive Pricing, Cost-plus Pricing,
Markup Pricing and Demand Pricing are four common methods for small business
owners to use. An important point to remember no matter which pricing method you
choose: Recent research shows that the Millennial and Gen Z consumers are willing to
pay more for a product from a local small business, if the customer experience is above
average.

1. Competitive Pricing

If you are in the business of selling readily-available products, then pricing that is similar
to your competitors can be an option. It is always a good idea to distinguish your business
on something other than a competitive price, in case you cannot maintain the volume a
vendor requires, or if costs spike suddenly.

2. Cost-Plus Pricing

In terms of small businesses, Cost-plus Pricing is often used when the manufacturer or
creator of a product also sells at retail. Cost-plus is adding the materials, labor and
overhead to a set profit margin to determine the final or total cost of the product.

3. Markup Pricing

Markup Pricing can be considered a variation on Competitive Pricing. This method is

when a set percentage, the markup, is added to the wholesale product cost. It may vary by
product or category.

4. Demand Pricing

Demand pricing is a more risky and complicated method sometimes known as customer-
based pricing. In this method, a retailer is using his or her knowledge of consumer
demand and perceived value to create the maximum price that someone might be willing
to pay.

These product pricing methods should help you determine which one will work best for
your business. Keystone Pricing definitely ranks as one of the easiest and fastest
methods. Just remember that giving attention to providing the best customer service can
make any pricing strategy more effective.
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New Product Pricing Strategies

What is New Product Pricing

Pricing may seem simple and easy. But it’s a very important and challenging part of any
business especially when the product is new in the market because you don’t know how
the market would react to the product price. Therefore, businesses and companies may
test various pricing strategies before setting the final price of a new product.

Some companies may follow the cost-plus pricing strategy, it means adding up all the
fixed and variable costs and then add a percentage of profit on it. Other businesses may
follow the return on investment strategy; it means that you decide how much return you
want on your investment. It doesn’t matter whatever the case is, companies should also
keep in mind the demand and market competition factor before pricing the new product.

Market demand vs. Pricing

It’s important to know the demand for your company’s product in the market before
setting the price. You should know that whether people are sensitive to the price of your
product. It means that the demand for the product would be lower if the price is higher.

If people aren’t sensitive about the pricing of the product, it means that the high prices
won’t affect the product demand in the market. It usually happens with technical
products. For instance, the high prices of the latest model of the mobile phone won’t
affect the product’s demand in the market, because people are focused on the product and
they care less about the price.

Pricing Strategy for New Products

As we know that a product passes through the different stages in its life cycle and its
demand changes at every stage. Therefore, the pricing strategy of the product changes at
different stages of the product’s life cycle with varying demand. The introductory stage is
when the product is new in the market.

Therefore, when companies launch the new product in the market, they face a challenge
that what type of pricing strategy they should follow, price skimming, or price
penetration. Let discuss them in detail;

Price Skimming Strategy

Price skimming strategy is when a company launches a new product in the market, and
then it follows price skimming. It means that charging high prices for the new product.
The purpose is to skim maximum profit from the market layer by layer because the
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market is willing to pay high prices. It also goes by the name of the market skimming
pricing strategy.

Companies follow the price skimming strategy is to earn a maximum profit for the new
product. They lower the prices at the later stages of the product’s lifecycle. The sale of
the new product may be lower in the beginning, but the company earns maximum profit
because of the price skimming strategy.

Example Price Skimming

When companies like Apple or Samsung plan to invent some new products or the latest
model of iPhone or Android, then they have to spend a lot of capital, manpower, and
resources in the research and development. Therefore, such companies follow the price
skimming strategy because they have to cover the high expenses in the beginning.

That’s why the prices of the latest model of smartphones are higher in the beginning, and
only those people buy it who is interested in the latest model. A few months later, the
company drops the prices in the 2nd stage to attract more people. In the 3rd stage after
some time, the company drops the prices to target the price-conscious customers.

You must have noticed these trends. That’s how smartphone companies skim profit layer
by layer at different stages of the product’s lifecycle.

Price skimming strategy may be suitable for some products, but it doesn’t work with all
the categories of products. Factors like the product’s quality, brand image, and
customers’ perception matter in some categories. Where customers think that the price of
the product is matched with research and development cost, that’s they justify the price.

But in some other product categories where the cost of the product is lower, if you follow
the price skimming strategy, then it won’t be much advantageous. If competitors see your
product not working with the price skimming strategy, they would lower the prices to
damage your business.

Penetration Pricing Strategy

Price penetration strategy is when companies set the prices lower for the new product.
Price penetration is opposite to the price skimming strategy. Where you skim off the
price, the purpose is to make the new product penetrate the market.

Companies follow the price penetration strategy to win the market share of the price-
conscious customers, but at the cost of low profitability. If the sale of the new product
increases because of the lower prices, it would make the company cut the prices more in
the future.
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Example of Penetration Pricing Strategy

Many companies follow a price penetration strategy. Ikea, a Swedish Furniture Company
is one of them. It has lowered its product prices to penetrate the market. That’s how the
company has attracted the price-conscious market across the world.

Although Ikea is selling its furniture products at lower prices, that means lower
profitability. But the question is how the company is managing it. The answer to secrete
is that less price increases the sale volume, and the company maintains its profitability
with more sales.

Price penetration strategy works in a certain market where you have to check factors like;
the customers in the target market must be price sensitive. It means when a
company/business lowers the prices, then it would attract a large number of customers
towards it. More customers would increase sales.

Price penetration is similar to the economies of the scale concept. Where you push the
competition out of the market by lowering the prices, it means more customers, more
sales, and fewer prices. Keep in mind that price penetration works only in a short time.

Price changes
Businesses and companies have to understand one thing that they just can’t keep the price
changes (high or low) forever. The price changing strategy can work only in the short
term. For instance, if a company follows the price skimming strategy in the long term,
then it would lose the majority of the customer market share. If a business adopts the
price penetration strategy for a long time, then the company would lose the profit and it
would lead to the company’s bankruptcy.

However, businesses should offer occasional price reductions and discounts to customers
to win customers’ loyalty. Some businesses provide some offers to their customers at the
new product, where customers would have the opportunity to win cash prizes in the
future.

Conclusion
The product pricing strategy article tells us how different factors affect the pricing
strategy of the new product. Companies use a price skimming strategy to recover the
research and development cost, and they use a price penetration strategy to penetrate the
market and win market share.

Some companies ask the customers before finalizing the price of the new product. They
conduct a focus group and market research for this purpose, and they ask customers how
much they’re willing to pay for such a product. How much they value the product
because their perception is also important. When you have answers to such questions,
then you should follow the price strategy accordingly.
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Pricing Objectives of Status Quo

A firm has to decide how to price its goods in order to achieve its goal of making a
profit. Pricing depends on what sort of competition and market conditions the firm
faces. In a market that has a number of competitors producing a product that is not
unique, such as the U.S. cereal market, one common pricing strategy is status quo
pricing.

Avoiding Price War

By setting a price that is in a similar range to that of its competitors, the firm that goes
in for status quo pricing aims to maintain the industry status quo. If the firm prices its
goods lower than its competitors, it faces the risk of starting a price war. If other firms
also decide to cut down their prices, a price war might ensue that will likely not benefit
anyone except the consumer.

Stable Profit

Another objective of status quo pricing is assuring steady profit from the sales of the
product. By not pricing above or below its competitors, the business gets a steady
stream of customers and is assured of a steady profit. This is likely, given that
competitors too opt for the same strategy and don’t upset the status quo by lowering
their prices.

Maintaining Pricing

Considering that the firm that engages in status quo pricing doesn’t have much control
in terms of setting its price, the way to achieve status quo pricing is to focus on cost
control. The firm focuses on controlling its costs of producing and marketing the good
so as to maintain its market price.

Changing Objective

A firm could change its pricing strategy as market conditions and its specific situation
change. Thus, if a firm opts for status quo pricing at a time when the market is down, so
as to survive a down market, it may decide to change its pricing objectives later. As the
market improves, the firm may decide to focus more on maximizing its profits and
change its pricing accordingly. Similarly, a new entrant to an established market might
opt for status quo pricing initially and change its strategy later as it gets better
established.
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5 Key Concepts for a Smart Startup Pricing Strategy

Building a company is no easy task. From creating a product to hiring the first employee,
there are a multitude of things an entrepreneur must do to get the company off the
ground.

One of the things that often gets lost in the shuffle (and really shouldn’t) is the startup’s
pricing strategy. Too often the task of pricing is left to the very end of a product launch,
but entrepreneurs should really take the time to build a thought-out pricing plan to
achieve larger goals for the company.

The result? For many startups, it’s going to market with an unachievable revenue model,
diluted value in the product and the company, and limited pricing capabilities to address
current and future market pressures.

So what can entrepreneurs do today to ensure value is not lost? Here are five essential
concepts you need to understand to start building your pricing strategy.

Know your product’s (pricing) value

Today’s entrepreneurs have been doing their homework and now understand that pricing
is a function of a product’s value. Yet when asked what value means, they find that the
question is much harder to answer than it appears. For most entrepreneurs it is easier to
create value through products than to extract value through pricing.

In the simplest terms, value in a pricing context is the benefit customers receive through
your product or service. This is not a feature or a price point, but the reason why
customers want to use your product. Even if this seems obvious, it’s often one of hardest
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exercises for startups because it is overlooked during the product development and
customer discovery stages.

The heart of a high-impact pricing strategy is identifying two drivers: what brings
customers to your product and what gets them to pay. While subtle, the distinction is
material—just because a customer is willing to use your product doesn’t mean they’re
willing to pay for the product. Get to the heart of your product’s value and you’re one
important step closer to building your pricing strategy.

Leverage insight powers of pricing

Many startups actively do research on the market, customers, and competition. This
research can be anything from collecting answers to short one-question surveys to longer
and more involved studies. While conducting this research, many entrepreneurs ignore
pricing as a signal, because they fail to realize how pricing and specifically the
development of a pricing strategy can provide invaluable insight to the customer and
market.

Unlike other forms of research, pricing research is focused on understanding the one
thing customers are less willing to part with—money. When startups start to dive into
pricing questions, new insights on product-market-fit are generated that would otherwise
be difficult to determine.

For example, it may turn out that a killer feature all customers loved during product
testing may not be one that those same customers are willing to pay for. This raises
questions not only for pricing, but also for the product, sales, and marketing teams.
Should the company continue developing the feature? Will changing the price level
change customers’ willingness to pay? How will sales and marketing fill the gap between
current perception of value and the desired pricing?
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These are difficult questions, but they can provide vital insight, not only into how a
product should be taken to market, but also into the startup’s objectives and its capability
to successfully execute them. Failure to capture this insight into a pricing strategy can
lead to a rude awakening.

Pricing is a strategic and tactical weapon

There is often a ―set it and forget it‖ mentality when it comes to pricing, but the
best companies understand that a strong pricing strategy is a source of competitive
advantage.

With clearly defined objectives and planning, startups can use strategic and tactical
pricing to achieve larger goals. For example, Apple rarely discounts their prices, and
instead often offers discounts via iTunes gift cards. This is an intentional, well-designed
strategy. Strategically, Apple’s prices are purposefully positioned to signal to customers
and competitors that its products are premium-tier. This also makes price a non-
negotiable factor, causing customers to evaluate other factors to determine their own
willingness to pay.

Pricing is also a tactical tool to achieve measured and often short-term goals. One
example is the use of promotions to increase basket size (i.e. the number of items
purchased in a single transaction) or move unwanted inventory. In other situations, a
company can use pricing to unbundle products or features to increase the perception of
affordability. This tactic is commonly used, for example, by airlines. Features such as
baggage and food are unpacked from the overall offer to bring the presented airfare price
down and increase the likelihood of a sale.

Mindset for leaders and teams

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One of the most important success factors to an effective pricing strategy is the mindset
of the company’s leaders. Company leaders set the vision for the company’s pricing
strategy, but also the development, execution and maintenance of pricing. This is a
classic example of success starting from the top.

Whole Foods’ co-founder John Mackey brought organic foods into the American
mainstream and reshape how people viewed healthy eating and food sourcing. He also
introduced prices to reflect the value he saw in foods that delivered this value.

While earning the store the cheeky nickname ―Whole Paycheck,‖ Whole Foods’
prices were both intentionally and purposefully high: they shaped perception of premium
value, created a sense of uniqueness and practically, and helped to drive profitability and
growth. This pricing strategy started from the top, with leadership setting the goals.

A purposeful pricing mindset isn’t found only in large corporations, but in startups as
well. The Information, a digital media company founded by Jessica Lessin, went against
digital media trends and put up a paywall to monetize for the quality content they were
creating.

How much value did Lessin see in their product? No less than the Wall Street Journal.
The Information’s annual subscription is priced at $399 or 18% more than a comparable
digital-only WSJ subscription.

When pricing starts at the top, it sets the tone for the rest of the company. Leaders guide
their teams on what value means and how pricing decisions are made. For startups where
leaders don’t take up the pricing mantle, their product’s value is diluted through poorer
pricing decisions and impact opportunities to drive revenue and profit growth.

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Way to keep your light on

This is perhaps one of the most obvious essential pricing concepts, but the pricing
strategy should be designed to help the company grow financially, starting with not
losing money (for too long). Many companies disassociate pricing and financial
objectives, often to the detriment of the startup.

It is vital for startups to understand that they are building a business and this means that
their revenue model needs to be built on better and stronger pricing. When prices are
misaligned with value and willingness to pay, the financial results for the company often
reflect that truth.

Building a pricing strategy also means identifying financial tradeoffs. For startups this
can mean speed of growth, market penetration, and profitability. It is critical for startups
to assess desired short-term gains, but also the implications those decisions have for
sustainability beyond. Many startups end up discounting and competing on lower prices
for short-term gain, only to find themselves either unable to retain customers or stuck
with a broken revenue model.

Final thoughts

Startups are challenged by many things inside and outside their companies – from limited
resources to competitive pressures. Pricing is one area where startups have some power to
shape their own destinies, but it requires a thoughtful strategy built on actionable insight
and leadership.

It’s easy and common for startups to push pricing to the backburner, but before too long,
they find out that it’s too late. Make the effort today to understand the components and
work required to build a strong pricing strategy. It can create be a well-earned advantage
many of your competitors will overlook.

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Pricing Strategy: The Ultimate Guide to E-commerce Pricing

Remember the last time you visited your favorite shop? Let’s relive those moments
together and see how you can relate that with e-commerce pricing.

You go into your favorite store, gazing through the stalls briefly, touching a couple of the
items for the feel and texture. Suddenly, you find your perfect match, grab it and put it
over your body to see if it really looks great on you. You love the item and the only thing
standing between you and the t-shirt is the price tag. You find it, flip it, and check how
much the item is worth.

Yikes!

It costs a lot. It’s not a bargain, so you give up and leave the shop feeling blue.

Sounds like ancient history, right?

Today we follow our favorite brands on Instagram, set eyes on a product and locate
where it’s sold in seconds.

And we have too many options. Options that sell identical products at different prices.

Google’s consumer barometer below shows how much time is spent on a product before
a purchasing decision is made.

As you can see only 21% start their research moments before a purchase. The rest starts
from hours to more than months!

So how many products and prices you think a consumer sees before landing on your
website and buying something? Hundreds to thousands.

To emphasize that even further, let’s look at some stats:

 The most important store features driving the purchasing decision (80%) is
competitive pricing.
 Around %90 of e-commerce shoppers are masters of hunting deals. Thanks to
technology and comparison shopping engines consumers get alerts in multiple
items from multiple stores.
 Price comparison engines are a key part of the e-commerce marketing stack, as
they constitute around % 20 of e-commerce traffic for all sorts of product
categories.

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Don’t get scared by these numbers. Here lies a great opportunity for gaining advantage
and changing the direction the wind blows.

You see, e-commerce pricing can act as a high-traffic marketing tool and can influence
both comparison engines and conversion rates.

We’re taking a holistic approach to pricing strategies, so get ready to learn each and
every pricing strategy that might the game-changer you’ve been looking for.

Cost-based pricing

This method requires the company to write down its unit product costs for each of its
products in its portfolio, and then set a target profit margin for each of those products.
The formula is below:

Some common costs most e-commerce businesses have are:

 Your domain
 Your website hosting
 Your rent (if you have an office space)
 Sourcing products
 Storing your products in a warehouse
 Platform fees
 Shipping
 Returns and refunds
 Bank and processing fees
 Software
 Salaries
 Marketing budget

It may be too obvious but it’s really shocking to see how so many e-commerce
companies lose track of their unit costs and fail to even apply this strategy.

Let’s take a look at the second part of the equation, where most of us get greedy, the
target profit margin.

The crucial task is coming up with the right profit margin that will maximize the profits
without scaring off the customers.

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There are 2 risks that come with this approach.

1. Pricing too cheap which will undervalue your products

2. Pricing too expensive and losing competitiveness

The reason why it carries such gruesome risks is that it ignores two major factors that
play an important role in the price/demand relationship:

 Competitor prices
 Consumers’ willingness to pay

For example, when you’re selling a diamond neckless, you know that the buyers don’t
care about low prices. So, a fatter profit margin could still hold valid.

However, the same approach would yield zero sales in the consumer electronics industry,
where the competition is harsh and the products are identical. There, the profit margins
are totally slim, and the players with relatively expensive prices do not have much of a
chance in the market.

Rather than pursuing a cost-based approach to pricing, you must make sure that your
costs are calculated in every pricing strategy you pursue.

Market-based pricing

If you’re not the single player in the market you definitely need to be aware of your
competitors. There are tons of active e-commerce companies in the industry,
around 860,000 to be exact. As part of this huge jungle, each company directly competes
with at least 15-20 businesses.

That’s why online retailers can’t ignore the market competition. As we mentioned above,
consumers care heavily about the price and they compare prices with all the time.

Pursuing a competitive pricing strategy doesn’t mean undercutting your competitors and
lowering your prices until your margins are paper-thin. It carries the risk of racing to the
bottom which is beneficial to no one.

The major and often neglected benefit of market-oriented pricing with solid competitive
pricing intelligence is that it sometimes grants companies exceptional price increase
opportunities, where you can increase profits while still holding a competitive edge.

Let’s take a look at this example. Below, there are three retailers selling the same LE
CREUSET 27cm Signature Oval Casserole, Marseille Blue.

The first one is the most competitive, selling at £171.08.

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The second and the third ones sell the same item at £210.00.

In this scenario, the first retailer could detect that opportunity through a competitor price
monitoring software and raise the price just below its competitors. They would increase
profit margins and still be the most competitive in the market.

Dynamic pricing

Dynamic pricing is a very profitable e-commerce pricing strategy in which marketers set
flexible prices by taking into account costs, targeted profit margins, the demand of the
market and your competitors’ prices.

In other words, it allows you to set the optimal prices at the right time in response to real-
time demand and competition status while taking into account your business goals.

Market-oriented pricing can be put on auto-pilot with a dynamic pricing engine.

Having tons of data is great. But, the crucial thing is to convert data into actionable
insights.

Fortunately, the dynamic pricing and repricing software collects competitor prices and
adjusts your prices immediately against any changes. Then, the technology lets you test
different price points through repricing rules that help you position your business
wherever you want.

If your business strategy is focused on selling in high volumes at cheap prices, then the
software does it. You can set rules like:

 My price should be the cheapest in the market

 My price should be 5% higher than the market average
 My price should be $50 lower than my cheapest competitor

The repricing engine works all day and your prices will be changed according to the
fluctuations in the market and, of course, based on the rules that you’ve set. As you’re
able to react to every single move in the market, your prices will always stay competitive
or optimized.

With the mix of competitive intelligence and repricing ability, your business can gain a
competitive edge in the market.
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Consumer-based pricing

In every aspect of e-commerce, customer-centricity should come before anything else.

When pricing your products, you must be able to answer two questions:

 Who are my customers?

 What value do I bring to my customers?

The answer to both of these questions will actually bring a solid self-awareness for the e-
commerce company.

You must segment your audience. Define who’s likely to buy your products, divide them
into groups to target each of them with the right products and prices. Use real-time data
and purchasing history to accurately identify customer segments.

After you finish segmenting, learn their willingness to pay (WTP) for your products. You
can conduct a WTP research yourself, or get help from professionals.

Bundle pricing

Product bundling is fairly simple. You sell a range of products together for a discounted
price.

For example, many products require accessories. Some are mandatory (like a lens cap on
a camera that usually comes with the camera), but some are highly desired, but optional,
like a tripod for a camera.

Bundling products of a similar nature is a great way to increase your average order value
because customers are likely to be looking for similar things. Someone buying a DSLR
camera is likely to be interested in a different lens or a tripod.

Penetration pricing

Penetration pricing is a marketing strategy where a business enters a new product market
with below-average prices.

Businesses also use this strategy when they’re highlighting a new product or service.

It works in a simple way, where they set their prices lower than competitors to lure
customers from competitors into their stores.

Price discrimination
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Price discrimination is a tailored approach to e-commerce pricing where an identical item

is sold at different prices to different buyers. It works on three levels:

1. First degree: Consumers are charged the maximum they’d be willing to pay for
any given product. For example, auction or bidding sites, where one customer
might pay lots more for a similar item, based on what they’re willing to pay.
2. Second degree: Consumers can choose their price discrimination. For example,
they might be offered a lower price if they buy a product in a higher quantity.
3. Third degree: Products are priced differently based on customer segments.

In essence, it involves taking past and real-time customer data, segment customers based
on that data and then generate prices specific to each segment.

Loss leader pricing

Loss leader pricing strategy involves setting a few products to be sold at a lower price – a
price that actually puts you at a loss – in order to get your customers through the door (or
on your website).

Loss leaders hope that once customers are on the website, they’re more likely to buy your
other (normally priced items).

An electric toothbrush is a great example of a loss-leader product. This electric

toothbrush costs £99.

Although we do not know the manufacturing costs, we can assume that they make most
of their profits on the replaceable toothbrush heads.

When you think about an electric toothbrush, you don’t tend to buy them often. And so
brands can afford to sell them at a loss because they know they’ll easily recoup their lost
profit costs form the accessories which need to be changed much more regularly for oral
hygiene.

So if you want to implement a loss leader strategy but you are worried, consider whether
you have any add-on products where people would need to come back to your store to
make a supplementary purchase.

Price skimming

In its simplest terms, e-commerce price skimming is the art of setting high prices for your
products during an introductory phase. What this means is that businesses are able to
leverage the ―newness‖ of their product and maximize their profits from the get-go.
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What you need to remember about price skimming is there are consumers out there who
want to be the first ones to get hold of a product. They like the feeling of exclusivity.

If you want to implement price skimming, use phrases such as ―exclusive offer‖ or
―limited availability‖, ―be the first to get your hands on‖ within your marketing copy
to make sure you highlight the urgency of the call.

Apple is one of the best examples of price skimming. During the run-up to a new iPhone
release, there are rumors before the announcement even happens.

Once it’s time for the actual announcement there has already been enough excitement
drummed up that increases the buyer’s appetite for a purchase.

You have seen the news, where wannabe iPhone owners would camp outside the store to
be one the first to get their hands on the newest model. Others would pre-pay for their
model weeks before they even get the phone.

Build your own strategy

Pricing fails when it’s taken as a dull task within an e-commerce company. When taken
seriously and handled in smart ways, it turns into a secret and very effective marketing
tool.

The approaches that we shared here are not necessarily mutually exclusive. In other
words, you don’t have to choose one and forget the others. Contrarily, like most of the
marketing and growth strategies, they work best when integrated into a mixed strategy.

Define your business objectives, needs, and interests. Then, decide which of the strategies
above would work well with your objectives. Combine them into a unique pricing
strategy that’ll correspond to your needs.

Finally, pricing is not a static task, and it requires an ongoing effort to optimize and fine-
tune it as your e-commerce company grows. Like any other e-commerce operation that
you need to run, there will always be room for improvement and it’s not going to be an
easy task. But, fortunately, you have quite enthusiastic folks like us that look forward to
helping you out!
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UNIT III
PROACTIVE PRICING STRATEGY

Overview:

This unit will focus on proactive pricing strategy approach. Further, it discusses also the
manners that the alternative to stay competitive implies switching to proactive pricing.

Learning Objectives:

At the end of the unit, I am able to:

1. Identify the pricing strategy that applied in a business.
2. Understand the product cost involved in making a product;
3. Describe the elements involved in cost.

Setting Up

Pre Test

Lesson Proper

Companies pour blood, sweat, and tears into making a great product. They spend
countless hours and scarce resources to bring in new customers.If your company doesn't have
a pricing strategy, you don’t understand who your customers are. You have no idea whether
you’re driving them away with poorly framed pricing and packaging system, or missing the
chance to exponentially grow your revenue with higher but more accurate prices. You're
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leaving huge revenues on the table, which makes you vulnerable to sudden disruptions that
can sink your business.

Here we can see all three aspects of a pricing strategy at work:

1.Positioning Aligning your product to attract the right customers. This is
along the horizontal axis. Wistia is positioning itself to attract a
wide range of possible customers, from small one-person shops
all the way to big enterprises, and segments them by buyer
persona.
2.Packaging Aligning your product to attract the right customers.
3.Pricing Finding the right price points that represent value and
customers are willing to pay.

What to consider when setting your pricing strategy

Setting your product or service’s prices shouldn’t be a haphazard decision focused entirely on
profit. It should be a calculated, informed choice where your business identity, brand and
financial stability are considered.

As with any business decision, determining your pricing strategy starts with assessing your
own business’s needs and goals. This involves some commercial soul searching – what do
you want your business to contribute to the economy and world? This could mean embracing
traditional retail strategy, establishing a service business mindset or emphasizing personal
customer relationships in your offering.

Once you have your goals and needs defined, do some research on the market you’re entering.
Determine three to five main competitors in the industry by conducting online research or
scouting out local businesses. No matter what pricing strategy you adopt, what your
competitors are doing will impact your business’s success and future decisions.
Understanding your competitors’ strategies can also help you differentiate your business from
other businesses in the market. In an economy where there are thousands of small businesses
providing the same products and services, an effective pricing strategy can help you stand out.

Pricing strategies to attract customers to your business

There are dozens of ways you can price your products, and you may find that some work
better than others — depending on the market you occupy. Consider these five common
strategies that many new businesses use to attract customers.

1. Price skimming involves initially charging the highest price your market will accept for
your product, then lowering it over time. The logic behind this is that you attempt to ―skim‖
off the top market segment to which you appeal, at the time when your product is freshest,
thereby maximizing your profit early on.

2. Market penetration pricing

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Pricing for market penetration is essentially the opposite of price skimming. Instead of
starting high and slowly lowering prices, you take over a market by undercutting your
competitors. Once you develop a reliable customer base, you raise prices. Many factors go
into deciding on this strategy, like your business’s ability to potentially take losses up front to
establish a strong footing in a market. It’s also crucial to develop a loyal customer base, which
can require other marketing and branding strategies.

3. Premium pricing
Premium pricing is for business that create high quality products and market them to high-
income individuals. The key with this pricing strategy is developing a product that is high
quality and that customers will consider to be high value. You’ll likely need to develop a
―luxury‖ or ―lifestyle‖ branding strategy to appeal to the right type of consumer.
4. Economy pricing
An economy pricing strategy involves targeting customers looking to save as much money as
possible on whatever good or service they’re purchasing. Big box stores, like Walmart and
Costco, are prime examples of economy pricing models. Like premium pricing, adopting an
economy pricing model depends on your overhead costs and the overall value of your
product.
5. Bundle pricing
When companies pair several products together and sell them for less money than each would
be individually, it’s known as bundle pricing. Bundle pricing is a good way to move a lot of
inventory quickly. A successful bundle pricing strategy involves profits on low value items
outweighing losses on high value items included in a bundle.

What is a Product Cost?

Product cost refers to the costs incurred to create a product. These costs include
direct labor, direct materials, consumable production supplies, and factory
overhead. Product cost can also be considered the cost of the labor required to
deliver a service to a customer. In the latter case, product cost should include all
costs related to a service, such as compensation, payroll taxes, and employee
benefits.

The cost of a product on a unit basis is typically derived by compiling the costs
associated with a batch of units that were produced as a group, and dividing by the
number of units manufactured. The calculation is:

(Total direct labor + Total direct materials + Consumable supplies + Total allocated
overhead) ÷ Total number of units

= Product unit cost

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Product cost can be recorded as an inventory asset if the product has not yet been sold. It
is charged to the cost of goods sold as soon as the product is sold, and appears as an
expense on the income statement.

Product cost appears in the financial statements, since it includes the manufacturing
overhead that is required by both GAAP and IFRS. However, managers may modify
product cost to strip out the overhead component when making short-term production and
sale-price decisions. Managers may also prefer to focus on the impact of a product on a
bottleneck operation, which means that their main focus is on the direct materials cost of
a product and the time it spends in the bottleneck operation.

What is Activity-Based Costing?

Activity-based costing (ABC) is a methodology for more precisely allocating overhead

costs by assigning them to activities. Once costs are assigned to activities, the costs can
be assigned to the cost objects that use those activities. The system can be employed for
the targeted reduction of overhead costs. ABC works best in complex environments,
where there are many machines and products, and tangled processes that are not easy to
sort out. Conversely, it is of less use in a streamlined environment where production
processes are abbreviated.

The Activity Based Costing Process Flow

Activity-based costing is best explained by walking through its various steps. They are:

1. Identify costs. The first step in ABC is to identify those costs that we want to allocate.
This is the most critical step in the entire process, since we do not want to waste time with
an excessively broad project scope. For example, if we want to determine the full cost of a
distribution channel, we will identify advertising and warehousing costs related to that
channel, but will ignore research costs, since they are related to products, not channels.

2. Load secondary cost pools. Create cost pools for those costs incurred to provide
services to other parts of the company, rather than directly supporting a company’s
products or services. The contents of secondary cost pools typically include computer
services and administrative salaries, and similar costs. These costs are later allocated to
other cost pools that more directly relate to products and services. There may be several of

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these secondary cost pools, depending upon the nature of the costs and how they will be
allocated.
3. Load primary cost pools. Create a set of cost pools for those costs more closely aligned
with the production of goods or services. It is very common to have separate cost pools for
each product line, since costs tend to occur at this level. Such costs can include research
and development, advertising, procurement, and distribution. Similarly, you might
consider creating cost pools for each distribution channel, or for each facility. If
production batches are of greatly varying lengths, then consider creating cost pools at the
batch level, so that you can adequately assign costs based on batch size.
4. Measure activity drivers. Use a data collection system to collect information about the
activity drivers that are used to allocate the costs in secondary cost pools to primary cost
pools, as well as to allocate the costs in primary cost pools to cost objects. It can be
expensive to accumulate activity driver information, so use activity drivers for which
information is already being collected, where possible.
5. Allocate costs in secondary pools to primary pools. Use activity drivers to apportion the
costs in the secondary cost pools to the primary cost pools.
6. Charge costs to cost objects. Use an activity driver to allocate the contents of each
primary cost pool to cost objects. There will be a separate activity driver for each cost
pool. To allocate the costs, divide the total cost in each cost pool by the total amount of
activity in the activity driver, to establish the cost per unit of activity. Then allocate the
cost per unit to the cost objects, based on their use of the activity driver.
7. Formulate reports. Convert the results of the ABC system into reports for management
consumption. For example, if the system was originally designed to accumulate overhead
information by geographical sales region, then report on revenues earned in each region,
all direct costs, and the overhead derived from the ABC system. This gives management a
full cost view of the results generated by each region.7
8. Act on the information. The most common management reaction to an ABC report is to
reduce the quantity of activity drivers used by each cost object. Doing so should reduce
the amount of overhead cost being used.

We have now arrived at a complete ABC allocation of overhead costs to those cost
objects that deserve to be charged with overhead costs. By doing so, managers can see
which activity drivers need to be reduced in order to shrink a corresponding amount of
overhead cost.

For example, if the cost of a single purchase order is $100, managers can focus on
letting the production system automatically place purchase orders, or on using

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procurement cards as a way to avoid purchase orders. Either solution results in fewer
purchase orders and therefore lower purchasing department costs.

How Activity-Based Costing is Used

The fundamental advantage of using an ABC system is to more precisely determine how
overhead is used. Once you have an ABC system, you can obtain better information about
the following issues:

1. Activity costs. ABC is designed to track the cost of activities, so you can use it to see if
activity costs are in line with industry standards. If not, ABC is an excellent feedback tool
for measuring the ongoing cost of specific services as management focuses on cost
reduction.

2. Customer profitability. Though most of the costs incurred for individual customers are
simply product costs, there is also an overhead component, such as unusually high
customer service levels, product return handling, and cooperative marketing agreements.
An ABC system can sort through these additional overhead costs and help you determine
which customers are actually earning you a reasonable profit. This analysis may result in
some unprofitable customers being turned away, or more emphasis being placed on those
customers who are earning the company its largest profits.
3. Distribution cost. The typical company uses a variety of distribution channels to sell its
products, such as retail, Internet, distributors, and mail order catalogs. Most of the
structural cost of maintaining a distribution channel is overhead, so if you can make a
reasonable determination of which distribution channels are using overhead, you can make
decisions to alter how distribution channels are used, or even to drop unprofitable
channels.
4. Make or buy. ABC provides a comprehensive view of every cost associated with the in-
house manufacture of a product, so that you can see precisely which costs will be
eliminated if an item is outsourced, versus which costs will remain.
5. Margins. With proper overhead allocation from an ABC system, you can determine the
margins of various products, product lines, and entire subsidiaries. This can be quite
useful for determining where to position company resources to earn the largest margins.
6. Minimum price. Product pricing is really based on the price that the market will bear,
but the marketing manager should know what the cost of the product is, in order to avoid
selling a product that will lose a company money on every sale. ABC is very good for
determining which overhead costs should be included in this minimum cost, depending
upon the circumstances under which products are being sold.
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7. Production facility cost. It is usually quite easy to segregate overhead costs at the plant-
wide level, so you can compare the costs of production between different facilities.

Clearly, there are many valuable uses for the information provided by an ABC system.
However, this information will only be available if you design the system to provide the
specific set of data needed for each decision. If you install a generic ABC system and
then use it for the above decisions, you may find that it does not provide the information
that you need. Ultimately, the design of the system is determined by a cost-benefit
analysis of which decisions you want it to assist with, and whether the cost of the system
is worth the benefit of the resulting information.

Problems with Activity Based Costing

Many companies initiate ABC projects with the best of intentions, only to see a very high
proportion of the projects either fail or eventually lapse into disuse. There are several
reasons for these issues, which are:

1. Cost pool volume. The advantage of an ABC system is the high quality of information
that it produces, but this comes at the cost of using a large number of cost pools – and the
more cost pools there are, the greater the cost of managing the system. To reduce this cost,
run an ongoing analysis of the cost to maintain each cost pool, in comparison to the util ity
of the resulting information. Doing so should keep the number of cost pools down to
manageable proportions.
2. Installation time. ABC systems are notoriously difficult to install, with multi-year
installations being the norm when a company attempts to install it across all product lines
and facilities. For such comprehensive installations, it is difficult to maintain a high level
of management and budgetary support as the months roll by without installation being
completed. Success rates are much higher for smaller, more targeted ABC installations.
3. Multi-department data sources. An ABC system may require data input from multiple
departments, and each of those departments may have greater priorities than the ABC
system. Thus, the larger the number of departments involved in the system, the greater the
risk that data inputs will fail over time. This problem can be avoided by designing the
system to only need information from the most supportive managers.
4. Project basis. Many ABC projects are authorized on a project basis, so that information
is only collected once; the information is useful for a company’s current operational
situation, and it gradually declines in usefulness as the operational structure changes over
time. Management may not authorize funding for additional ABC projects later on, so
ABC tends to be ―done‖ once and then discarded. To mitigate this issue, build as much of
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the ABC data collection structure into the existing accounting system, so that the cost of
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these projects is reduced; at a lower cost, it is more likely that additional ABC projects
will be authorized in the future.
5. Reporting of unused time. When a company asks its employees to report on the time
spent on various activities, they have a strong tendency to make sure that the reported
amounts equal 100% of their time. However, there is a large amount of slack time in
anyone’s work day that may involve breaks, administrative meetings, playing games on
the Internet, and so forth. Employees usually mask these activities by apportioning more
time to other activities. These inflated numbers represent misallocations of costs in the
ABC system, sometimes by quite substantial amounts.
6. Separate data set. An ABC system rarely can be constructed to pull all of the
information it needs directly from the general ledger. Instead, it requires a separate
database that pulls in information from several sources, only one of which is existing
general ledger accounts. It can be quite difficult to maintain this extra database, since it
calls for significant extra staff time for which there may not be an adequate budget. The
best work-around is to design the system to require the minimum amount of additional
information other than that which is already available in the general ledger.
7. Targeted usage. The benefits of ABC are most apparent when cost accounting
information is difficult to discern, due to the presence of multiple product lines, machines
being used for the production of many products, numerous machine setups, and so forth –
in other words, in complex production environments. If a company does not operate in
such an environment, then it may spend a great deal of money on an ABC installation,
only to find that the resulting information is not overly valuable.

The broad range of issues noted here should make it clear that ABC tends to
follow a bumpy path in many organizations, with a tendency for its usefulness to decline
over time. Of the problem mitigation suggestions noted here, the key point is to construct
a highly targeted ABC system that produces the most critical information at a reasonable
cost. If that system takes root in your company, then consider a gradual expansion, during
which you only expand further if there is a clear and demonstrable benefit in doing so.
The worst thing you can do is to install a large and comprehensive ABC system, since it
is expensive, meets with the most resistance, and is the most likely to fail over the long
term.
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Chapter 4
Pricing Structure
Learning Objectives

At the end of this unit, I am able to:

1. define pricing structure
2. discuss price wars, price promotions, price bundling, price discrimination
3. discuss nonlinear pricing, value pricing, pricing psychology, dynamic pricing

Overview

This unit gives you the idea of pricing structure. Furthermore, this chapter will give a
broad discussion about the price wars, price promotions, price bundling, price discrimination,
nonlinear pricing, value pricing, pricing psychology, and dynamic pricing.

Setting Up

Pre Test
Name: Date:
Course/Year/Section: Score:

Directions: Look at the picture below. Answer the following questions below.
1. What do you think about the picture?
2. Is there a relationship among them?
3. Explain briefly their relationship
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Lesson Proper

Introduction
A pricing structure fundamentally answers the question, "How much do I charge for my product?" by
assisting you in determining the relationship between the value of your product or service and the costs
incurred in its creation. Your pricing structure defines your product or service pricing setup, including
your core price points as well as discounts, offers, and strategy. Your pricing structure has a significant
impact on how your company is regarded from the outside and how quickly it is likely to grow. A
corporation that understands its buyer personas and the competitive worth of its product charges a
reasonable price. This equates to significant growth. Every pricing structure starts with a pricing goal.
If you modify the goal, you must also adjust the framework. Whether you're trying to enter into a
competitive market, selling a high-value and very inventive product, catering to a wide range of
consumer personas, or competing in a narrow field, your price structure should reflect this.

PRICE STRUCTURE

The price structure of a company is the pattern of prices it charges its clients. A pricing
structure is a method of pricing products and services that establishes multiple prices,
discounts, and offers that are compatible with the organization's goals and strategy. Price
structure can have an impact on how a firm grows and how customers view it. It has a direct
impact not only on the bottom line, but also on the brand's image and perception.

PRICE WARS

A pricing war is a competitive exchange in which competitor enterprises lower the price
points on their products in order to undercut one another and get a larger market share. A
price war can be utilized to enhance revenue in the short term or as a long-term plan. Price
wars can be avoided by employing strategic price management, which entails non-aggressive
pricing, a detailed understanding of the competition, and even open dialogue with
competitors.
When a corporation wants to grow its market share, the simplest method to do so is to lower
prices, which leads to an increase in product sales. If the competitor sells identical products, it
may be pushed to follow suit. And when prices fall, the number of sales grows, which benefits
customers.
At some point, a price point is reached at which only one company can afford to offer while
being profitable. Some businesses will even sell at a loss in order to entirely eradicate the
competition.
In order to attract more customers, companies that engage in price wars make a concentrated
attempt to reduce or eliminate their current profit margins.
To minimize these effects, a company may enter into an agreement with its suppliers to obtain
materials or completed goods at a significant discount when compared to the prices the
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suppliers charge other enterprises. This approach allows the corporation to provide lower
prices to customers for longer periods of time than the competitors.

ADVANTAGES OF PRICE WARS

 Consumers benefit from lower prices
 Consumers also benefit from additional add-on services
 Companies benefit by gaining new customers

DISADVANTAGES OF PRICE WARS

 Companies that lose a price war lose market share and profits
 Price wars can lead to less competition and higher prices
 Consumers have fewer choices for products and services

PRICE PROMOTIONS
A price promotion is a discount intended to increase sales. This frequently leads to an increase
in sales in the short term at the price of profit margins. Alternatively, a price reduction might
be part of a strategy to maximize long-term returns on client acquisition and retention.
The following are the common types of price promotion.
 Sale Price – Putting items on sale by offering a percentage or a dollar discount such as
50% off.
 Multi-Buy Promotion – Offering a deal with multiple purchases such as buy two get
one free
 Coupons – Issuing coupons to customers. This is a form of price discrimination as
price insensitive customers may not bother looking for coupons.
 Deal of the Day – Regular deals, often loss leaders, that are designed to encourage
regular and habitual visits
 Loss leader – is a very low price for an item that is designed to get your customers to
visit.
 Regular Sale – a big sale whereby all items or most items are discounted that occurs at
regular and predicable intervals.
 Sales event – a sale that is combined with promotional features such as contests, free
food and giveaways.
 Clearance price – steep discount for unpopular or out of season items that are designed
to clear inventory
 Seasonal Sale – A sale that attempts to prevent inventory problems by discounting
seasonal items in the middle of the season.
 Limited time offer – an offer that expires very quickly so as to create a sense of
urgency.
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 New customer promotion – a price promotion that is only available to new customers.
 Subscription deal – a price that is only available if you subscribe to regular automatic
purchases that can be canceled at any time.

PRICE BUNDLING
Price bundling is the practice of merging many products or services into a single
comprehensive package for a discounted all-inclusive price. Despite the fact that the things
are sold at a discount, it might improve revenues because it encourages the purchase of many
items.
Price bundling, also known as product bundle pricing, is a retail strategy that allows
businesses to sell a large number of things at a larger margin while also offering a discount to
customers. Bundle pricing involves shops offering multiple different things as a package deal,
then selling that package to customers at a cheaper price than it would cost to buy those items
separately.
There are two fundamental bundle pricing strategies: pure bundling and mixed bundling.
Pure bundling is when products are only sold together. In some cases, products don’t exist
outside the bundle. Pure bundling has three subcategories: joint bundling, leader bundling, and
mixed-leader bundling.
 Joint bundling is when the two products are offered together for one bundled price.
 Leader bundling is when a leader product is offered for a discount if purchased with
a non-leader product, accessory, etc.
 Mixed-leader bundling is a type of leader bundling with the added possibility
of buying the leader product on its own.
Mixed bundling, also called custom bundling, is when customers are offered to purchase a
bundle or separate products on their own. Consumers are offered complete cable, internet, and
telephone packages. The price will depend on the level of service that the package provides. If
you choose high-speed internet and maximum channels, it’s going to be much more expensive
than getting a package with low-speed internet and minimum channels.

PRICE DISCRIMINATION
Price discrimination is a sales approach in which the seller charges customers various prices
for the same product or service based on what the vendor believes the customer will agree to.
The vendor charges each customer the greatest amount they will pay in pure price
discrimination. In more typical kinds of price discrimination, the vendor divides clients into
groups based on particular characteristics and charges a different price to each group.
Price discrimination occurs when a vendor believes that customers in certain groups should be
requested to pay more or less depending on certain demographics or how they value the
product or service in question. Price discrimination is most valuable when the profit generated
from separating the markets is greater than the profit earned from keeping the markets
combined.
The relative elasticities of demand in the submarkets determine whether price discrimination
works and how long different groups are prepared to pay different prices for the same
commodity. Consumers in a more inelastic submarket pay more, whereas those in a relatively
elastic submarket pay less.
For example, educational institutions can purchase Microsoft Office Schools version at a
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lesser cost than ordinary customers.

TYPES OF PRICE DISCRIMINATION
Price discrimination is classified into three types: first-degree or perfect price discrimination,
second-degree, and third-degree. These price discrimination levels are also known as
personalized pricing (1st-degree pricing), product versioning or menu pricing (2nd-degree
pricing), and group pricing (3rd-degree pricing) (3rd-degree pricing).
 First-degree price discrimination - First-degree discrimination, often known as perfect
price discrimination, happens when a company charges the highest price feasible for
each unit consumed. Because prices differ between units, the company obtains all
available consumer surplus, or the economic surplus. Many sectors that provide client
services engage in first-degree price discrimination, which occurs when a corporation
charges a different price for each commodity or service sold.
 Second-degree price discrimination - When a corporation charges a different price for
different quantities consumed, such as quantity discounts on bulk purchases, this is
referred to as second-degree pricing discrimination.
 Third-degree price discrimination - When a company charges different prices to
distinct consumer groups, this is referred to as third-degree price discrimination. For
example, a movie theater may separate moviegoers into seniors, adults, and children,
with each paying a different amount to see the same film. This is the most common
type of discrimination.
NON-LINEAR PRICING
Nonlinear pricing refers to any tariff structure in which the purchase price is not strictly
proportional to some measure of purchase quantity but also reflects other characteristics of the
product, the purchaser, the purchase as a whole, its timing, and any contractual terms
imposing restrictions on the purchase and its subsequent use.
The systematic exploitation of variation in client preferences with regard to purchasing
characteristics, as well as explicit modeling targeting the preference structures underlying
such heterogeneity, is a core part of nonlinear pricing methodology.
A key assumption of nonlinear pricing is the existence of identifiable differences among
customers that affect their choices in a systematic way. Furthermore, it is assumed that these
differences among customers are either directly observable or that customers can be sorted by
observing measurable characteristics of the customer orher purchases.
Nonlinear pricing is motivated by several goals such as: efficient use of resources, cost
recovery by a regulated utility, exercise of monopoly power, obtaining competitive advantage,
rewarding customer loyalty as well as social goals such as subsidies to the poor and discounts
to service persons in uniform. Being able to sell identical or similar products or services at
different prices to different customers has powerful ramifications and can lead to win–win
outcomes from the customers’ and the sellers’ perspectives.
To illustrate such potential benefits let us consider the classic case of a homogeneous
commodity sold by a monopoly supplier at a uniform unit price. The demand for the
commodity is characterized by a simple downward sloping demand function. Such a demand
function does not distinguish between multi-unit purchases by a single customer or single unit
purchases by many customers.
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VALUE BASED PRICING

Value-based pricing is a strategy of setting prices primarily based on a consumer's
perceived value of product or service. Value pricing is customer-focused pricing, meaning
companies base their pricing on how much the customer believes a product is worth.
Consumer-focused pricing is defined as value pricing, which means that organizations base
their pricing on how much a customer believes a product is worth. The value-based pricing
theory is most prevalent in marketplaces where owning an item improves a customer's self-
image or allows for exceptional life experiences. To that end, perceived value represents the
value that customers are willing to give to an item and, as a result, has a direct impact on the
price the consumer eventually pays.
Any company that engages in value pricing must have a product or service that sets it apart
from the competitors.
The product must be customer-focused, which means that any enhancements or new features
must be based on the customer's demands and needs. Of course, if the company's leaders want
to pursue a value-added pricing approach, the product or service must be of excellent quality.
The company must also have open communication channels and strong consumer ties.
Companies can get input from their customers about the things they want and how much
they're willing to pay this way.
For example, luxury automakers solicit customer feedback that effectively quantifies
customers' perceived value of their experiences driving a particular car model. As a result,
sellers can use the value-based pricing approach to establish a vehicle's price, going forward.
The fashion business is significantly impacted by value-based pricing, with value price
calculation being typical practice. Popular name-brand designers typically fetch greater costs
due to buyers' opinions of how the brand influences their image. Also, if a designer can
persuade an A-list celebrity to wear his or her look to a red-carpet event, the perceived value
of the associated brand can suddenly skyrocket.

PRICING PSYCHOLOGY
Psychological pricing refers to the practice of setting prices that are less than a whole
number. The idea behind psychological pricing is that customers will read the slightly
reduced price and treat it as though it were lower than the actual price.
ADVANTAGES OF PSYCHOLOGICAL PRICING
 Attention boost - Any form of large promotion will increase interest in your product.
If you own a physical store, putting large, red placards explaining your product
promotion will compel customers to look at what you're selling. Even if consumers
don't buy, your brand is becoming noticed.
 Simplified decision-making process - Most psychological pricing strategies make it
easier for customers to make a decision. Having the discount or promotion clearly
displayed reduces the amount of investment that consumers must consider. This is
a positive thing for retail stores that rely on one-time sales.
 High return - Psychological pricing discounts can provide a significant return on
investment for one-time sales, particularly during peak seasons and holidays.
Obtaining a large return at the end of the day is likely with promotions that appeal
to the masses.
 Sense of urgency - Psychological pricing, depending on the technique, provides a
sense of urgency. Customers will want to move decisively in order to avoid missing
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out on the deal. This will also increase the likelihood of a quick high return on
investment.
DISADVANTAGES OF PSYCHOLOGICAL PRICING
 Deceitful - Some people may be able to see right through psychological pricing
strategies and see them as taking advantage of clients. Some, on the other hand, may
recognize the methods and embrace them as a necessary part of doing business.
 Misperceived value – There is always the risk of misperceived value when using
psychological pricing strategies. Your price is the means via which you transmit value
to your customers. This form of communication is dependent on how your customers
perceive you’re pricing. If you undercut your rates only to get a quick sale, your
customers may have a negative perception of your product's quality and come to
expect those low costs all the time.
 Not a long term solution – Using psychological pricing techniques is not a long-term
price strategy. It may bring you quick conversions for a short time, but B2B
companies should have a more solid and long-term plan in place.

An example of psychological pricing is an item that is priced $3.99 but conveyed by the
consumer as 3 dollars and not 4 dollars, treating $3.99 as a lower price than $4.00.

DYNAMIC PRICING
A dynamic pricing strategy is a sort of price discrimination that seeks the best price point at
any given time. Price fluctuations can be based on a consumer's impression of how much they
are willing to pay for an item at a given moment, competitive price, and other factors.
Dynamic pricing is a partially technology-based pricing system under which prices are
altered to different customers, depending upon their willingness to pay.
Examples of dynamic pricing:
 Airlines - The price of airline seats varies depending on the type of seat, the number
of seats remaining, and the amount of time until the trip departs. As a result, multiple
different prices for seats on a single aircraft may be charged.
 Hotels – Prices in the hotel sector vary depending on the size and configuration of the
rooms, as well as the time of year. As a result, ski resorts raise their accommodation
rates during the Christmas holiday, while Vermont inns up their pricing during the
fall foliage season and Caribbean resorts lower their prices during the hurricane
season.
 Electricity - Utilities may charge higher prices during peak usage periods.
ADVANTAGES OF DYNAMIC PRICING
Profit maximization is a significant advantage of employing the dynamic pricing strategy. If
a seller's prices are regularly updated with dynamic pricing, it will most likely maximize its
potential profits. Furthermore, dynamic pricing necessitates a significant amount of inventory
monitoring, with price reductions in reaction to increased inventory levels. This method
swiftly eliminates surplus inventory.
DISADVANTAGES OF DYNAMIC PRICING
Despite the previous list of benefits, there are a number of drawbacks to using the dynamic
pricing strategy. First, if prices fluctuate frequently, customers may become confused and
gravitate toward merchants that do not employ dynamic pricing. As a result, it may result in a
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loss of market share. Second, rapid price changes might alter demand for items, making
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inventory replenishment harder to plan for. Third, communicating pricing adjustments to

clients may necessitate a larger marketing presence in the marketplace. Fourth, if employed in
a retail context, it necessitates significant activity to update product pricing as soon as the
system changes prices. Finally, if a whole industry adopts dynamic pricing, a company must
invest in competitor price monitoring systems to see whether its prices are comparable to
those of competitors.
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