PRICING STRATEGIES

Setting the right price for products and services, plays a very crucial role in marketing.?Pricing too high can result in missed sales opportunities, while pricing too low can lead to a loss in revenue.?Many companies tend to base their pricing strategy solely on their production costs,?but the customers considers only the value they gain from the products or services, not how much it costs to produce them.?Prices are also subject to change based on supply and demand.?Market trends, Price of the competitors, and the customers' needs and expectations determine the price for the products or services. The pricing strategy should be flexible to adapt to the changes in the market. By focusing on customer value and understanding market dynamics, one can develop a pricing strategy that will not only attract customers but also drive revenue growth.?Hence learning different pricing techniques and strategies can enhance the knowledge of marketers.?It is quite interesting to know the various pricing techniques adopted in today’s world.?Some may appear similar or repeat, but connecting them with real life?instances, give us a deep insight.?As a consumer, this knowledge helps us take the right decision, without falling prey to these techniques.

PREMIUM or PRESTIGE or LUXURY PRICING : This is a pricing approach where companies price their products at a higher rate to create the impression that their products are of High Value, Luxury, or Premium. This pricing method concentrates on the perceived value of the product rather than its actual production cost. It involves setting prices higher than most competitors in the market, particularly for exclusive high-tech products where customers are willing to pay more due to their positive brand perception. The goal of premium pricing is to establish a sense of superiority in the product's market compared to other similar products.?Prestige pricing is closely tied to brand perception, and brands that use this approach are known to offer value and status through their products, which justifies their higher pricing. This pricing method is often applied in fashion and technology industries, where products can be marketed as exclusive, rare, and luxurious.?To influence the product's premium perception, businesses employ various marketing strategies such as using influencers, controlling supply, and driving up demand. This pricing method is best suited for businesses that have a significant competitive advantage and can charge higher prices without facing competition from similar quality products.?For premium pricing to work, the product's perceived value must be carefully established and maintained. Business owners must ensure that the product's packaging, the store's decor, and the marketing strategy associated with the product all work together to support the premium price. Some examples of brands that use premium pricing include Rolls-Royce, Rolex, Apple, Starbucks, and Louis Vuitton.?Brands that employ prestige pricing justify their premium prices through offering high-quality products, fine craftsmanship, attention to detail, premium materials, and personalized services. These features appeal to customers who are willing to pay more for a product that provides a unique experience and sense of luxury.

DYNAMIC or DEMAND or SURGE PRICING : This strategy involves adjusting prices in real-time based on market demand and other factors such as time of day, day of the week, and seasonality. This technique is commonly used in industries such as transportation and hospitality, where prices fluctuate based on time.?Industries like airlines, hotels, utility companies, and event management companies use dynamic pricing by applying algorithms that consider the demand and competitor pricing. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.?While dynamic pricing is relatively common in e-commerce and the transportation industry, it doesn’t work for every type of business. The greatest risks can come when variable prices are applied to products or services that are typically bought by price-sensitive customers.?Uber, Ola, and Swiggy use demand pricing to adjust their prices based on the level of demand for their services. During peak hours or high-demand periods, the prices of their rides increase, while during low-demand periods, the prices are lower. IndiGo uses demand pricing to offer lower prices to customers who book their flights well in advance. The prices of the flights increase as the demand for the flight increases, closer to the travel date.?This pricing strategy is sometimes considered as Price Discrimination, as the same product is sold at different prices based on factors such as location, time, and customer type.?It's important to note that illegal price discrimination can result in anti-trust violations, as was the case with Google.?While price discrimination can help businesses maximize their profits, it can also be perceived as unfair by customers who feel that they are being charged different prices for the same product or service. Therefore, companies must exercise caution when using this strategy and ensure that their pricing tactics are transparent and ethical.

LOSS LEADER PRICING : Loss leader pricing is a tactic employed by sellers to lure customers by pricing a product or service below cost, with the aim of making up for the loss with sales of other products or services. This strategy is commonly used by retailers in India when onion or sugar prices are at their peak. The stores offer these items at very low prices, but with the condition that the customers purchase other items for a specific value. The purpose is to attract customers to the store, with the expectation that they will purchase additional items at full price, thereby compensating for the loss incurred through the sale of the loss-leading item.?The seller recovers the loss on the discounted item by selling other products with healthier margins. Big Bazaar and Reliance Fresh, two prominent retail chains in India, use loss-leading pricing to entice customers into their stores. They offer deep discounts on certain products, hoping that customers will purchase other items at full price.?

PENETRATION PRICING : Penetration pricing is a marketing strategy where a company introduces a new product at a low price to gain market share. The objective of this strategy is to build a loyal customer base.?New businesses often use penetration pricing to enter the market and gain a competitive edge. It helps to increase market share and sales volume, which can lead to lower production costs and faster inventory turnover. However, penetration pricing may not be sustainable in the long term as it can attract bargain hunters and customers with low loyalty.?Penetration pricing draws attention away from higher-priced competitors by offering an extremely low price. It is typically applied for a short time, but over time, the increase in brand awareness can drive profits and help businesses stand out.?Reliance Jio is a classic example of a company that used penetration pricing. It entered the market at a low price and gradually increased its prices over time, yet it continues to retain and gain customers.?However, penetration pricing can create pricing expectations for customers, which may reduce customer loyalty since most will be bargain hunters. It can also trigger price wars and hurt brand image, as customers may perceive discounted products as cheap or of poor quality.?Ola, Uber, Swiggy, Zomato, Flipkart, and many other aggregators have used penetration pricing by offering discounts and cashback offers to attract new customers and encourage them to use the platform more frequently. This has helped these brands to quickly gain market share and become a popular choice among consumers.?

PRE-EMPTIVE or PROACTIVE PRICING is a pricing strategy adopted by established brands to outpace competitors.?The established player sets a lower than normal or market price for its product or service for a brief period to increase sales or outpace competitors. It is designed to prevent new players from entering the market by discouraging them from launching similar products at a lower price. Brands implement pre-emptive pricing by offering incentives to customers along with a low price, which helps in attracting and retaining them while simultaneously deterring competitors from undercutting their prices.?Pre-emptive pricing is often utilized when a company expects new competitors to enter the market or when it intends to dominate a specific market segment. The primary distinction between pre-emptive pricing and penetration pricing is that pre-emptive pricing is a tactic to discourage competition by setting prices lower than competitors, while penetration pricing is a technique to gain market share quickly by setting prices lower than competitors. Pre-emptive pricing is adopted by market leader in that product category, while penetration pricing is adopted by new entrant in that product category.?While Reliance Jio adopt Penetrative pricing strategy to gain market share, Airtel adopts Pre-emptive pricing strategy to discourage competition.

PRICE SKIMMING : Price skimming is a pricing strategy that involves setting a high initial price for a new product and gradually lowering it over time as the product becomes more mainstream and competition increases. The purpose of this strategy is to maximize profits from early adopters who are willing to pay a premium price for the new product. This strategy is commonly used for products with high demand and limited supply, such as new technology products, where there is a high level of excitement and buzz surrounding the launch of a new model.?Major tech companies such as Apple and Samsung use this strategy to launch new products at a high price point, which is then gradually lowered as newer models are introduced or competition increases. By doing so, they can maximize profits through early adopters and create an illusion of exclusivity and quality. This pricing strategy can work well if the product has a varying life cycle length, as it allows businesses to retain customer interest in the long term.?While price skimming can help recover sunk costs and sell products beyond their novelty, it can also annoy customers who bought the product at full price. It's important to note that this strategy works well when the quality of the new product or service justifies the higher cost, and won't work if your competitors are creating similar products.?The expected sales volume and speed of developing new products in the technology industry make it an ideal market for price skimming, but it is important to adjust the price gradually and carefully to avoid alienating early adopters who paid a premium price.?

HIGH-LOW PRICING : This is a?technique of charging high price during introduction and reducing the price through discounts and clearance sales during low demand.?High-low pricing requires considerable marketing efforts and often relies on sale promotions. This pricing strategy is commonly used by retail companies that sell seasonal or frequently changing products, such as furniture, decor, and clothing.?Van Heusen, Jockey and Shoppers Stop are examples of brands that use this pricing strategy by running frequent sales and discounts throughout the year, creating a sense of urgency among customers and optimizing their sales.?This approach is also known as a Discount Pricing strategy.?Consumers tend to anticipate sales and discounts, which is why universal discount days such as Black Friday are so popular. By adopting a high-low pricing strategy, businesses can keep foot traffic steady year-round and boost sales by attracting customers through promotions and sales.

BUNDLING : Bundling is a common pricing strategy used by many industries to increase sales and provide additional value to the customer. It can also help businesses move inventory, especially if they bundle a less-popular item with a top seller. In addition to being about pricing, bundling is also about product packaging and grouping several items together under a single price tag.?One of the benefits of bundling is that it can be a useful psychological nudge technique to motivate customers to purchase more products than they would otherwise. This is especially true if the collective value of the items in the bundle is greater than the bundle price. By offering a bundle at a lower price, businesses can create the perception of a good deal for the customer, who may be more likely to purchase the bundle than the individual items at a higher price.?Fast food restaurants often offer bundled meals, such as a burger, fries, and a drink for a fixed price. This technique is also used by cable and internet providers, who offer customers a discounted price for signing up for multiple services, such as cable TV, internet, and phone services.?Another benefit of bundling is that it encourages customers to purchase multiple items from a brand's product line instead of just the single item they were originally after. Bundling is a powerful pricing strategy that can help businesses increase sales, move inventory, and encourage repeat purchases.

CAPTIVE-PRODUCT PRICING : Captive-product pricing is a strategic pricing approach that considers both core products and their captive or secondary products when determining pricing. The strategy involves setting higher prices for captive products, such as replacement parts or accessories, compared to core products, which can increase revenue margins for companies. One of the key benefits of captive pricing is that it can attract a high volume of customers to a product intended for a one-time purchase, increase traffic flow to the core product.?By offering the core product at a low price and generating revenue from the ancillary products or services, companies can increase customer loyalty, generate repeat business, and achieve long-term profitability.?Printer manufacturers use captive pricing by selling printers at a low cost and then charging a premium for replacement ink cartridges, making customers captive to buying the more expensive ink cartridges from the same manufacturer. Gaming console manufacturers also utilize this approach by selling consoles at a low cost and then charging a premium for video games, and Amazon sells Kindle e-readers at a low cost and then charges a premium for e-books.?A similar approach is followed in Razor and Blade Model also.?While captive pricing and the razor and blade model share some similarities in that they involve selling a product at a low cost and then charging a premium for related products or services, there are significant differences between the two pricing strategies. In Captive product pricing, the primary product has a longer lifespan and requires ongoing maintenance, while in razor and blade model pricing the primary product is disposable or has a shorter lifespan.??Gillette, a well-known brand of razors and blades, is perhaps the most famous example of the Razor and Blade model. By selling their razors at a low price, Gillette was able to establish a significant market share and then generate substantial revenue from the sale of their high-margin blades. This approach allowed Gillette to maintain its dominance in the razor industry and continue to innovate with new products and services.?When the complimentary product is not essential, but an enhancement, then it will be called as Bait & Hook Model.?Unlike the Razor and Blade model, which focuses on selling essential complementary products to the base product, the Bait and Hook model pricing strategy focuses on selling complementary products that enhance or supplement the use of the base product.

FREEMIUM MODEL : The freemium model is a pricing strategy that involves offering a basic version of a product or service for free, while charging customers for more advanced features or functionality. This approach is commonly used by software companies, particularly those in the SaaS industry, as it allows potential customers to test the product before committing to a paid subscription. By offering a free trial or limited membership, companies can build trust with potential customers and provide them with a glimpse into the full functionality of the product.?Companies that offer a free version of their product or service must be careful to set prices that present a low barrier to entry, but still provide incremental value as customers are offered more features and benefits. For example, if a company offers a free version of their software, they cannot expect customers to pay a high price to upgrade to the paid version.?Examples of companies that use the freemium model include Dropbox, which offers a small amount of storage with a free account and charges users for additional space, and Canva, a graphic design platform that provides a limited number of design templates and features for free, but charges users for access to a wider range of templates, features, and tools. Another example is Hotstar, a popular streaming service in India, which offers a free version of its platform with limited content and features, and a premium version with access to a wider range of content and features. Similarly, Zerodha, a stock brokerage platform, offers a free version of its platform with basic trading features, and a premium version with access to advanced trading tools and features.?Overall, the freemium model is an effective way for companies to attract and retain customers, as it allows potential customers to try out a product or service before committing to a paid subscription.???

ARTIFICIAL SCARCITY or SUPPLY RESTRICTION : The strategy of "Artificial Scarcity" or "Supply Restriction" involves intentionally limiting the supply of a product in order to increase its perceived value and drive up demand. This approach is commonly used in luxury goods or limited edition products, where the exclusivity of the product is emphasized to justify a higher price point.?For instance, Nike employs this strategy by releasing a limited number of pairs of a new sneaker design, creating a sense of urgency and exclusivity among sneaker enthusiasts. This creates a high demand for the product, allowing Nike to charge a premium price for these limited edition sneakers and increase their profit margins.?Similarly, manufacturers of high-end cars, two-wheelers or smartphones often use supply restriction during the initial stages of a product launch. By limiting the supply of the product, they create a buzz and a sense of exclusivity among early adopters who are willing to pay a premium price to own the latest model. This generates more revenue for the manufacturer and increases profit margins until the supply catches up with the demand.

FRICTION PRICING : This pricing strategy involves adding obstacles or barriers to the purchasing process in order to encourage customers to select higher-priced options. This strategy can be implemented in several ways, such as making lower-priced options more difficult to find or adding additional steps or fees to the purchasing process for lower-priced options.?Some e-commerce platforms, such as Flipkart and Amazon, use friction pricing by highlighting or promoting advertised products and making other options harder to find. Many telecom companies, including Reliance Jio, use friction pricing to encourage customers to subscribe to higher-priced data plans by limiting the availability of lower-priced plans or requiring customers to go through multiple steps to purchase them.?However, this strategy can backfire if customers feel like they are being forced into a subscription they don't want or need.??Many gyms in India use friction pricing to encourage customers to commit to longer-term subscriptions by offering lower monthly subscription rates for longer-term contracts and charging a higher fee for shorter-term contracts. This creates a sense of urgency for customers to commit to a longer-term contract in order to get a lower price. Similarly, subscription-based companies like streaming services, online courses, and SaaS providers use this pricing strategy to encourage long-term commitments and improve customer retention and predictability of revenue.?

PREDATORY PRICING : Predatory pricing involves aggressive under-pricing of a product to eliminate competition.??It is widely regarded as anti-competitive and illegal in many countries, including India. In order to prevent unfair competition practices, monopolies, and price-fixing, companies are often subject to antitrust laws.?It has been alleged that Pepsi and Coca-Cola engaged in predatory pricing in India in an attempt to establish a monopoly. However, such tactics are considered illegal and anti-competitive, and companies engaging in such practices can face severe penalties under antitrust laws.?Recently, there have been several high-profile cases of antitrust violations by large corporations, such as Google in the European Union, where the company was fined billions of euros for allegedly abusing its dominant market position in search engine to promote its own products over those of its competitors.

PSYCHOLOGICAL PRICING : This strategy leverages consumer buying patterns to influence purchasing decisions. This approach simplifies the decision-making process for customers by directing them towards certain products or promotions. By appealing to customers' emotions and perceptions, companies can increase the perceived value of their products and services. Customers are more likely to make purchases when they feel they are getting a good deal or that the product/service is worth the price. Overall, psychological pricing is a powerful tool that can be used to influence consumer behaviour and drive business growth.?Changing the font, size, and colour of pricing information on products can also influence consumer behaviour. Using persuasive phrases or CTAs such as "limited time offer" or "last chance to book/buy" create a sense of urgency and encourage customers to act quickly.??Few psychological pricing strategies are as follows :

a.??????PRICING ORDER : The arrangement of prices, such as in a menu, in a descending order has been found to be an effective pricing strategy as it encourages customers to select higher-priced options. This is because of the cognitive bias in humans to be more concerned about losing something valuable rather than gaining something. When customers are presented with higher-priced options first, they perceive them to be of superior quality and worry that the quality might decrease as they scan down the list.

b.??????COMPARATIVE PRICING : The pricing technique involves framing the cost of a premium option as an upgrade to a standard option, rather than presenting it as an independent cost.??For instance, imagine a scenario where a $999 smart phone is placed next to its $1,099 counterpart, which offers a larger screen and more storage. By framing the premium option as a $100 upgrade from the $999 option, instead of presenting it as a whole cost of $1,099, customers are more likely to opt for the premium option.

c.??????ODD PRICING : Odd pricing is a widely used psychological pricing tactic where prices are set just below a round number, such as setting a price at Rs. 99 instead of Rs. 100. This pricing strategy is commonly employed by brands to create a perception of affordability and value for their products. Brands like McDonald’s, Reliance Fresh, Fastrack and Cafe Coffee Day have all utilized odd pricing for many of their menu items. This tactic creates an impression of a good deal and can motivate customers to make a purchase.

d.??????PRICE ANCHORING : This concept involves strategically positioning a high-priced product next to a lower-priced product to make the lower-priced item appear more reasonable in comparison. This technique capitalizes on the fact that customers often use relative pricing to make purchasing decisions.?Another price anchoring strategy is tiered pricing, where companies offer multiple pricing options, with the highest-priced option serving as an anchor. For example, a software company may offer three pricing options, with the most expensive option anchoring the other two, making them appear to be better value.?When a product is discounted from $100 to $50, the initial higher price is referred to as the anchor price.?Similarly, Amazon displays a higher "suggested retail price" for products, anchoring the consumer's expectation of the product's value and making the actual price seem like a good deal.?

e.??????THE DECOY EFFECT : The decoy effect is a phenomenon in which customers are more likely to change their purchasing decisions between two products when a third product, or decoy, is introduced. This decoy is typically a product that most customers would not logically choose, yet it influences their decision-making process by making one of the original two options more appealing. For example, a News Paper offered three subscription options: $59 for Web Only, $125 for Print Only, and $125 for Web & Print. The decoy option of Print Only influenced customers to choose the Web & Print option, despite potentially being a less practical choice. ?

CONCLUSION : Multiple pricing techniques and psychological pricing approaches are utilized by large corporates to retain various types of customers. Typically, they classify their users or potential customers into buyer personas based on their demographics, needs, pain points, and product usage. They then map these buyer personas across different stages of the buyer journey, including the awareness stage, consideration stage, and decision-making stage, to develop suitable pricing strategies and psychological pricing approaches. ?Having a comprehensive understanding of diverse pricing strategies always provides an advantage, whether you are a marketer or a consumer.