How pricing strategies help to maximize revenues
Pricing is one of the key decisions which maximizes the sales and revenues. It is one of the key factors of the marketing mix and it represents the value of a product or a service for both the sellers and buyers. Pricing strategies make possible to face a severe competition and to defend the new entrants without sacrificing the profits. Pricing decisions help to increase the brand image and reputation for a particular brand in the market.
When selling a product or service a business can use various strategies for pricing, because though the consumers have willingness to buy and ability to pay for a product or a service, then also they may not ready to buy that product because of the price variations when compared with the prices of similar products of the competitors.
New entrants may enjoy the profits with the skimming prices during their initial stages, but gradually sales decrease with the customer awareness about the product price. Skimming prices for a product during its entry is not a bad idea, after enjoying the huge profits for a period of time; companies change their pricing decisions to retain the existed customers and to attract the potential customers.
A company’s pricing strategies and decisions affect the consumer’s behavior and their decisions whether to buy the product or not. When the firms want to take pricing decisions then they have to consider various elements which in turn highly influence the profits.
According to the law of demand customers usually, buy more units of product at a low price. Customers are highly selective regarding their purchase decisions because they are aware of the market conditions and their knowledge towards monitory value. With the growing technology and the internet usage facilitates customers to compare the prices. With a simple internet access customers may change their purchase decisions even at the last moment of buying also. Online buyers not only search for the better and low priced products but they compare the shipping charges also. So, while taking the pricing decisions managers should consider all these factors and possibilities.
Pricing decisions of marketers regarding a product or a service depends on the competitors. Competitors use various strategies in order to gain the market share so that they use different pricing strategies to attract the customers. While taking pricing decisions firms should analyze the markets and competitor’s moves.
The cost of raw materials, advertisement costs, labor costs, distribution costs and fixed costs are taken into the consideration while fixing the prices of a product or a service. Marketers estimate the cost of production and profits at various prices which make it easy to reach the breakeven point.
Taxation policy shows effects on the pricing strategies used by the companies. Depending on the interest rates and price regulations, marketers fix prices.
Models of Pricing
In absorption pricing strategy all costs such as each item’s variable costs and fixed costs in a proportionate amount are included.
New range and innovative products are priced with the skimming prices. Marketers set skimming prices (high prices) by sacrificing higher sales instead of higher profits. Skimming price strategy is adopted by the companies for a shorter duration in order to recover the huge investment on the product and for the better future marketing strategies.
Penetration pricing strategy is quite opposite to the skimming pricing strategy. In this strategy initially very low prices are set to attract the customers and to gain the market share. Slowly the marketers raise the prices of the products or services after gaining the loyal customers and the market share. Penetration pricing strategy misleads and discourages the new entrants and the competitors so that they do not dare to enter the markets or may skip away from the severe competition.
Penetration pricing strategies are usually used by the new entrants to increase the demand for the product or services and to gain the brand image with huge sales. This is a very successful strategy and recommended for various products during multiple situations like severe competition, for maximizing sales and demand.
Cost plus Pricing
In this method, marketers set the prices by adding all the costs incurred like direct raw materials costs, overheads costs and direct labor costs. To these costs, they add a little profit to create a profit margin. This cost-based pricing method is usually used to increase the demand and sales during the initial stages also they can earn profits, unlike penetration strategies.
This is a very common and successful pricing strategy. Even though the customers are aware of the price of the product, then also they will get convinced because the prices of the products seem to be very less. Here the marketers take the advantage of the human psychology.
Marginal Cost Pricing
In this strategy, the marketers set the price to equal the total extra cost of producing one extra unit of output. During low sales businesses often use this strategy, because they believe that even a little profit is better than no sales.
Pay what you want Pricing
This is a special promotional strategy; instead of giving free samples, marketers attract the customers by offering pay what you want. Through this strategy, a product or service can get a quick brand image through the word of mouth and it creates product awareness and increases sales.
This is also a commonly seen pricing strategy to attract the customers and to recover the costs within a short period of time. It is a flexible pricing strategy in which marketers change the prices frequently. Most of the online marketers use this strategy according to the prices of the identical products, products’ demand and end users willingness to pay.
The sum total of the variable characteristics like date, location and interest rates etc are included while fixing the price of the product. It maintains a balance between per unit sold and sales volume.
Loss Leader Pricing
In Loss Leader pricing strategies the products or services are sold below the cost of production. Customers visit the stores not only to buy the low priced products but they buy other products also. Loss on selling low-priced products is covered by the profits on other things sold.
This strategy is more suitable for high capital invested industries like railways and airlines. In this strategy, we can see different prices for the same product or service. Prices of airlines and railways vary at different times of the same day.
This is also called as Predatory Pricing; it is not a healthy competition however the companies are using this strategy to prevent the new entrants and to force competitors to move out of the industry. Here companies offer free gifts, free products, and price cuttings.
Target pricing strategy is used to reach the breakeven point quickly. Marketers estimate the cost of production and profits at various prices so that the breakeven point is made to fix the target price.