Pricing Strategies

There are many ways in which the price of a product can be determined. The following are the foremost strategies that businesses are likely to use.

• Competition based pricing;
• Cost-plus pricing;
• Creaming or skimming;
• Limit pricing;
• Loss leader;
• Market oriented pricing;
• Penetration pricing;
• Price discrimination;
• Predatory pricing;
• Contribution Margin-based Pricing;
• Psychological pricing.

Competition based pricing
Setting the price based upon prices of the similar competitor products.
Competitive Pricing is based on three types of competitive product:

• Products have lasting distinctiveness from competitor's product. here we can assume
  - The product has low price elasticity.
  - The product has low cross elasticity.
  - The demand of the product will rise.
• Products have perishable distinctiveness from competitor's product, assuming the product features are medium distinctiveness.
• Products have little distinctiveness from competitor's product. assuming that:
  - The product has high price elasticity.
  - The product has some cross elasticity.
  - No expectation that demand of the product will rise.

The pricing is done based on these three factors.

Cost-plus pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
Price = Cost of Production + Margin of Profit.

Creaming or skimming
Selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. Usually employed to reimburse the cost of investment of the original research into the product - commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product/service. These early adopters are relatively less price sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration.

Limit pricing
This is a strategy of pricing adopted by firms in a contestable market in order to 'limit' the ability of new entrants to take advantage of economies of scale where by costs are low enough for them to become competitive. This is one of the most popular price adjustment strategy used in the market.

Loss leader
A product which is sold at a loss to attract customers to buy other full priced products sold by the business.

Market oriented pricing
Setting a price based upon analysis and research compiled from the targeted market.

Penetration pricing
Setting an initial low price at the stage of deployment of the product to attract initial customers. The price is likely to rise later as the product gains a market share.

Price discrimination
Setting a different price for the same product in different segments to the market. For example, this can be for different ages or for different opening times, such as cinema tickets.

Predatory pricing
Aggressive pricing intended to drive out competitors from a market. It is illegal in some places.

Contribution Margin-based Pricing
Contribution Margin-based Pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's Contribution Margin Per Unit), and on one’s assumptions regarding the relationship between the product’s price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e., to Operating Income) is maximized when a price is chosen that maximizes the following: (Contribution Margin Per Unit) X (Number of Units Sold).

Psychological pricing
Pricing designed to have a positive psychological impact. For example, selling a product at £4.99 rather than £5.