7 Methods of Pricing Policy You Need to Know
Pricing policy is one of the most important aspects of marketing strategy. It determines how much value you can create for your customers and how much profit you can make for your business. But how do you choose the right pricing policy for your product or service? What factors should you consider when setting your prices? And what are the different methods of pricing policy that you can use?
In this article, we will answer these questions and more. We will explain what pricing policy is, why it matters, and how it affects your marketing mix. We will also introduce you to seven methods of pricing policy that you can apply to your business, depending on your goals, market, and competition. By the end of this article, you will have a better understanding of how to price your products or services effectively and strategically.
Key Takeaways
Pricing policy is the set of rules and guidelines that a company follows when setting its prices.
Pricing policy is important because it affects sales volume, revenue, profit, brand image, customer satisfaction, loyalty, and competitiveness.
Pricing policy affects and is affected by the other elements of the marketing mix: product, place, and promotion.
There are seven methods of pricing policy that you can use: cost-based, value-based, competition-based, penetration, skimming, dynamic, and psychological.
You need to choose the pricing policy that best fits your business goals, market conditions, and competitive environment.
What is Pricing Policy?
Pricing policy is the set of rules and guidelines that a company follows when setting the prices of its products or services. It reflects the company’s objectives, positioning, and value proposition. It also takes into account the costs of production, distribution, and promotion, as well as the demand, competition, and legal regulations in the market.
Pricing policy is not a one-time decision, but a dynamic process that requires constant monitoring and evaluation. A company may change its pricing policy over time to adapt to changing market conditions, customer preferences, or competitive actions. A company may also use different pricing policies for different products, segments, or channels.
Why is Pricing Policy Important?
Pricing policy is important because it has a direct impact on your sales volume, revenue, and profit. It also affects your brand image, customer satisfaction, and loyalty. Here are some of the benefits of having a good pricing policy:
- It helps you create value for your customers by offering them a fair price that matches their perceived value of your product or service.
- It helps you capture value for your business by generating enough revenue to cover your costs and earn a reasonable profit margin.
- It helps you communicate your positioning and differentiation by signaling your quality, prestige, or affordability to your target market.
- It helps you attract and retain customers by meeting their expectations, needs, and preferences.
- It helps you compete effectively by setting prices that are competitive, but not too low or too high.
How Does Pricing Policy Affect Your Marketing Mix?
Pricing policy is one of the four elements of the marketing mix, along with product, place, and promotion. The marketing mix is the combination of strategies and tactics that a company uses to market its products or services to its target customers. The four elements of the marketing mix are interrelated and influence each other. Therefore, pricing policy affects and is affected by the other elements of the marketing mix.
For example:
Product
The price of your product or service should reflect its features, benefits, quality, and performance. The price should also match the product life cycle stage (introduction, growth, maturity, or decline) and the product line strategy (width, depth, or consistency).
Place
The price of your product or service should consider the costs and margins of the distribution channels that you use to deliver it to your customers. The price should also suit the type of channel (direct or indirect), the level of channel (intensive, selective, or exclusive), and the location of channel (online or offline).
Promotion
The price of your product or service should support your promotional efforts and objectives. The price should also coordinate with the promotional mix elements (advertising, sales promotion, public relations, personal selling, or direct marketing) and the promotional strategies (push or pull).
7 Methods of Pricing Policy You Need to Know
There are many methods of pricing policy that you can use to set your prices. However, not all methods are suitable for all situations. You need to choose the method that best fits your business goals, market conditions, and competitive environment. Here are seven methods of pricing policy that you can consider:
1. Cost-Based Pricing
This method involves setting your prices based on the costs of producing, distributing, and selling your product or service. You can either add a fixed percentage (markup) or a fixed amount (margin) to your total costs to determine your price. This method ensures that you cover your costs and make a profit. However, it does not take into account the demand or competition in the market.
2. Value-Based Pricing
This method involves setting your prices based on the perceived value that your product or service provides to your customers. You can either use customer research (such as surveys or interviews) or competitor analysis (such as benchmarking or mystery shopping) to estimate how much your customers are willing to pay for your product or service. This method allows you to capture more value from your customers and differentiate yourself from your competitors. However, it requires a good understanding of your customers’ needs and preferences.
3. Competition-Based Pricing
This method involves setting your prices based on the prices of your competitors. You can either match, undercut, or premiumize your prices compared to your competitors. This method helps you stay competitive and avoid price wars. However, it does not reflect your costs or value proposition.
4. Penetration Pricing
This method involves setting your prices low when you enter a new market or launch a new product or service. The aim is to attract customers, gain market share, and create word-of-mouth. This method can help you establish a strong customer base and discourage potential competitors. However, it can also erode your profit margin and create a low-price image.
5. Skimming Pricing
This method involves setting your prices high when you enter a new market or launch a new product or service. The aim is to target the early adopters, who are willing to pay a premium for your product or service, and recover your development costs quickly. This method can help you maximize your profit margin and create a high-quality image. However, it can also limit your sales volume and attract more competitors.
6. Dynamic Pricing
This method involves changing your prices frequently based on the changes in demand, supply, or other factors in the market. The aim is to optimize your revenue and profit by matching your prices to the market conditions. This method can help you capture more value from different customer segments and respond quickly to market fluctuations. However, it can also confuse or annoy your customers and require sophisticated technology and data analysis.
7. Psychological Pricing
This method involves setting your prices based on the psychological effects that they have on your customers. The aim is to influence your customers’ perception of your product or service and their purchase behavior. Some examples of psychological pricing are charm pricing (ending prices with 9 or 99), prestige pricing (setting high prices to convey quality or status), bundle pricing (offering discounts for buying multiple products or services), and anchor pricing (showing the original price and the discounted price). This method can help you increase your sales and customer satisfaction. However, it can also backfire if your customers perceive it as manipulative or dishonest.
Tips
- Do not base your pricing policy solely on costs, value, or competition. Use a combination of these factors to set optimal prices.
- Do not set your prices too low or too high. Find the right balance between creating value for your customers and capturing value for your business.
- Do not keep your prices static. Monitor and adjust your prices according to the changes in the market.
Methods of Pricing Policy and Global Demand
Pricing policy is the process of setting prices for products or services based on various factors, such as cost, demand, competition, and value. Pricing policy can have a significant impact on the global demand for a product or service, as it affects the profitability, market share, customer satisfaction, and brand image of the seller. Different methods of pricing policy can be used to achieve different objectives, such as maximizing revenue, increasing market penetration, enhancing customer loyalty, or creating a competitive advantage.
Some of the common methods of pricing policy are:
Cost-based pricing
This method involves adding a fixed percentage or amount of profit to the total cost of production or delivery of the product or service. This method is simple to calculate and ensures that the seller covers the costs and earns a desired profit margin. However, this method ignores the price strategies of competitors and the role of customers in determining the value of the product or service. Examples of cost-based pricing are cost-plus pricing and markup pricing.
Competitive pricing
This method involves setting prices based on what the competitors charge for similar products or services. This method helps the seller to stay competitive and attract customers who are price-sensitive. However, this method may reduce the profitability and differentiation of the seller, as it does not reflect the unique features or benefits of the product or service. Examples of competitive pricing are matching prices, undercutting prices, or premium pricing.
Price skimming
This method involves setting a high price initially and lowering it gradually as the market evolves. This method helps the seller to recover the high costs of research and development, create a perception of high quality and exclusivity, and segment the market based on customer willingness to pay. However, this method may attract competitors who can offer lower prices, reduce customer loyalty, and limit market expansion. Examples of price skimming are new technology products, luxury goods, or innovative services.
Penetration pricing
This method involves setting a low price initially to enter a competitive market and raise it later. This method helps the seller to gain market share quickly, create customer awareness and loyalty, and discourage potential competitors from entering the market. However, this method may reduce profitability in the short term, create a perception of low quality or value, and face price wars from existing competitors. Examples of penetration pricing are new entrants in a mature market, subscription-based services, or products with network effects.
Economy pricing
This method involves setting a low price for a basic product or service with minimal marketing and promotion costs. This method helps the seller to target price-conscious customers who are looking for value for money, increase sales volume and efficiency, and achieve economies of scale. However, this method may reduce customer satisfaction and retention, erode brand image and reputation, and face intense competition from low-cost rivals. Examples of economy pricing are generic products, discount retailers, or no-frills services.
The choice of pricing policy depends on various factors, such as the objectives of the seller, the characteristics of the product or service, the nature of the market, the behavior of customers, and the actions of competitors. A well-designed pricing policy can help increase or decrease global demand in an industry by influencing customer preferences, perceptions, and purchase decisions.
Frequently Asked Questions:
Q1: What is the difference between pricing policy and pricing strategy?
A: Pricing policy is the general approach that a company follows when setting its prices. Pricing strategy is the specific plan that a company implements for a particular product, segment, or channel.
Q2: How do I choose the best pricing policy for my business?
A: There is no one-size-fits-all answer to this question. You need to consider your business goals, market conditions, and competitive environment. You also need to test and evaluate different pricing policies and see what works best for you.
Q3: How do I measure the effectiveness of my pricing policy?
A: You can use various metrics to measure the effectiveness of your pricing policy, such as sales volume, revenue, profit margin, market share, customer satisfaction, and loyalty.
References:
https://zenodo.org/record/894118
https://www.yalelawjournal.org/note/amazons-antitrust-paradox
http://strategiccfo.com/wikicfo/absorption-vs-variable-costing-advantages-and-disadvantages/
https://www.ridefreefearlessmoney.com/blog/2016/05/sliding-scale-1/
https://www.worldcat.org/oclc/711052195
https://www.paddle.com/resources/pricing-strategy
https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pricing-5-common-strategies
https://bbamantra.com/price-pricing-methods-strategies/
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