9 Important Methods used for Formulating Effective Pricing Strategies

Practice of setting a price for the product that is comparable to that of the market leader (prices set by the biggest player (s) in the industry) or price leader (close to prices set by the lowest-price players on the market. Thus it is an approach to meet competitive pressures more than other factors. Impact of internet has made marketers to adopt parity pricing.

3. Complementary Pricing:

There are many complementary products where one without the other can’t work. A computer printer without paper can’t operate. The price of computer printer (core product) is kept low but paper prices are kept high. There are many cases of complementary products. The price of gas oven may be kept low but the gas cylinder may be kept high.

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4. Bundle Pricing:

Consumers often buy baskets of products from different product categories. Even when buying a car they do evaluate to go for C?JG kit fitted car or to buy from independent CNG kit supplier. It is this interrelationship among products which provides meaning and power to the strategy of bundling. Bundling two or more products or services as a specially priced package – is a form of nonlinear pricing.

There are three bundling pricing in use. First, Pure components (or unbundling) strategy, the seller offers the products separately (but not as a bundle); second, pure bundling where the seller offers the bundle alone; and third, mix bundling – the seller offers the bundle as well as the individual items. The bundles could be components (e.g. Razor with shaving cream) substitutes (a six-ticket combo to travel anywhere in India at any time during the year) or independently valued products. There could be bundle of brands, often seen during festival times (Coca Cola, Pepsi, Red Bull, Eclair, Soup powder etc). Magazines also provide special prices for 3-year, 5-year or 10-year subscriptions.

The bundling pricing strategy is adopted due to firm-side rationales {lower inventory holding costs, Lower sorting cost (like De Beers sells uncut diamonds as a package), and greater economies of scope (like Microsoft integrating the development of Windows and Internet explorer apparently to reduce costs and increase quality}; demand-side rationales (Price discrimination (A sport franchise offering higher-priced ticket for one-way ticket and discounted fare for return ticket), balance within a portfolio (Dish TV, a DTH company, offers different channel packages for different prices), and complementarily (an airline may offers air tickets plus resorts to those going on holiday); and competitor-side rationales – Tie-in sales (neighbourhood store offering Amul butter to regular buyers of bread), and enabling competition through unbundling to facilitate market growth (Selling stereo without speakers).

5. Cost-Plus Pricing:

Pricing of a product at a predetermined margin over the product’s estimated production costs is known as cost-plus pricing. It is the most popular pricing objectives used by firms in different industries and different countries. This strategy shows a strong internal orientation. This strategy may harm profitability by overpricing the product in weak markets and under pricing it when demand is strong.

Another problem is that it is very difficult to accurately predict costs without affecting volume. It is a conservative approach that balances risks and returns by trying to achieve an acceptable level of financial viability rather than maximise profitability.

Greater the number of intermediaries in the firm’s supply chain, the less likely the firm is to adopt cost-plus pricing. High level of product differentiation increases the likelihood of a firm adopting cost-plus pricing. Normally the larger firms are more likely to adopt cost-plus pricing as they have cost-plus calculation methods in place.

Recently most of the FMCG and auto companies have increased the prices to recover increased input prices. P&G has increased the price of Ariel Oxy Blue from Rs 80 to 84 and Whisper Choice from Rs 20 to 22 for a pack of eight. HUL has increased the price of Lifebuoy by Re 1 to Rs 19.

6. Premium Pricing:

Premium pricing is a tactic employed by marketers that have multiple versions of the same product along a product line, with each version targeted at different customer segments. Normally, firms in Singapore are more likely to adopt premium pricing, followed by the USA and India; and larger firms compared with smaller firms are more likely to have different versions for sale (not one-size-fits-all).

7. Perceived value Pricing:

Price set in accordance with customer perceptions about the value of the product/service. Examples include status products/exclusive products. The practice of pricing the product in accordance with what customers perceive the product to be worth is known as ‘perceived value pricing”. It is a customer-centric pricing approach that gives first priority to customer’s product valuation above cost, competition and other considerations.

More the firm looks toward the customer for pricing decisions, it feels free from competitive pressures and creates entry barriers for new players. Customers will remain loyal to the firm when they think that they are getting value for money. However, a good product image does not necessarily imply an expensive or exclusive product.

Country-specific factors also affect this pricing. Firms operating in the USA appear more likely to adopt this method, followed by Singapore an then India.

8. Marginal Pricing:

An import cost-oriented approach is known as marginal pricing. Suppose, a firm manufactures some item which carry a fixed overhead charge of Rs 1,00,000 and variable cost of Re. 0.50 per unit. The firm currently supplies 10,00,000 items to a shoe company at Re. 0.75 each and has considerable spare capacity. Now an enquiry is received for another 10,00,000 items. What the price would be? According to Marginal Pricing the same can be priced at above Rs 0.50 instead, because the fixed cost is already recovered.

9. Geographical Pricing:

There are five main geographic price systems – FOB, Uniform Delivery price, Zone Deliver Price (Uniform delivery price within one zone), Freight Absorption Pricing (seller permitted to deduct transport charges from the bill), and Base Point Pricing (Factory-price plus freight charges from the base point nearest the buyer).