As one of the four major elements of the marketing mix, pricing plays an important strategic role because it can represent product expectation as well as product positioning. It means that it would be a measure of perceived value from the customer’s perspective. Sometimes, it also implies product’s cost and quality. However, the pricing decisions are influenced by many aspects, such as the cost of production, competitive pricing and customers’ willingness to pay. It could be adjusted at any time because of product promotions and the change of profitability across the various product lifecycle stages, and it would also be as a signal sends to the market. Hence, setting a suitable pricing strategy is so important for a new product after a set of preparation of marketing research.
There are three types of pricing strategy, they are price skimming, price penetration, and status quo. The first pricing strategy is skimming strategy, its main goal is to ride the demand curve all the way down, hence charging a high price at the beginning of releasing, then lower the price gradually to attractive more customers later. Secondly, the main propose of penetration pricing is to ‘invade’ the market with a low price, then pounce the price back after a certain degree of brand recognition and goodwill. And the last pricing strategy is Status quo when the product emerges into the market with a similar price with its competitors.
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The skim strategy is widely employed by tech companies, Apple for instance, because they know their products have seldom competitors and few good substitutes so that its price can stay stable to acquire maximum current profit by their product-quality leadership. It is an inelastic demand, which means that the consumers will buy the products even if high price or the price increases. It is beneficial to recoup the costly R&D costs very quickly. But it has drawbacks, with the price lower, the managers shall be aware of the early adopters group. For instance, in 2007, Apple introduced the original iPhone for an 8GB version which price is $599 (According to the price mood, the prices ending in 99, like $599 tend to be more attractive than $600). However, in order to maintain profitability or attract more customers, the product was lessened that price by 33% after the two months later. It caused that the managers had to issue a public announcement and launch a generous rewards for their early adopters, which is the $100 credit toward any purchase at an Apple retail store. Although this is a smart coupons strategy to encourage more new or old customers to purchase the products once more, but the company has harmed the early adopters group and some loyal customers. As a consequence, the marketers should use the price to manage demands and need to make the customers get perceptions of fairness as well.
On the other hand, if a competitor sees your high price, they will use the strategy of penetration pricing to launch similar products with the attractively lower price. For example, the penetration pricing is useful for the late comers in the market. It could stimulate sales and encourage trial. However, it result in a problem, ‘are these customers brand loyal?’ Take smart phone market as example, Apple came into the market with skimming price and kept its high price. Later on, Samsung entered the market with lower price. While the market share of both of them were further squeezed by the entrance of Micromax. It indicates that the price-sensitive customer who do not have strong brand loyalty and preferences or have limited income will keep switching to cheaper brands where he could get more value by the same money. As a result, penetration pricing would be easy to cause the price wars so that it would be harmful for whole industry.
Instead of grabbing eyeballs, status quo strategy is an approach to blend in the market by charging the same amount of money as the products of competitors. As a consequence, it will not turn to an effective move until it is combined with actively watching and waiting for a new opportunity. For example, the price of a bottle tends to be meetly consistent, for either Pepsi or Coca-Cola product. Other competitors may try a discounted price when introducing new products because of their less brand loyalty.
To summary, in order to set an appropriate price, the managers should consider some aspects. Firstly, we should keep an eye on costs, the pricing decision needs to cover our costs. Secondly, we have to develop the price sensitivity estimates using scanner data, survey data or conjoint analysis to reduce the systematic biases in pricing. Thirdly, the marketers need to use game theory to estimate likely results of price cuts and competitive response. Finally, Marketers need to think about the broader market and competitive responses, not just their own decisions.