A company can employ a wide variety of pricing strategies while selling a product or service to customers. To determine the best pricing strategy for an organization, top executives must first identify their unique pricing environment, identifying which products and services their customers’ purchase in large volumes, which suppliers offer them at attractive prices, and the extent to which competitors are able to undercut them. A company should also create a pricing framework, basing its strategy on key assumptions about the supply, demand, and price structure of the market to be considered. Pricing strategies can vary according to the type of merchandise or services to be sold. The marketing mix of the organization also contributes to the price of its products.
In certain cases, pricing mistakes can be very costly. If competitors are able to take advantage of a pricing strategy, the damage to the organization’s sales and profit margin can be far-reaching. For example, if competitors are able to extract price concessions from the seller of a particular product, the seller may choose to either drop that product from his inventory altogether or increase the price of the same product to take advantage of the competitors’ actions. Thus, a competitor’s decision to adopt a less expensive strategy may be effective, but it may have a counter-productive impact on the sale of the competitor’s products and services. It is often difficult for businesses to determine whether they are acting in their own best interests when they are the target of what they perceive to be negative competitive behavior.
Another problem arises when the pricing decision does not align with the long-term growth plan. One common mistake is the belief that the best strategy is one that is implemented today because it will reduce costs over the long term. However, by pricing too low, a company could damage its credibility and impede growth. Thus, it is important to weigh the benefits of any pricing strategy against the downside risks that are associated with it.
Performance Based Pricing Strategies Price discrimination is often seen as a performance-based pricing strategy, in which pricing is based on the individual performance of the company rather than on general industry trends. The major drawback with this approach is that companies must rely on internal reviews and monitoring efforts to detect negative performance. Moreover, companies that use this strategy typically only deal with established and successful firms, limiting access to new or less profitable companies. Furthermore, firms that use this strategy to face the challenge of establishing cost-competitiveness, especially where external factors (such as economic conditions and political developments) may affect market perceptions of their firm.
Market Share Strategies Price discrimination requires the company to determine its ideal target price, but companies must still contend with the limitations of their knowledge. If they choose too high a price that is too high, they may not be able to attract enough customers to cover the cost of setting the price. Conversely, a price that is too low could result in loss of market share. Therefore, it is important for companies to determine their target market share and then set a pricing strategy to help them achieve that target market share. This Pricing Strategy can either be a fixed or a variable, high or low-cost strategy, depending on the situation.
Bundle Pricing Strategy Companies that relies on bundling to reduce cost is currently experiencing increased competition, so they may want to consider adjusting their bundling strategy to take into account the current state of the economy. Fixed-rate bundling generally offers a lower cost than do the variable-rate bundling strategies, since fixed-rate contracts are guaranteed for the life of the product. Fixed-rate bundling contracts are best suited for companies that have steady cash flows, good credit ratings, and strong profit margins. Variable-rate bundling strategies are more suitable for companies that need flexibility in their pricing. However, these strategies usually have higher service costs and other fees that offset some of the advantages of fixed-rate contracts.