PRICE STRATEGY: TYPES, ADVANTAGES, DISADVANTAGES, EXAMPLES - DUDAS - 2025

The pricing strategy refers to all the various methods or models that companies use to find the most competitive price for their products or services. This strategy is combined with the other marketing strategies, such as 4P strategies (product, price, point of sale and promotion), economic patterns, competition, market demand and product characteristics.

Pricing strategy makes up one of the most important ingredients in all marketing, as it focuses on generating and increasing revenue for an organization, which will ultimately turn into a profit for the company.

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Understanding market conditions and unsatisfied consumer wants, along with the price the consumer is willing to pay to fulfill their unsatisfied wants, is the best way to be successful in pricing a product or service.

Don't forget that the ultimate goal of a business is to maximize profits while competing and staying in a competitive market.

However, to maximize profits and retain consumers, you must ensure that you choose the correct pricing strategy. This will help you achieve your goals as an organization.

Fixing the price

Deciding how much to charge for a product requires more thought than simply calculating costs and adding a surcharge.

The management of a company needs to price its products and services very effectively, as it would not want to get into some situation where sales are affected due to a relatively high price compared to competitors.

Nor would the company want to keep a price that is too low to minimize profits or incur losses.

Therefore, pricing must be done very smartly and effectively, ensuring that the organization's management considers all aspects before setting the price of a product.

What is the pricing strategy?

Pricing products can be difficult. Pricing too high will cause valuable sales to be lost. Setting them too low will cause valuable income to be lost.

Fortunately, the price doesn't have to be random. There are dozens of pricing models and strategies that can help you better understand how to set the correct prices for your audience and for your revenue goals.

Pricing strategies help you choose prices that maximize profits, while considering consumer and market demand.

Pricing strategies take into account many of the business factors, such as revenue goals, marketing objectives, target audience, brand positioning, and product attributes.

They are also influenced by external factors, such as consumer demand, competitive prices, and general market and economic trends.

Profit versus competition

Entrepreneurs often look at the cost of their product, consider the price of competitors, and adjust their own selling price with an additional amount.

Although cost and competitors are important, they should not be at the center of the pricing strategy. The best pricing strategy is the one that maximizes profit.

However, the pricing strategy is not always about profit margin. For example, you may choose to set the cost of a product at a low price to maintain market share and prevent competitors from invading your territory.

In these cases, you must be willing to sacrifice your profit margin to focus on more competitive prices.

However, care must be taken when performing an action like this. Although it could be useful for the business, it could also end up paralyzing the company.

A good rule of thumb to remember when pricing products is that customers will not buy the product if the price is too high, but the business will not be able to cover expenses if the price is too low.

Types

Economical price

It involves minimizing marketing and production expenses as much as possible. Due to the lower amount of expenses, you can set a lower price and still make a small profit.

Price based on value

The price is established based on the value that the customer believes that what is being sold.

It has very little to do with cost and has more to do with how the product is valued by the customer.

It occurs when external factors, such as a strong increase in competitors or an economic recession, force companies to provide value to customers to maintain sales.

Customers don't care how much a product costs to make as long as they feel like they're getting great value from buying it.

Sliding price

A high price is set for the product and then it is lowered as competing products appear on the market.

Helps companies maximize the sale of new products. It not only serves to recoup your development costs, but also creates an illusion of quality and exclusivity when the product is first introduced to the market.

Penetration price

A low price is set first to enter a competitive market and is increased later. Seeks to attract buyers by offering lower prices than competitors on products.

It can be risky because it can result in an initial loss of income for the business. However, after entering the market, the price can be increased to generate profit.

Premium price

When you have a unique product or brand that no one can compete with. This strategy should only be considered if you have a significant competitive advantage and you know that you can charge a higher price without being affected by a product of similar quality.

Because customers must perceive that the product is worth that higher price, you have to work hard to create a perception of value.

Psychological price

It refers to techniques used to entice customers to buy based on emotional impulses, rather than logic.

Geographical price

It is considered if the business expands to other state or international lines. This involves setting a point price based on where it is sold.

How to make a price strategy?

You must start with what is required. This will help identify the correct type of pricing strategy to use.

You just have to calculate certain numbers, like costs and profit target, and figure out what is most important to the business.

Pricing is often based on cost alone, because it is easier. You can also copy the price of the competition, which is a slightly better strategy.

However, pricing is an iterative process. The correct prices are unlikely to be set immediately, it may take several attempts and a lot of research.

Ideally, you should consider everything before pricing a product, including the consumer's ability to pay for the product, market conditions, competitor action, production costs, and raw materials.

Price based on value

For products that stand out in the market (artisan or high-tech products), the value-based pricing will help better convey the value on offer.

Steps to follow

- Choose a product that is comparable to the one you want to price and verify what the customer is paying for it.

- Find all the attributes where it differs from the product that is being compared.

- Assign a monetary value to all these differences, adding everything that is positive and subtracting the negative, in order to obtain a potential price.

- Make sure that the value for the customer is higher than the cost of the product. Otherwise, you will lose money on every product that is sold.

- Demonstrate to customers why the price will be acceptable. If there is an established market, the existing price range will help inform customers' price expectations.

Advantage

Price based on value

- The price is better adjusted to the customer's perspective.

- It allows to be more profitable, which means that more resources can be acquired and the business grow.

- When the price does not work, the answer is not to lower it, but to determine how the customer value can be improved. That may mean better adapting the product to the market.

Economical price

- Helps companies survive in times of economic instability, since it allows to set lower prices, attracting customers with financial pressures.

- Selling a similar item at a lower price helps to weaken the competition and thus gain a solid competitive advantage.

Penetration price

- It is the fastest way to gain market share from your competition and then secure it against new competitors.

- The rapid increase in sales volume allows to achieve economies of scale in a short period of time.

Sliding price

- Allows companies to maximize profits with first customers before lowering the price to attract more price-sensitive consumers.

- It is the best strategy to guarantee to cover production costs.

Premium price

- The product has a premium, which means that it has the potential to achieve a high profit margin.

- A premium price tag can help improve the identity of the brand and add it to the quality that the product aspires to.

Disadvantages

Economical price

Small businesses using affordable pricing may find it difficult to remain profitable as they are less likely to reach the sales volume necessary for this strategy to be successful.

When cost is a pressing issue for customers, their loyalty is not guaranteed. Budget-priced customers will always be looking for the best deal and aren't afraid to switch providers to get it.

This means that you are vulnerable to competitors and that the profit margin can be unstable, varying greatly from month to month.

Penetration price

As the price of the product is initially set quite low, profit margins may suffer until the price increases.

Setting the starting price too low can cause the brand to be perceived as low quality. This can make it difficult to retain customers after a decision is made to increase the price, leading to sales falling well below expectations.

It can be difficult to increase the price, as this can meet strong resistance from the customer.

Sliding price

Launching with a high price that will drop later may upset early buyers, who paid a premium for the privilege of getting the product first.

This can hurt brand loyalty, particularly if the price is lowered too quickly after launch.

If the price of the product stays high for too long, customers can start to lose interest. This can put future growth potential at risk.

Premium price

- It is difficult to start and maintain. The cost of the brand will likely be high, while the volume of sales will be low.

- The high price of the product means that competitors will lower its price.

The risk associated with over or under production of a premium product can be significant:

- Insufficient production will not be able to meet demand.

- With overproduction, there is a risk that production costs destroy profits.

Examples

Economical price

It is used by generic food providers and discount retailers. While incredibly useful for large companies like Walmart and Target, the technique can be dangerous for small businesses.

Premium prices

It is seen in the luxury car industry. Companies like Tesla may have higher prices because they are offering products, like autonomous cars, that are more unique than anything else on the market.

Sliding price

An example of this strategy is seen with the introduction of new technology, such as an 8K television, when there are currently only 4K and HDTV televisions on the market.

Psychological price

Setting the price of a watch at $ 199 has been shown to attract more consumers than setting it at $ 200, even though the actual difference is quite small.

One explanation for this is that consumers tend to pay more attention to the first number on a price tag than the last.

Geographical price

The Sport store sells high-performance sportswear. For winter clothing, a higher price may be set at retail stores located in cold weather than at stores located in warm weather.

Price based on value

A company can produce a line of high-end dresses, which it sells for $ 1,000. On the other hand, she makes umbrellas that they sell for $ 100.

Umbrellas may cost more to make than dresses. However, dresses are priced higher because customers feel they are receiving much better value. No one would probably pay $ 1,000 for an umbrella.

References

1. Bdc (2019). How to price your product: 5 common strategies. Taken from: bdc.ca.
2. Chris Scott (2019). How to choose a pricing strategy for your small business. Intuit Quickbooks. Taken from: quickbooks.intuit.com.
3. Educba (2019). 10 Most Important Pricing Strategies in Marketing (Timeless). Taken from: educba.com.
4. Allie Decker (2019). The Ultimate Guide to Pricing Strategies. Taken from: blog.hubspot.com.
5. Wikipedia, the free encyclopedia (2019). Pricing strategies. Taken from: en.wikipedia.org.
6. Mindtools (2019). The Pricing Strategy Matrix. Taken from: mindtools.com.
7. Jim Woodruff (2019). Different Types of Pricing Strategy. Small Business-Chron. Taken from: smallbusiness.chron.com.