subject: Marketing Approaches to Pricing [print this page] Marketing Approaches to Pricing Marketing Approaches to Pricing
The prices you charge obviously must cover all costs of producing the product or providing service. Here are the three basic marketing approaches possible that can guide you in your business.
A high price strategy. Often called "skimming the cream" pricing. This approach sets prices of the product or service well above the costs of production. For instance, your prices for your greeting cards arrive at computing the materials and production costs plus the labor. The cost of production greatly influences the price for the greeting cards especially on custom greeting card printing service because labor costs a lot.
A low price strategy. Sometimes referred to as market penetration pricing, this strategy calls for setting prices just above production costs in an attempt to achieve a high volume of sales rapidly.
A meet-the-competition strategy. Also known as "Me, too!" pricing. This approach is intended to match prices charged by other similar businesses.
The approach you select depends of course on the kind of business you want to create. Skimming-the-cream pricing reinforces the uniqueness of your business. The high prices take advantage of any image connotations that your product or service may have.
And skimming-the-cream pricing is also not price maximization. At no time do we advocate price maximization. Remember that your goal should be to set prices that will help you to achieve maximum sales and profits. If General Motors wanted to maximize the price of Cadillac, it would produce and sell just one per month, or one per year. Instead, GM charges a price well above production costs, consistent with the image of high quality and status the Cadillac conveys to its market.
As I've said before, it is easier to lower prices than to raise them. Many companies regularly use the skimming strategy for new products and gradually reduce price after the product is introduced at a high price. Early adopters- consumers who enjoy being the first to buy the newest, buy the product and tell others about it. Almost all early adopters have high income and are relatively insensitive to price.
As word spreads about the new product, the price is reduced so others can afford to buy it. Products that have been sold through this strategy are numerous: hand held electronic calculators, microwave ovens, electric toothbrushes, and digital watches to name just a few. This pricing strategy enables the company to recover its initial investment costs quickly, to meet competitor's attempts to copy its success, and to reach more segments of the market. Sales and profit are kept high early on in the product's life cycle.
Market penetration pricing is usually used for products that become fads. They progress through the life cycle rapidly. Hula-hoops and Superballs are good examples. The products are unique. The objective is to gain quick access to the market, to obtain shelf space in a dealer's store, and to achieve a high level of sales within a short time. Penetration pricing affords the entrepreneur the most profitable way to sell easily copied products that appeal to a large market.
Meet the competition pricing. It is a strategy that is highly recommendable to small businesses. If your new business can't charge more for its product or service than its competitors, it's a "Me, too!" business. The only conceivable reason to be in it in the first place would be if you were using the product or service as a holding action, giving the customers more value for their money than your competitors, while you were developing a truly unique product or service.
