There is a direct link between the factors influencing price setting and a company’s marketing strategy. The pricing strategy will depend on the company’s marketing objectives. The following are some marketing objective possibilities:
- Is the company entering a new market and hoping to attract customers’ attention and gain acceptance? If so, it should probably charge a low introductory price.
- Is the company looking to position itself in a particular way? If the company wants customers to view its products as luxury or quality goods, it should price accordingly.
- Is the company seeking to maximize the market opportunity by addressing all portions of the available market? If so, it may want to price flexibly to capture every part of the market.
- Is the market so far away that the company wants to minimize the administrative and operational costs of selling? If so, perhaps it should charge a single price.
- Is it seeking to recoup its investments within a narrow window? If so, it should charge whatever the market will bear before competitors drive down prices.
Companies’ marketing plans should also address day-to-day tactical marketing concerns. For example, should companies offer discounts for volume purchases? What kinds of special sales and promotions are appropriate?
Flexible, or variable, pricing involves offering identical products to different customers in the market at different prices. In essence, the seller positions the product differently, pointing out different sources of value to different groups of customers.
For example, one target group might be well-to-do and care about prestige. It may be possible to charge this group a high price by positioning the product as an imported luxury item.
Another group, such as middle-income earners, may be more concerned about getting value for money. The company would use mid-range pricing and position the product as offering quality or durability.
How high a price is depends on a customer’s bargaining ability, which in turn depends on the level of competition.
By addressing all possible market sectors, companies can maximize returns on their export investment and market position within a specified period. This strategy risks alienating customers who have paid the higher price.
Flexible pricing to a distribution network requires particular caution. The company’s distributors may hear of this practice and resources may be tied up in extended bargaining for the lowest prices.
There is also a natural inclination to divert supplies of the product from the lower to the higher priced territories.
Companies using static or uniform pricing offer the same price to all customers. Benefits of this strategy include the ease of administration and the customer goodwill created by such a policy.
The main disadvantage is that a rigid uniform pricing policy can easily be matched or undercut by competitors.
Another disadvantage is that a single price will not satisfy all parts of the market. Some high-end customers will think of the price as low, and may consider the product as less attractive and look for a superior (i.e., more prestigious) alternative.
The penetration strategy aims to capture market share by initially offering customers a low price. The company foresees that larger market share will enable it to achieve greater economies of scale. This means that its costs of production will come down, thereby opening up the margin for profit.
The target market becomes familiar with the product, accepts it, and ultimately comes to rely on it. In addition, as marginal competitors are forced out because they cannot match the low price, the original producer faces less competition. Then the company can slowly increase price and generate higher profits over time.
For example, the very first Japanese goods to enter North America several decades ago were offered at extremely low prices. In the 1950s and 1960s, “Made in Japan” was a byword for cheap and often shoddy merchandise.
Once the Japanese were established in the North American marketplace, however, they began to emphasize superior quality.
The success of this strategy can be seen in consumer electronics, where Japanese and Asian manufacturers now dominate the North American marketplace. It is also evident in the number of Japanese cars driven on North American highways.
Other Asian countries quickly imitated the Japanese strategy and, in some cases, overtook the Japanese.
Not all companies are in a position to adopt this strategy. It takes deep pockets and an ability to wait out a situation. Those that are in a position to do this must watch that they do not price so low that they violate a country’s antidumping laws.
International trade agreements prohibit the sale of goods at prices that are lower than the costs of production and delivery. Since costing is often inexact, considerable controversy can arise over what should be charged.
If they wish to avoid costly litigation, companies pursuing a strategy of penetration pricing should exercise caution.
With a price-skimming strategy, the company charges a high price in an attempt to maximize returns on a new product before competition materializes.
For example, the developers of a new technology (a more powerful computer, a new way of recording sound or video) will have incurred significant R&D costs that they will want to recover as quickly as possible.
They will also want to get whatever returns they can from their innovation before competitors figure out how to imitate it.
Because they have not incurred those R&D costs, imitators can easily offer the product at a lower price and still make a profit. Thus, the initial innovator has a narrow window in which to recoup the investment.
Weighing the benefits and drawbacks
Where demand is uncertain, high prices can establish an initial fix on the level of demand and then be reduced later as appropriate. The disadvantage is that the higher the pricing, the more attractive the opportunity will appear to competitors.
Companies need to think carefully about how long they have to pursue their strategy and what market position, if any, they hope to be able to maintain once competition appears.
Being the innovator that first brought the product to market may ultimately be less appealing than being the quality or the low-cost provider to mass markets.
Which of these plans fits best with your company’s marketing needs?