There are 6 Different Pricing Strategies used by any Organization. Each of these types of pricing is discussed in this article.
Price skimming is the practice of marking and selling the product at the highest price buyers are willing to pay and charging a lesser amount as time passes by.
In this case, a business may rate the product unreasonably high at the beginning, but as newer opponents emerge and the consumer surplus sinks, the firm steadily lowers its costs down to provide to a price-sensitive customer base. It is most frequently used by originators of innovative technology.
Example – Apple
Apple popularly applies price-skimming strategies with every new release of the iPhone generation. It prices every new model at a high cost and with time when the demand for the new phones at that initial price point fades, the models get comparatively cheaper after being in the market for some time.
It is a cyclic process as the brand eventually releases a new iPhone model at a higher price again.
It is the process of drawing new customers to an offering by underpricing its value on the initial offering meaning setting low prices during launch with an aim is to build the perception of that product’s value relative to its competitors.
This approach is built with the purpose to increase brand awareness due to its lower price, after the brand captures customer attention it is bound to retain the customers that initially gave the product a chance even if the price rises.
Example – Jio Telecom (India)
EDLP stands for Everyday Low Prices. This strategy is not suitable for all retail brands however it is mainly used by brands such as Walmart. This is simply because a company needs certain other strengths to support the low prices which mainly draws revenue for Walmart.
Example – Walmart
The business used the EDLP pricing strategy right from its establishment and never differed from the strategy. Here the company controls its costs by cutting down operational expenses and other charges. The EDLC helps Walmart to manage costs and give benefits to its customers.
Walmart procures its products straight from the manufacturers bypassing the middlemen which ultimately reduces the exorbitant costs and considering it buys goods in bulk, it can further cut down the rates.
Now maintaining low prices of products indicates smaller profit margins. So, the deficit margin is met by extraordinary sales volume at Walmart which helps to subdue all the other weaknesses. The selling volume is simply so large that despite of having thinner margins, the firm still enjoys a significantly high profit level.
4. Loss Leader
Loss leader pricing is a retailing strategy that includes a selection of one or more products to be marketed below the cost of production. This means the retailer bears a loss to entice customers by selling products at a super low price.
Example 1 – Printers
This strategy has been standard in the printing industry for decades. Businesses such as Hewlett-Packard (NYSE: HPQ) have utilised this model to its fullest as the cost of ink for their ink-jet printers could go as high as $8,000-per-gallon.
Example 2 – Gaming Consoles
Launched in 2013, Microsoft’s Xbox One held a production bill of $471 for manufacturing and materials according to IHS, compared to its launch price of $499. Sony’s PS4 was launched at $399 and took $381 to make.
After considering the advertising, freighting, and other operating costs, both Microsoft and Sony lost money on every dispatched console. Both the companies also lowered the prices of their consoles many times afterwards.
Sony and Microsoft manage to sell their consoles at a loss as they can recover their money via software and subscription sales. The companies retain around $7 in platform royalties on every $60 game sold,. They also retain about $27 in publishing fees for first-party games.
Example 3 – Black Friday Sale
Multiple deals offered on Black Friday make use of this strategy. Shops offer appliances, televisions, and toys at a considerably low price that draws customers. Few stores even offer free gifts to the first 100 customers in the line to hype up demand.
The intention behind is that the buyers don’t just take the free offer but also they stick around and purchase other goods that are not as heavily discounted.
5. Captive Pricing
Such a strategy is employed when the worth of the main product is quite low but that of the supporting accessories that are required for smoothly running the main product is high.
Example – Razors
Razors are an excellent example of this pricing strategy. In this case, the base product is the razor handle and the captive product are its cartridges. The cost of a razor handle paired with a confined number of razor cartridges is a lot less than that of a packet of just bundled cartridges as the firm entices the buyer with its budget-friendly priced handle and then makes a bigger profit as they buy more cartridges.
Example – Video Game Consoles
Captive product pricing is practised for gaming consoles and their accessories. Here the console is the costlier item and the games, extra controllers, rechargeable battery packs (or batteries), and other accessories are captive products as they are less expensive yet very essential items.
Example – Printers
The inkjet printer business has embraced this business strategy by providing the basic printer at an inexpensive price or even below cost and imposing a more expensive price on their exclusive ink cartridges.
A good printer can be purchased at a modest price, and it generally is coupled with ink and even a bit of paper. However, once that ink and papers are utilised consumers need to go back for buying more. In this way, the printer is the base product, and the ink and paper are the captive products.
6. Yield Management
This pricing strategy is ordinarily used by enterprises in hospitality, air travel and other tourism-related sectors. It is used to generate maximum revenue from perishable inventory such as hotel rooms, or airline seats. Yield management, in short, is an approach taken by companies for targeting the right customer base, at the right time, for the right price.
Example – Airlines
This strategy was first adopted by the airline industry (United and American). It attempts to sell all the accessible inventory and leverage the maximum profit possible.
Airlines have a set number of seat available on a plane. If any seat is unsold the airline loses its ability to ever make a profit on that seat again. Yield Management just strives to sell every seat at the best price possible.
Example – Hotels
Considering the hotel industry, this approach suggests selling the right room, to the right guest(s), at the best possible time, for the highest amount, in order to maximise the revenue earned. Yield management methods try to use past data and specialized algorithms to decide the appropriate price to sell the inventory.
These methods work in real-time and adjust rates based on demand and it runs best in situations where the demand exceeds supply. This strategy was first adopted by the airline industry (United and American).
It attempts to sell all the accessible inventory and leverage the maximum profit possible. Airlines have a set number of seat available on a plane. If any seat is unsold the airline loses its ability to ever make a profit on that seat again. Yield Management just strives to sell every seat at the best price possible.
Example – American Airlines
American Airlines had adopted yield management systems for a revenue jump of $500 million per year. Delta also used similar systems to boost its revenues by almost $300 million per year.
Marriott Hotels also uses these practices for extra revenue of $100 million per year. Travel brokers too use yield management methods to make the best possible revenue from their holiday packages.