Strategic Planning with the Pricing Strategy & Price Optimization Framework
Pricing Strategy & Price Optimization is a technique that enables better strategic planning in business.
Pricing strategy is one of the most critical components of a business. However, the strategies available are many and varied. The appropriate strategy depends on the competitive landscape, internal company dynamics, and customer demand. The following are the most common pricing strategies:
- Competition-Based Pricing: This is perhaps the least sophisticated and most widely used approach to pricing. Price is set relative to similar competing products. Price may be lower, equal, or higher depending on the specific strategy and objective
- Cost-plus pricing: Another widely used approach is to mark up the product or service by a specific amount (e.g., 10%) based on actual costs. In some cases, this is sub-optimal, since it doesn't account for the value to the customer that is being delivered
- Creaming or skimming: Setting a high price that will capture only a small percentage of the market provides significantly higher profit margins than would otherwise be achieved, however depending on the price elasticity of demand this likely yields a smaller gross profit. Therefore, companies may use this strategy for an initial product offering, after which they lower the price to capture a larger share of the market.
- Market-oriented pricing: Setting a price based upon analysis and research compiled from the targeted market.
- Penetration pricing: The price is deliberately set at low level to gain customer's interest and establishing a foot-hold in the market
- Price discrimination: Setting a different price for the same product in different segments to the market. For example, this can be for different ages or for different opening times
- Premium pricing: Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction.
- Contribution margin-based pricing: Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on oneís assumptions regarding the relationship between the productís price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).
- Psychological pricing: Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4
- Dynamic pricing: A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customerís willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
- High-low pricing: Method of pricing for and organization where the goods or services offered by the organization are regularly priced high in market comparison, but through promotions, advertisements, and or coupons, lower prices are offered. The lower promotional prices are targeted to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products
- Marginal-cost pricing: Pricing a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all
Other Strategic Planning Frameworks
- 4P's Marketing Mix
- Seven S (7S) Management Framework
- AIDA - Attention, Interest, Desire, Action - Buying Process
- Ansoff's Matrix - Product-Market Growth Matrix - Expansion Strategy
- BCG Growth-Share Matrix
- Bass Diffusion Model - Product Adoption and Innovation
- Blue Ocean Strategy
- Choice Model for Decision-Making Behavior
- Competitive Advantage
- Core Competence - Collective Learning in the Organization
- Cost-Benefit Analysis
- Delta Model
- ERG (Existence, Relatedness, Growth) Theory of Motivation
- Experience Curve
- Framing Effect on Psychology and Marketing
- GE (McKinsey) Matrix
- Growth Phases
- Predicting Industry Evolution and Change
- OODA Loop - Observe, Orient, Decide, Act
- PDCA (Plan, Do, Check, Act) - The Deming Cycle
- PEST Analysis - Political, Economical, Social, Technological, Environmental, and Legal Factors
- Perceptual Mapping - Brand Marketing
- Porter's Five Forces
- Product and Marketing Positioning
- Product Lifecycle (Industry Lifecycle)
- Root Cause Analysis
- SWOT Analysis - Strengths, Weaknesses, Opportunties, Threats
- Technology Adoption Curve
- Value Chain
- Balanced Scorecard
- Customer Segmentation
- Pricing Strategy & Price Optimization
- Mergers and Acquisitions (M&A)
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