Pricing Strategies, a Challenging Practice (Part 1)

Introduction

The market, continuously changing, demands adapting strategies to confront critical sudden scenarios and bring responses to fit economic challenges inside and outside the organizations when products are launched. A critical, affective, and effective thinking, together with correct plans can head the aims towards the right decisions by using and trusting accurate tools and people that help reduce risks and achieve the appropriate strategy.

Current globalization has brought new concerns about the importance of multiple scenarios when designing marketing strategies; that is to say, decisions cannot just be based on traditions or experience, they should also explore different alternatives to approach their product to the correct strategy.

Several pricing strategies bring a broader view to cover a larger range of scenarios, nevertheless, practice can be tricky when managers try to implement them, thus, the purpose of this article is to describe some pricing strategies when a product enters the market, and some challenges managers face when strategy is put into practice.

Let’s understand price

Getting right prices is the best way to make the organizations earn profits. That is why it must be the first responsibility every manager should have.

Michael V. Marn and Robert L. Rosiello suggest dividing pricing into three leves for an easier management. The first level they call ‘industry supply and demand’ let managers understand the logic of the laws of economics and markets in context to have a broader panorama to make their decisions by exploring trends. The second level, ‘product market strategy’ gives information about the perception customers have about their products; at this moment, some research tools can be used to find out data to play an increasing or decreasing game with the price. Finally, the third level, ‘transaction’, is where the based price is set according, considering multiple variables as rebate, discounts, incentives, bonuses, among others (Marn & Rosiello, 1992, p. 85).

It shapes a lot of events and functions, it is not just a number tagged on a product. When a product is purchased, the price also involves salaries, rates, fees, fares, debates, incentives, discounts, and commissions (Kotler & Lane, 2012, p. 383). In the same way, price is what a costumer must pay for a product or service. They consider It is important to highlight that such price involves all the values given in exchange for having or using the product or service. Some characteristics are given to the price:

First, it has been a very stable variable in the market, in fact, it has been the most influential factor of buyer choice. Second, it is one of the primary variables to understand the market share and the profitability of the organizations. Third, it is the most flexible factor in the marketing mix. It can easily be adapted and modified which does not happen to other variables such us product or channel commitment.

Finally, it is the factor of the marketing mix able to make profit. (Kotler & Armstrong, 2016, p. 324).

Formulating objectives to choose the correct strategy

Setting the correct price is a very tough job for managers; variables as the company, the customers, the competition, and the marketing environment need to be observed to find the correct price.

Products or services provided by companies may have diverse aims in the market. Some try to generate a high volume of sales, while others only may just try to pursue a branding objective. These differences oblige that the price setting of each of the products to have a segregated objective, which will be consistent with the sales or marketing goal. The clearer and more forceful the price setting objectives, the easier it can be to establish a strategy for them, and the result may be more efficient.

Similarly, the strategy can be designed for attracting new customers or retaining existing ones; also, a price strategy can help organizations to fend off old competitors or just avoid competition entering the market by setting low prices. Finally, setting prices may be a formula to maintain the get along well with their resellers or avoid government intervention (Kotler & Armstrong, 2016, p. 335).

When the objective is clearly determined, choosing a correct strategy becomes less complex and decision making provides better chances to reduce risks.

Pricing strategies

Philip Kotler and Gary Lane (2011) describe five pricing strategies (Kotler & Lane, 2012, pp. 314-335):

New-Product Pricing Strategies:

According to the authors, setting prices for the first time is a challenging event for all firms, two strategies are recommended below: market-skimming pricing and market-penetration pricing.

- Market-skimming pricing: this pricing strategy is very useful to capture the highest level of the market; it is a strategy that sets a high price for a new product in order to obtain maximum incomes from the segments that are willing to pay that high price; The company sells less, but with a higher profit margin. A good example is that of the first iPhone Apple Inc. introduced in the market; first, a high launch price was set to attract those customers interested in new technology and gadgets, little by little, they adjusted the features of the device and decreased the prices to capture different income-related costumers.

For this strategy to be successful, image and product quality must be at the same high level as the price, there should be a significant number of buyers willing to buy the product at that price, smaller volume production costs should not be so high that they eliminate the possibility of charging highly, and finally, it should not be easy for competitors to enter the market and sell a cheaper product.

- Market-penetration pricing: this strategy is completely opposite to the previous one. In this case, a low price for a new product is set, seeking to attract a large number of buyers and achieve a significant market share. Ikea takes advantage of this strategy, when it first entered the Chinese Market, the company filled its stocks with Chinese products, then, it could offer the lowest price in the world and captured a huge market.

For this strategy to be successful, “first, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration price must maintain its low-price position. Otherwise, the price advantage may be only temporary” (p.315)