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Price, one of the four p’s of the marketing mix, refers to how much a business charges for their product or service. It is normal for a business owner to feel that they must set the price as low as possible and hence embark on bargain pricing when they start their business. Nevertheless, this may create an impression of low quality among the consumers and it may deviate from the image that the owner wants to project. Hence it is necessary to portray the appropriate positioning of the product in the market and establish a price that covers cost and a profit margin. There are a number of pricing strategies that can be followed and the most common six among them are as follows.
• Markup or cost-plus:
Here, the company adds a standard markup or percentage of profit to the cost of production. Accurate assessment of fixed and variable costs is important. This is mostly used among the contractors, lawyers, practitioners, chartered accountants, manufacturing companies for pricing job orders, customized products, etc. This strategy works only when the marked-up price brings in the expected sales level, but this is not possible in all cases since this strategy ignores perceived value, demand and competition.
• Target-Return Pricing:
Here the company estimates the price that yields its target rate of return on investment. The price is normally equal to the cost of production plus the required rate of return. This is popular among the large-scale manufacturing companies, public investment companies, etc. This results in a similar manner like markup pricing, since it also ignores a few major factors. A company following this strategy must look for ways to lower their production costs in all manners.
• Perceived Value Pricing:
Perceived value is a combination of elements like buyer’s image of the product performance, channel deliverables, customer support, warranty quality, supplier’s reputation, esteem and trustworthiness. A company will base its price on the basis of this value (customer’s perceptions and expectations about the product). This is popularly employed for non-durable or soft goods such as food, cosmetics, fuel, packaging and containers, paper and its products, textiles, rubber, cleaning products and all others whose life span may be less than 3 years. Any company tries to deliver more value than its competitor and demonstrate the same to their consumers.
• Value pricing:
This indicates that products of high quality will be priced at fair levels. This is extensively used by retailers, personal computer manufacturing industry, electronic goods, etc. Some types of this strategy include high-low pricing, everyday low pricing, etc.
• Going-rate pricing:
Here the company prices its products based on the competitor’s price levels or that of the existing products. The price may be higher, lower or the same with the “follow the leader” attitude. There is little or no control by the firm on price. This is quite popular in the steel, cement, paper, petrol, fertilizers and chemical industries.
• Auction-type pricing:
Here the companies base their prices based on competition and demand. This has become popular after the advent of internet and e-shopping. The industries manufacturing agricultural produce, minerals and metals are still employing auction to determine their prices. Some of the types of this strategy include English auctions, Dutch auctions, sealed-bid auctions, etc. Sealed-bid is the most common type in awarding government contracts.
There are also other pricing strategies such as skimming, penetration, discount, loss-leader, psychological, limit, premium, predatory, absorption, price leadership, dynamic, etc.
The ------------ Barbeque Restaurant in my area has a private dining room, family room as well as a garden room. Their menu includes helpings of beef, sausage served with potato salad, beans, bread and onions, chicken (seasonal) or turkey, vegetable and sandwiches along with desserts and beverages. The business employs a combination of the above-mentioned two to three strategies for its pricing. They price such that it covers all the expenses such as costs of food and ingredients, costs of labor, marketing costs, rent, fuel or electrical expenses, equipment, packaging, etc. They also price their products competitively, based on other barbeque restaurants in and around the area and try to give better quality comparatively. Thus a combination of cost-plus and perceived value pricing is employed.
Besides, they employ different strategies to price different categories of food. The normal foods such as beef, salads, etc are priced according to the going-rate pricing and other occasional foods such as specialty seafood or pastries are priced with a profit margin (mark-up value). When they organize buffets, they go for bargain pricing strategy, where all the food is priced based on a bargain price. Thus it is evident that a business in the real world cannot stick to a single pricing strategy at all times and for all products or services and it varies based on situations.