Pricing is the only element of the Marketing Mix which generates revenue, the others are costs.
A starting point in the process is setting pricing objectives in accordance with the overall mission of the company. A company’s objectives may be as basic as ‘survival’, which means the pricing approach will be very short term and reactive. Other approaches may focus on profit maximization , return on investment , or cash flow . In a stable market when the competitive threat is weak, there may be no incentive to manage prices.
Product quality objectives can be reflected in price as there is a fundamental psychological association with the value of products. This results in premium pricing with high prices for high quality brands or luxury products. At the other end of the scale lies economy pricing , when low prices are supported by low organizational costs with lower subsequent quality. The issue with discussing prices and product quality is that their perception is usually very subjective and depends on every individual’s background.
With a penetration pricing approach, companies set lower prices compared to those of competitors in order to attract new customers and gain market share. They may increase prices at a later stage once the objectives have been achieved, e.g. sufficient market share. Price skimming is when companies offer their service or product at the highest price a customer will pay. This often happens with new products (see Product Life Cycle) but the price usually drops in time as new competitors enter the market and substitute products begin to appear. Producers will often switch to a penetration pricing strategy at this point. A price skimming strategy implies that the producer will set a high price for a new and usually high quality or uniquely differentiated product which has innovators and early adopters as target customers.
Prestige pricing is maintaining a high price for a product throughout its entire life, as opposed to the short term high price of a skimming strategy. In this case, prestige is associated with value and it represents an intrinsic purchasing motivation.
Strategies such as pre-emptive pricing or extinction prices involve setting low prices to eliminate competition and discourage potential new entrants. Some companies can set extinction prices even lower than production costs for a short period, but once the competition is extinguished and they become leader in the market, prices can be increased to a profitable level, turning into a long term benefit.
A final strategy that we are introduced to is the so-called “ Goldilocks” approach, which is the practice of providing both a premium product as well as a lower priced option alongside the average regular priced product in order to make it more appealing. It is priced not too high and not too low – it’s just right, hence the name. This technique relies on the psychological predisposition of individuals to choose elements between extremes, so marketers can present the product which generates the highest profit as being centered between these two extremes.