Product Pricing

Product Pricing: You can call a product strategy to be the vision of the product. If a company launches a product, then it has a vision of where the product will reach. The product strategy is the bare bone planning of the steps to ensure the product reaches the desired space. Such a strategy helps in setting the right direction for the product. Product strategy helps in deciding the basic elements of a product such as its marketing mix and its design. At the same time, it also helps in targeting the product to the right segment, product line stretching etc. All this will be discussed in the steps to develop a product strategy.

Methods of Pricing strategy

1. Geographical Pricing
   Geographical pricing adjusts the selling price of a product or service according to a customer’s location.
   Geographical pricing is a pricing model where the final price of the product is decided on the basis of the geography or the location where the product is being sold. When an organization is operating in multiple countries or multiple regions within a country, then they have to implement geographical pricing as per the local taxation laws and local requirements.
   Types Of Geographic Pricing
   • FOB Origin -
     FOB-origin pricing is a geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the freight from the factory to the location.
     FOB origin implies that the purchaser takes complete ownership.FOB Origin refers to the authorized fact that buyer assumes title or control of goods the time when freight carrier receives or signs the bill of landing at the origin pick-up location. FOB Origin thus refers to the legal fact that purchaser will take full accountability during the time of carrier delivery.
   • Uniform Delivery Pricing-
     Uniform delivery Pricing (UDP) includes all expenses of transportation and place where the seller recollects the control and responsibility of the group until they are delivered to the customer.
   • Zone Pricing-
     Zone pricing is known as a pricing method where all consumes within a distinct area of region is charged equal prices.
   • Basing Point Pricing-
     Base point pricing also known as delivered pricing refers to a process where a customer must pay a price for a product which includes freight costs which do not depend on the location of the trader.
   • Freight-Absorption Pricing-
     In this pricing method, manufacturers takes into account some or majority of the freight or transportation expenses involved in transporting the products to the customers.
2. Discount and allowance pricing-
   A Discount is a straight reduction in price during a stated period of time. There are many forms of discounts:
   • Cash discount - it’s when the buyer pays the bill in advance. For example if I sell tables to Mobilia, and they usually pay me within 30 days, I can tell them that ill give them a 2% discount on the price of the table if they pay me within 10 days- this type of policy improves cash flow and reduces the risk of bad depts. it’s also a way of encouraging fast payment.
   • Quantity discount - it’s when you give a discount because the buyer buys a large volume of products. For example if you sell toilet paper to WalMart, if they buy 100 pack they pay 3$ per pack but if they buy more than 100 packs they get to pay 2$ per pack. In this case, with the competition act, discounts must be offered equally to all customers. This type of discount provides an incentive to the customer to buy more from one given seller.
   • Seasonal discount - it’s when you give a price reduction to buyers because they buy the product out of season. For example a ski manufacturer will sell skis to a retailer at a lower price if the retailer buys it during the summer. Seasonal discounts allow the seller to keep production steady during an entire year.
     When you offer a discount there are three kinds of way to go about doing it.:
     • Non- Cumulative discount - it’s when you want to make a big sale ASAP so you go to the buyer and you tell him if you buy 10 thousand units I will give you 10% off. However, this kind of discount only happens when you decide, not every time that buyer wants to buy things from you.
     • Cumulative discount - it’s when you add up what that buyer bought during the year and if it adds up to 10 thousand units then ill give you a reduction. In this case you want to get a long term relationship with the consumer.
     • Functional discount - its when the buyer does something for you in exchange for a discount. If for example I sell toilet paper to IGA. There are usually at the end of the aisle but I can give IGA a discount if they put my toilet paper in the beginning of the aisle so that everyone can see it.It’s basically a discount made to perform a function.
       Then we have Allowances - it’s another form of price reduction.
   • Promotional allowances - they are payment or price reduction to reward dealers for participating in advertising and sales support programs.
3. Promotional Pricing:
   The Promotional Pricing is a sales promotion technique, wherein the firm reduces the price of a product drastically, but for a short period.
   Companies adopt several promotional pricing schemes, some of them are listed below:
   • Special-Event Pricing: Companies offer discounts and rebates on festivals, during the off-seasons with the intention to pull as many customers as possible.
   • Cash Rebates: The consumer goods companies viz. Automobile sector, electronics industry, cellular industry, etc. offers the cash rebates on their items if purchased in a particular time period.
   • Loss-Leader Pricing: Often the big retailers or supermarkets reduce the price of a well-known brand with the intention to have an additional store traffic.Through this strategy, the retailers try to compensate their margin loss from the additional sales achieved from additional 
   • Low-interest financing: Nowadays, especially the cellular companies are offering an easy EMI scheme with less rate of interest, so as to boost the sale of their mobile sets.
   • Warranties and service contracts: The companies offer the extended warranties and free services of the product to the customers.
   • Psychological Discounting: This type of promotional pricing is very much visible these days. Under this strategy, the companies artificially set the high price of the product and then offer it at substantial savings, such as an item was of RS 359, but now it is available at just Rs 259.
4. Price Discrimination:
   In price discrimination, the seller will charge the buyer the absolute maximum price that he is willing to pay. Companies use price discrimination in order to make the most revenue possible from every customer. This allows the producer to capture more of the total surplus by selling to consumers at prices closer to their maximum willingness to pay.
   An example of price discrimination would be the cost of movie tickets. Prices at one theater are different for children, adults, and seniors. The prices of each ticket can also vary based on the day and chosen show time. Ticket prices also vary depending on the portion of the country as well.
   Different Types of Price Discrimination:
   • First Degree Price Discrimination - Also known as perfect price discrimination, first-degree price discrimination involves charging consumers the maximum price that they are willing to pay for a good or service.
   • Second Degree Price Discrimination - Second-degree price discrimination involves charging consumers a different price for the amount of quantity consumed. Examples include:
     • A phone plan that charges a higher rate after a determined amount of minutes are used
     • Reward cards that provide frequent shoppers with a discount on future products
     • Quantity discounts for consumers that purchase a determined number of more of a certain good
   • Third Degree Price Discrimination - Also known as group price discrimination, third-degree price discrimination involves charging different prices depending on a particular market segment or consumer group. It is commonly seen in the entertainment industry.
     For example, when an individual wants to see a movie, prices for the same screening are different depending on if you are a minor, adult, or senior.
5. New product Pricing:
   Pricing strategies tend to change as a product goes through its product life cycle. One stage is particularly challenging: the introductory stage. This is called New Product Pricing. When companies bring out a new product, they face the challenge of setting prices for the very first time. Two new product pricing strategies are available:
   
   • Price-Skimming and Market-Penetration Pricing
   Let’s learn more about these two new product pricing strategies.
   1. Price-Skimming – New Product Pricing:
      The first new product pricing strategies is called price-skimming.Price-skimming calls for setting a high price for a new product to skim maximum revenues layer by layer from those segments willing to pay the high price.As a result of this new product pricing strategy, the company makes fewer but more profitable sales.
      
      An example for a company using this new product pricing strategy is Apple. When it introduced the first iPhone, its initial price was rather high for a phone. The phones were, consequently, only purchased by customers who really wanted the new gadget and could afford to pay a high price for it. After this segment had been skimmed for six months, Apple dropped the price considerably to attract new buyers. Within a year, prices were dropped again. This way, the company skimmed off the maximum amount of revenue from the various segments of the market.
      
      
   2. Market-Penetration Pricing – New Product Pricing:
      The opposite new product pricing strategy of price skimming is market-penetration pricing. market-penetration pricing refers to setting a low price for a new product to penetrate the market quickly and deeply. Thereby, a large number of buyers and a large market share are won, but at the expense of profitability. The high sales volume leads to falling costs, which allows companies to cut their prices even further.
      
      An example is the giant Swedish furniture retailer Ikea. By introducing products at very low prices, a large number of buyers is attracted, making Ikea the biggest furniture retailer worldwide. Although the low prices make each sale less profitable, the high volume results in lower costs and allows Ikea to maintain a healthy profit margin.
6. Product mix pricing:
   Before proceeding towards the topic “product mix pricing strategies in marketing” first you should be aware of this common marketing terms “product mix”. Here I am mentioning three most common definitions of product mix
   1. The product mix is the collection of all those products and services that a particular company offers in the market.
   2. The set of all product line or item which a particular seller offers to sale.
   3. The number of all product of similar nature or kind offered by a particular seller for sale.
   Types of Product Mix Pricing Strategies:
   When the product is a part of product mix or portfolio, companies adopt five kinds of pricing strategies in marketing which are as under-
   1. Product Line Pricing : Product line pricing is setting the price on the base of cost difference between different products in a product line. Marketer also keeps in mind the customer evolution of different features and also competitive prices.
   2. Optional Product Pricing : This strategy is used to set the price of optional products or accessories along with a main product. For example refrigerator comes with optional ice maker or CD players and sound systems are optional product with a car.
   3. Captive Product Pricing : this strategy used for setting a price for a product that must be used along with a main product, for examples blades with razor and films with a camera. Gillette sells low priced razors but company make money on the replacement of cartridges.
   4. By-Product Pricing : By-product pricing is determining of the price for by-products in order to make the main product’s price more attractive and competitive. For example processing of rice results in two by-products i.e. rice husk and rice brain oil, and sugar cane with husk. Now if company sells husk and brain oil to other consumers, they will generate extra revenue by adopting this by-product pricing.
   5. Product Bundle Pricing : This is a common price and selling strategy adopted by many companies. Companies offer the bundles at the reduced price. This strategy helps many companies to increase sales, and to get rid of the unused products. This bundle pricing strategy also attracts the price conscious consumer. Best example is anchor toothpaste with brush at offered lower prices.
   Conclusion:
   In conclusion it is clear that pricing strategies play the most unique role in that it changes often, most volatile business strategy and is dependent and interactive. Pricing makes a product attractive or non-attractive.