As the well-known marketing rule of Ps says, there are basically four constituent parts of a successful marketing strategy, namely: developing the product, determining the price, promoting, and placing the product where it is needed. Even though all of the elements are highly related, this article will focus on the second of the four Ps, which is the price.
Deciding how much to charge for your product requires more than simply calculating your costs and adding a mark-up. Moreover, it definitely requires knowledge and understanding of the market, which is highly unstable and continuously fluctuating. Therefore, it might be argued that once a price for a product has been fixed, the price will never vary. However, a bit of background knowledge is needed for further discussion of this topic.
The price itself is the value that is put on a product or service. When the value is too high, customers will not purchase the proposed product, simply due to the fact that it is too expensive. On the other hand, if a company offers low prices, there will be no chance to cover all of the costs of the business and, therefore, no success. Given these considerations, a good pricing strategy is needed in order to analyze all the factors and use them to the maximal level of benefit. Among the many strategies that businesses implement when setting prices for their products and services are market penetration pricing, market skimming, loss-leader pricing, perceived-value pricing, odd pricing, etc. Some have more effect than others, yet all of them can be successfully applied in different marketing situations.
Market penetration pricing is the strategy that aims to increase market share through lower prices. In other words, it is the period of time when prices are set relatively low, which leads to higher demand and, as a result, more sales. This strategy is usually used when a new product is being launched, and it is understood that prices will be raised once the promotion period is over and market share objectives are achieved.
The next strategy is market skimming, the main idea of which is to generate maximum profit before the product or segment attracts more competitors, who will force profits down. One of the benefits of price skimming is that it allows businesses to maximize profits in the early stages before reducing prices to attract more price-sensitive consumers.
Loss-leader pricing is exemplified by products which are offered at a price that is not profitable (low) in order to attract new customers or to sell additional products and services to those customers. This strategy is based on the belief that customers will make up for the losses on products on offer with additional purchases of profitable goods; and they really do, at least in many instances.
If one thinks of luxury, high quality, and expensive products, the perceived-value pricing strategy comes into play. This is the situation in which a company sets extremely high prices, knowing that the demand will be stable due to the product’s status of being prestigious or unique. Interestingly, in some cases customers no longer want to buy a product if it has a low price, believing that it is no longer really unique, or effective, or simply is not good enough.
Last but not least is odd-pricing, which is a psychological method based on the belief that certain prices seem to be more appealing to some customers than to others. Therefore, such prices as $79.99 instead of $80 appear. Even though nowadays this strategy is not that effective, it is still widely used, oriented to those customers who do not see an obvious trick.
Based on the strategies above, it is obvious that prices cannot be stable all the time, which is also true for the strategy and market in general. Even though one strategy or another may have been implemented, this will probably not be enough for a successful pricing process due to the phenomenon called product life cycle. The problem is that not all the strategies discussed above apply to all periods of a product life cycle.
At this point, the question of what the product life cycle is arises, which leads us to the following point for consideration.
Like everything, a product has its own beginning (the moment when it is launched) and ending (i.e. the inevitable drop in demand), which in the field of marketing is called: introduction, growth, maturity, and decline. The introduction period, as is evident from the term, is the time when a new product is being introduced to the market. Concerning the price during this period, it is basically up to the company. It can either choose high pricing in order to recover developmental costs, or low pricing to build market share rapidly. Once a product has been introduced to customers, the period of growth follows. During this stage, prices can remain unchanged, due to the fact that demand is still increasing and no real competitors are yet present. This condition is slightly changed as soon as the maturity period begins. Even as the sales volume peaks, pricing will require some changes. Namely, the price may have to be reduced in order to respond to the competitors in the market. This will be followed by the decline stage, which is illustrated by a drop in sales volume, as well a possible decline in prices in order to keep customers.
All of this shows that it is unlikely, if not impossible, to have a stable price over the long term. Moreover, such dispensable features as economic conditions, consumers’ tastes, and the simple relevance of a product, which we have not yet mentioned, play a significant role in price changes as well. The probability of change is always present and, in the majority of cases, is relatively high. Successful companies know that nothing is stable, and every period requires flexibility in decision-making and actions as well. Since price is firmly related both to a company’s profitability and customer satisfaction and loyalty, as a result, flexibility of it is essential to success. Therefore, it can be undoubtedly stated that the price will always vary from the moment it has first been set. It cannot and should not be stable if companies want to create and maintain a really successful and long-lasting market share.
Author: Valeriia Tsytsyk