Definition: Pricing strategy in marketing is a process where businesses determine the price of their product or service. Product pricing is an integral part of marketing, and it considers all factors to reflect the market value of the product.
Product pricing is the value that the seller gets in exchange for goods and services.
The objective of every business is to earn a profit, and pricing strategy plays a key role in achieving this objective.
The following are the key points in deciding the product or service pricing:
- The price of a similar product in the market
- The actual cost of the product
- After-sales support
- Warrantee
The Objective of Pricing Strategy
The pricing strategy of a product has the following objectives:
- Product Survival
- Earn Profit
- Capture Market Share
Product Survival
This is the most crucial product pricing selection factor, especially for new launches. Every product has an equal chance of acceptance or rejection by the audience, and businesses are very sensitive about it.
Product survival is a must. Therefore, businesses study the market pricing of similar products and adjust the price accordingly. They calculate the actual cost of the product and a reasonable profit margin to set the final price.
Once the product is accepted in the market, they can tweak the price.
Earn Profit
This is the second important key factor in pricing strategy after survival. Every business wants to earn profit and grow its business. The profit depends on many factors, such as market competition, brand value, etc.
Brand plays a key role in determining the profit margin. Well-known brands can easily increase the price and earn more profit because of the acceptability of their product. For example, Apple can increase the price of their products, and the audience will still buy the products because of brand recognition.
Market competition is another factor affecting the profit margin. If the competition is fierce, the business may not want to increase the profit margin as this could deter customers.
Capture Market Share
Capturing market share is the third key factor in pricing strategy. For new product launches, many businesses keep the product or service price low to capture the market share for a short duration.
A higher volume also helps keep the production cost low because of the economy of scale.
FMCG and the telecommunication sectors are good examples of this strategy.
In India, Reliance launched its telecommunication services with free subscriptions, which helped them capture millions of users within a short duration. Soon, they became the third-largest telecommunication company in India.
This pricing strategy is called penetrating pricing and is useful when the competition is fierce and consumers are price sensitive.
In penetrating pricing strategy, businesses temporarily offer their product or services at a low price for a shorter period to attract customers. It helps businesses penetrate the market and steal customers from competitors.
Summary
Pricing strategy is key to business survival, and setting the price in marketing requires an understanding of many factors, such as market competition, brand recognition of the product, etc. The ideal pricing strategy helps organizations stay in business, earn a profit, and at the same time, provide value to consumers.