Price is a very important element in the marketing mix. It is perhaps the most flexible element in the mix and companies use it to produce revenues and achieve other business objectives. The purpose of this article is to explore pricing strategies in marketing.
Definition of price
Price is the amount of money companies charge customers for their products or services. According to Kotler et al. (2009, p.574) ‘price is not just a number on tag. Price comes in many forms and performs many functions’. According to Lancaster & Reynolds (2004), it is the means whereby an organisation covers costs of research, manufacturing, marketing and other activities.
Definition of pricing strategies
Pricing strategy refers to the methods companies use to price their products or services. There are a variety of pricing strategies available to a business when selling a product or service. A business can use pricing strategies for a number of purposes e.g. increasing sales, maximising profits, and defending an existing market from new entrants.
Examples of pricing strategies
Fundamentally, there are two pricing principles i.e. market penetration and market skimming. Market penetration refers to pricing products and services low to secure high volumes. On the other hand, market skimming refers to setting high price while securing low volumes. Based on these principles and other price-setting considerations, companies use a variety of pricing strategies to achieve their business objectives.
As mentioned above, companies can indeed use a variety of pricing strategies. For example, perceived value pricing, loss leader, psychological pricing, going-rate, competitor pricing, price-discrimination, and cost-plus pricing are some of the popular pricing strategies.
Often companies use psychological pricing to persuade customers to purchase their products and services. For instance, think about pricing a product or service £9.99 instead of £10.00? Amazon, McDonald’s, Gap, Primark, Apple and indeed almost all businesses use this type of pricing.
Value pricing is another popular pricing strategy which refers to pricing being set in line with customer perceptions about the value of the product/service. McDonald’s often uses value pricing. Some organisations use cost-plus pricing strategy which is the simplest method of pricing in which a standard or traditional percentage is added to the cost (BPP Learning Media, 2010).
Importance of appropriate pricing strategies in marketing
Companies must select appropriate pricing strategies. Application of unsuitable pricing strategies may cost them badly. For example, think about pricing high for a product which is not that great from a quality perspective. Likewise, when there is a massive demand for a product/service, companies can set a high price comfortably. However, they need to keep an eye on their competitors’ pricing. Otherwise, competitors may gain competitive advantage over them through pricing.
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Last updated: 02 March 2018
BPP Learning Media (2010) Marketing Principles, 2nd edition, London : BPP Learning Media Ltd.
Kotler et al. (2009) Marketing Management, 1st European Edition, UK: Pearson Education Limited
Lancaster, G. and Reynolds, P. (2004) Marketing, 1st Edition, Palgrave Macmillan
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Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of both Leeds Metropolitan University and London South Bank University.