At Price marketing, also Pricing strategy called pricing, is the process of determining the most appropriate price for a product or service. It is a key element of a company's overall marketing strategy because the price of a product can greatly influence its perceived value and sales figures. Generally, a price is formed by supply and demand.
There are different pricing strategies that companies can use, e.g:
- Surcharge: The setting of a price based on the cost of producing the product plus a mark-up.
- Value-based pricing: The price is based on the perceived value of the product to the customer.
- Competitive pricing: The setting of a price that is based on the prices of similar products offered by competitors.
- Penetration prices: Setting a low price to attract customers and gain market share.
- Psychological pricing: The setting of a price that creates a psychological perception of value or affordability in the minds of customers.
The choice of pricing strategy depends on various factors, e.g. the target market, the specific characteristics of the product and the competition in the market.
The Price marketing strategy must be connected with the overall marketing strategy of the company. Pricing should target specific segments and be in line with the communication strategy and distribution channels.
A brief digression on psychological pricing strategies
Psychological pricing uses psychological principles to influence consumer perception and behaviour. This involves setting certain prices to achieve certain psychological effects, e.g. to make a product appear more valuable or to increase the perceived value of a product.
Odd prices: Setting prices with an odd number, e.g. €19.99 instead of €20, to make the product appear cheaper.
Anchor: Set a high price for a product and then offer a discount to make the reduced price seem cheaper.
Prestige pricing: Setting a high price for a product to give the impression of exclusivity and luxury.
In short, psychological pricing influences consumer perception and behaviour. The aim of the Psychological pricing strategy is to make a product more attractive to customers, which can lead to higher sales and profits.
Low price strategy
Examples of low price strategy
There are many brands that follow a low-price strategy, also known as economy pricing or value pricing. Some examples are:
- Retailers like Walmart, Target and Aldi
- Fast fashion brands like H&M, Zara and Forever 21
- Discount department stores like TJ Maxx and Ross
- Low-cost airlines like Spirit and Frontier
- Supermarkets without frills like Aldi and Lidl
- Generic or private label products such as Great Value from Walmart and Up & Up from Target.
These brands use a low-price strategy to appeal to cost-conscious consumers who are looking for the best deal. They often focus on offering products at lower prices than their competitors while maintaining good quality. They use economies of scale and efficient operations to reduce the cost of the products they sell and pass these savings on to their customers. Compared to other brands, they can also offer a more limited range of products.
Advantages of the low price strategy
There are several advantages to a low-price strategy:
- Boost salesLow prices can attract cost-conscious consumers who are looking for the best deal. This can lead to higher sales and market share.
- Competitive advantageLow prices can help companies compete with larger, established companies by making their products more affordable for consumers.
- Attract price-sensitive customers: Low prices can attract price-sensitive customers who are looking for the best deal. This can be particularly advantageous for companies selling products that are considered essential for life.
- Low barrier to entry: Low prices can make it easier for new companies to enter the market and compete with incumbents.
- Higher market share: Low prices can help companies gain market share by making their products more affordable than those of their competitors.
- Cost savingsCompanies pursuing a low-price strategy can reduce their costs by taking advantage of economies of scale and efficient operations. This can help them offer lower prices to consumers and increase their profit margins.
- Increase in volumeLow prices can help companies increase their sales volume, which in turn can lead to economies of scale and lower production costs. This can help them maintain their low prices and increase profits.
A low-price strategy is not suitable for every company or market and is usually not sustainable in the long run. A low-price strategy may not be able to create a sustainable competitive advantage and may attract fewer loyal customers. Companies should consider their target market and the long-term goals of their business before implementing a low-price strategy.
Disadvantages of the low price strategy
There are several disadvantages of a low-price strategy:
- Limited margins: When prices are low, profit margins are also low. This can make it difficult for companies to sustain themselves in the long term, especially if they are not able to generate a high volume of sales.
- Quality concernsLow prices can be associated with inferior products, which can damage a brand's reputation. Companies pursuing a low-price strategy may have to compromise on quality in order to offer low prices, which can damage their reputation in the long run.
- Brand image: Low prices can be associated with inferior, low-priced or cheap products. This can have a negative impact on the brand's image and make it difficult to charge higher prices in the future.
- Price dependence: For companies that rely on low prices as their main competitive advantage, it can be difficult to stand out from the competition. It can also be difficult to raise prices in the future, as customers may not be willing to pay more.
- Limited flexibility: Companies that focus on low prices may have limited flexibility in terms of product development and marketing. They may not be able to invest in new technologies, product developments or marketing initiatives that could help them differentiate themselves from the competition.
They attract the wrong customers: Low prices can attract a price-sensitive, less loyal customer base that may not be willing to pay more for the same product in the future.
It is important that companies weigh the potential advantages and disadvantages of a low-price strategy before implementing it, as it may not be the best strategy for every company and every market. A low-price strategy may not be sustainable in the long run and may not create a sustainable competitive advantage.
High price strategy
Examples of high price strategy
There are many brands that follow a high price strategy, also known as prestige price or premium price. Some examples are:
- Luxury fashion brands like Louis Vuitton, Gucci and Prada
- Luxury car brands such as Mercedes-Benz, BMW and Rolls-Royce
- High quality watch brands such as Rolex, Patek Philippe and Audemars Piguet
- High quality household appliance brands like Sub-Zero, Viking and Miele
- Brands for quality audio equipment like Bose, Bang & Olufsen and Sennheiser
- High-quality skin care and cosmetics brands such as La Mer, La Prairie and Clé de Peau Beauté
These brands use a high-price strategy to create the impression of exclusivity, quality and luxury. They rely on the status, prestige and exclusivity that comes with owning one of their products. These brands have loyal customers who are willing to pay a high price for their products and they have often built a reputation over time that justifies the high prices.
Advantages of the high price strategy
- High profit margins: High prices can lead to high profit margins, which help companies generate more revenue and sustain themselves in the long run.
- Perceived quality: High prices can give customers the impression of high quality, exclusivity, luxury and status. This can be particularly beneficial for companies selling luxury goods or services.
- Brand image: High prices can help companies build a strong brand image and reputation. Consumers may associate high prices with high quality, luxury and exclusivity.
- Attract the right customers: High prices can attract customers who are willing to pay more for a product or service because they perceive it to be of high quality.
- Flexibility: Companies that focus on high prices have more flexibility in product development and marketing. They can afford to invest in new technologies, product developments or marketing initiatives that can differentiate them from the competition.
Disadvantages of the high price strategy
- Limited marketHigh prices can limit the potential market for a product or service to those customers who can afford the high price.
- Price sensitivity: High prices can make a product or service more sensitive to price changes, which can make it harder to maintain high prices in competition.
- Quality concerns: High prices can create unrealistic expectations of a product or service, and if these are not met, it can damage the brand's reputation.
- Price dependence: It can be difficult for companies that rely on high prices as their key competitive advantage to stand out from the competition.
- Limited sales volume: High prices can limit the potential sales volume of a product or service, which can make it difficult for companies to achieve economies of scale.
- Can be perceived as greed: High prices can be perceived as greed by some customers, especially in difficult economic times, leading to a negative perception of the brand.
Like any pricing strategy, the high price strategy has its advantages and disadvantages. Companies should consider the target market, the competition and the long-term goals of their business before adopting a high price strategy. It is not necessarily the best strategy for every company and every market.