Pricing strategies can be used to pursue different types of objectives, such as increasing market share, expanding profit margin, or driving a competitor from the marketplace. It may be necessary for a business to alter its pricing strategy over time as its market changes.
A number of pricing strategies are listed below, along with a brief description of each one. Each description is linked to a more comprehensive explanation that usually includes a definition, example, advantages, disadvantages, and evaluation.
Cost-Based Pricing Strategies
These pricing strategies are based on the cost of the underlying product or service. They are:
- Absorption pricing. Includes all variable costs, as well as an allocation of fixed costs. It may or may not include a profit markup.
- Break even pricing. The setting of a price at the exact point at which a company earns no profit, based on an examination of variable costs and the estimated number of units to be sold.
- Cost plus pricing. Includes all variable costs, an allocation of fixed costs, and a predetermined markup percentage.
- Marginal cost pricing. Prices are set near the marginal cost required to produce an item, usually to take advantage of otherwise-unused production capacity.
- Time and materials pricing. Customers are billed for the labor and materials incurred by the company, with a profit markup.
Value Pricing Strategies
These pricing strategies do not rely upon cost, but rather the perception of customers of the value of the product or service. They are:
- Dynamic pricing. Technology is used to alter prices continuously, based on the willingness of customers to pay.
- Premium pricing. The practice of setting prices higher than the market rate in order to create the aura of exclusivity.
- Price skimming. The practice of initially setting a high price to reap unusually high profits when a product is initially introduced.
- Value pricing. Prices are set based on the perceived value of the product or service to the customer.
Teaser Pricing Strategies
These strategies are based on the concept of luring in customers with a few low-priced or free products or services, and then cross-selling them higher-priced items. They are:
- Freemium pricing. The practice of offering a basic service for free, and charging a price for a higher service level.
- High-low pricing. The practice of pricing a few products below the market rate to bring in customers, and pricing all other items above the market rate.
- Loss leader pricing. The practice of offering special deals on a few items, in hopes of drawing in customers to buy other, regularly-priced items.
Strategic Pricing Strategies
These strategies involve the use of product pricing to position a company within a market or to exclude competitors from it. They are:
- Limit pricing. The practice of setting an unusually low, long-term price that will deter potential competitors from entering a market.
- Penetration pricing. The practice of setting a price below the market rate in order to increase market share.
- Predatory pricing. The practice of setting prices low enough to drive competitors from the market.
- Price leadership. When one company sets a price point that is adopted by competitors.
Miscellaneous Pricing Strategies
The following pricing strategies are separate pricing concepts not related to the preceding categories. They are:
- Psychological pricing. The practice of setting prices slightly lower than a rounded price, in the expectation that customers will consider the prices to be substantially lower than they really are.
- Shadow pricing. The assignment of a price to an intangible item for which there is no market price.
- Transfer pricing. The price at which a product is sold from one subsidiary of a parent company to another.