As a consumer, you might be wondering how companies set their price and what kind of strategy that they use in pricing your products? So, price is the only income-generating element in marketing mix. To increase revenue, pricing strategy is used by companies as a way, to shape the product image of a business. For example, they’re giving the lowest price to embed a good image on the offered products. This is done to maintain a stable relationship between a company and the price of an industry leader. There are three major pricing strategies. Let’s try to know them one by one to know how companies priced your products!
1. Customer Value-Based Pricing
This pricing strategy is based on your perceptions, as buyers, of value rather than based on the seller’s cost. First, they find out what customers’ needs and value perceptions are. They then set the most appropriate price that matches the customer perceived value. In producing the product, the cost has to be determined carefully. They have to determine the cost that can be incurred. After going through the process, they finally have to design the product that “screams” the value that people desired.
So, there are two types of customer-value based pricing. There are good value pricing and value-added pricing. In good value pricing, companies are combining quality that is given through a great service[1]. This combination comes with a reasonable price. For example, every car companies always offer that small and inexpensive models that fits the pocket of the people. The other type is value-added pricing. Companies add features and services that adds the value of the product. It is to differentiate what the company is offering with other competitors. They also charge a higher price in exchange for the added value. For example, you will prefer to fly with Singapore Airlines and pay more to get more value, like comfort and luxury.
2. Cost Based Pricing
This pricing strategy is used by companies when they added their calculation of profit percentage to their cost of production and distribution[2]. There are three types of the cost itself, which are fixed, variable, and total cost. Fixed cost is the cost that does not vary with production or sales level. For variable cost, it varies directly with the production level. Last but not least, total cost is the sum of the two previous cost. Total cost is simply fixed cost added by variable cost.
The company will demand the minimum (floor price) and maximum (ceiling price) prices for a certain product or service. In determining the price, companies should pay attention to the market condition. Using this cost-based pricing, companies can be steady in generating its profit rate[3].
3. Competition-Based Pricing
In a business, just like in life, there will always be competition. “Keep your friends close and your enemies closer.” is definitely what companies are going to say. They have to be aware of their competitor’s strategies, prices, cost, and market offering, to then set their price based on those consideration. Companies usually implement this pricing strategy when they have one or two competitors in the industry[4]. For example, there are two manufacture body soap. Both of the companies will charge their body soap for the same price. You will see both competitors is the same in term of price, but then you will figure out both their differences through their advertisement. They use advertisement to compete with each other by showing how their product is better than the other competitor. If one competitor decided to increase its price, they most probably add a new feature that makes them better. By doing so, the increasing on price can be justified. On the other hand, if a company wants to lower their price from it competitor, it has to really put all things into consideration. The consideration includes thoughts on whether it is really possible to lower the price without having no risk of bankruptcy.
At the end, pricing is a crucial tool to help companies exploit market opportunities. Now, you know that if you go to a store and see the price tag, the companies are pricing your products based on different strategies.
[1] Maximillian Claessens, “Customer Value-Based Pricing – Price Based On Customer Value”, https://marketing-insider.eu/customer-value-based-pricing/, retrieved on April 21 2019.
[2] https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/6742-cost-based-pricing.html, retrieved on April 21 2019.
[3] Maximillian Claessens, “Cost Based Pricing – Pricing Based On Cost” https://marketing-insider.eu/cost-based-pricing/, retrieved by April 21 2019.
[4] Vivian Guo, “Competitor Based Pricing Strategy: Competition Based Pricing For SAAS.” https://www.priceintelligently.com/blog/bid/161610/competitor-based-pricing-101-the-necessities-and-your-pricing-strategy, retrieved on April 21 2019.
Written by: Diana Riziq M.S and Vera Loestefani
really educative
nice