What is a Pricing Strategy? – A Business’s Pricing Strategy in Marketing

Pricing Strategy is one of the most important tasks for Marketing in particular and for businesses in general. How is a pricing strategy developed, and what types of pricing strategies are there? So, what is a pricing strategy? Let’s find out with 1Office in the article below!

I. What is a Pricing Strategy?

A pricing strategy is the process of setting goals and direction for a company’s product selling price at a specific time, aiming to help the business achieve one or more objectives (increasing market share, sales volume, maximizing profit, etc.)

Defining a pricing strategy is a crucial part of achieving business goals when launching a product or boosting customer purchasing power, so it requires the right approach to achieve the best results. Customer choice is partly influenced by the product’s selling price.

II. Types of Pricing Strategies in Business

2.1 What is a Pricing Strategy when applied to a new product line?

Before launching a product, a company’s strategists must discuss and agree on a price to bring the product to market. Currently, there are two common pricing strategy approaches chosen by many businesses:

– Price Skimming Strategy: The essence of this strategy is that the seller sets a relatively high initial price for new products to tap into the demand of a customer group with high purchasing power, aiming to quickly recover investment costs and generate profit.

After this customer group has been fully tapped, the business gradually lowers the price to attract customer groups with lower purchasing power. Businesses primarily use this pricing strategy because:

– The business has a temporary monopoly, and the product’s demand is inelastic to price. Customers are compelled to buy the product due to their needs and the lack of other options. For example, mooncakes – although there are many mooncake brands today, brands like Bao Phuong, Dong Phuong, etc., are still chosen by many despite their prices being higher than the general market.

– There are existing groups of consumers in the market with high purchasing power who are ready to buy. They are very interested in the novelty and uniqueness of new products. For example, fashion brands selling limited-edition products may reduce prices at the end of the sales campaign to sell off remaining stock.

– The business already has a reputable position in the market. These companies always have a stable customer base to purchase their products, regardless of the price.

– This new item is of high quality, and the high price contributes to creating an image of a high-quality product. For example, Apple’s iPhone models always have a very high price upon launch, yet they often “sell out”.

– Penetration Pricing Strategy: Here, the business sets a relatively low initial price for a new product to encourage buyers, aiming to rapidly expand the market and thereby increase sales volume. This strategy focuses on the business objective of capturing the market and increasing brand awareness, helping the brand lead in market share and retain new customers before returning the price to normal. This penetration pricing strategy is often used when a business wants to develop the market, quickly increase its competitiveness, and when product demand is highly elastic to price changes.

When applying this strategy, the business is willing to incur losses during this period to achieve its market share goals, then gradually brings the product price back to a profitable level. Therefore, it is suitable for common consumer products like food, laundry detergent, shampoo, shower gel, etc., which have a relatively long product life cycle and where market demand tends to grow. However, this pricing strategy is also risky because when the price is returned to normal, many customers may switch to a competitor’s service or stop using it altogether.

For example, many movie streaming or photo download sites now offer a price that is only ½ or ¼ of the normal price for new customers for a limited time (14 days or 1 month), after which customers will use the service at the regular price. This is called an introductory offer period. But afterward, two scenarios can occur: customers may continue to use the service, or after the “trial” period, they will discontinue its use.

2.2 Pricing Strategy for a Product Portfolio

Depending on the product line and items of the manufacturing business, there will be separate pricing strategies. While the article above mentioned launching new products, the product mix pricing strategy delves into analyzing existing items, targeting consumer purchasing psychology. 

– Product line pricing strategy: For the same core product/service, businesses will customize different versions to offer more choices to consumers. The item’s value also increases correspondingly with each version. For example, when you go to Highland for a peach tea, you have the option of small, medium, or large sizes at different prices. 

– Optional product pricing strategy: When purchasing a product at its original price, customers have the opportunity to buy another product at a discounted rate. This strategy aims to increase the competitiveness of the main product and to boost the clearance of inventory for accompanying products. You can encounter this pricing strategy frequently when shopping at electronics stores today. For example, when buying a camera, customers are offered a discount to purchase a memory card at 50% of the listed price. 

– Combo pricing strategy: Businesses will combine product lines to offer a combo package at the most favorable price, lower than the total listed price of each individual service. For example, a travel combo including flights and a hotel – when purchasing this combo, tourists might pay only slightly more than if they bought each service separately. 

2.3 What is a Pricing Strategy in relation to price adjustment?

This type of strategy is often used after a product or service has been on the market for a long time, based on consumer demand and business objectives. 

– Psychological pricing strategy: For the same type of item or service, a higher price can give consumers the impression that they will receive better quality, making them feel more secure about the product.

– Customer segment pricing strategy: Depending on the user segment for the service, the product will have a preferential price. This also encourages the customer group in that segment to use more of the product. For example, movie tickets for students and bus fares for the elderly and students are offered at a discount. 

– Promotional pricing strategy: Quite common in today’s business environment. Businesses need to have specific price promotion programs to stimulate customer demand for services. 

– Deferred payment pricing strategy: When purchasing high-value products, businesses now offer deferred payment policies with very low or no interest to retain customers. 

III. How to determine a suitable pricing strategy

Choosing the right pricing strategy is crucial for increasing revenue and reaching customers. Therefore, business owners and their teams need to carefully research the following factors to determine what the pricing strategy should be for their company: 

– The business’s marketing objectives for the product: Expand the market more, maximize profits more, or balance the two objectives? Types of marketing strategies for businesses should align closely with this objective. 

– Financial capacity of the target customer: What price can customers accept? At this point, the business can use a sales funnel for businesses to accurately identify the target audience and their financial capacity – setting a reasonable price for each period. From there, data can be collected to answer the question of what the pricing strategy is.

– The business’s own financial capacity: How long can the business sustain a loss (if using a penetration pricing strategy), or what is the best way to recover capital the fastest? 

– Stage in the product life cycle: What stage is the company’s product currently in (introduction, growth, maturity, or decline)? to determine the main objective of the upcoming pricing strategy. 

– Level of competition: Research the number of competitors in the market as well as their products – the level of competition, and the pros and cons of competitors’ products to devise a reasonable plan. 

Through this article, 1Office hopes to have provided readers with a complete answer to the question of what a pricing strategy is, as well as how to build an effective one. Regardless of which pricing strategy is used in the business, strategists and business owners need to carefully research its advantages and risks, as well as understand their business and products to find the most suitable approach.