Pricing Policies & Procedures

by Jim Woodruff - Updated October 25, 2018
a supermarket produce display with broccoli, cauliflower and many carrots with a price sign

When pricing a product in the marketplace, a company must decide on a strategy. Will the product be positioned as a high-priced luxury item or will it use a low price to beat the competition and gain market share? The decision is critical. The choice of pricing policies determines the methods of distribution and the size of advertising and marketing budgets.

A marketer must have a thorough understanding of the market. What are the demographics? How strong is the competition? What are the strengths and weaknesses of the product? How will the product be positioned in the minds of consumers?

Offer the Lowest Price

One pricing model is to set prices at the lowest possible point that still allows a minimal profit. The objective is to dominate the market and sell a high volume of products. Walmart is an example of this low-price, high-volume strategy.

Small businesses have difficulty using this pricing strategy because they don't have the infrastructure or large advertising and marketing budgets like Walmart and cannot generate the sales volume needed to make a profit at low prices.

Penetrate to Gain Market Share

Similar to the low-price strategy, companies use penetration pricing to undercut the competition and gain market share when introducing a new product. Marketers use this strategy to get consumers' attention and persuade them to buy the product. While this pricing policy may result in losses at first, the idea is to raise prices after gaining market share.

An example is Frito-Lay's introduction of its Stax potato chips. When the product was first introduced, it was priced at 69 cents. After a few months on the market, the price was raised to $1.29.

One downside to this strategy is that the customers who were initially attracted to the low prices may not be loyal. They might switch to cheaper brands when prices are raised.

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Use Premium Pricing With Competitive Advantages

At the opposite end of the pricing strategies spectrum is the premium pricing model. This strategy is used when marketers are introducing new products that have well-defined advantages over competitor products. The premium pricing method aims to convince consumers that the new product is superior to its competition and is worth the premium price.

The cell phone market is an example of premium pricing strategies wars. Apple phones command a higher price because consumers believe the features are worth more, and they're willing to pay for them. However, Samsung is a strong competitor and is never too far behind in offering new phones with the same features to compete with Apple.

Price Skimming Maximizes Profits

Similar to premium pricing is the price-skimming strategy. Marketers use this strategy to introduce a new product that has few competitors in the market. This approach uses a high price when introducing the product to maximize profits before the competition brings out their own products and prices begin to drop.

Bundle Pricing Model Adds Value

Companies that have product lines with complementary items sometimes use the strategy of bundle pricing. With this policy, the company combines several products to sell at a fixed price that is less than if the products were all purchased separately.

Managers use a bundle strategy to sell products that are not moving well or may not sell at all by themselves. For example, take cable television. Cable providers do not offer a lot of options to buy individual channels. If they do, the price for a single channel is usually high. Instead, you have to purchase a package that contains the channel you want. This means you get access to another 200 channels in which you don't have any interest.

Selecting a pricing strategy is an important decision for any company. The choice determines the types of advertising and marketing campaigns to pursue and the budgets needed to succeed in the market. A mistake can result in losses and the ultimate demise of products.

About the Author

James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.

Photo Credits

  • carrots with price image by Jo Ann Koch from Fotolia.com
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