Types of Pricing Strategies

Cost plus pricing strategy

The fixed profit percentage is added to the product and product is offered into the market. There are two methods of setting price under this strategy either a percentage of profit is added to cost price or selling price of product.

Advantages of cost plus pricing strategy

1.Profit is known

This method is investor knows the profit on investment how much he will earn on his investment. The ultimate need of the investor to earn a profit from the investment is satisfied by adopting this strategy.

2.Suitable for big contraction contract bidding: -

The big project involves big investment therefore it is suitable method to calculate the profit from a construction contract using this method and offering a bid for the contract.

Disadvantages of cost plus pricing strategy

1. Ignore the competitor price

This method ignores the prices in the market. You are in the market so you need to compare the prices before setting price of your product. The prices set in isolation will bring a disaster result for your product.  The competitor prices play important role to decide the market share.

2. Ignore Demand

This method ignore the market demand which is one of the more important factor of setting prices if you will not adjust the price according to demand there is fair chance that your product will lying the market.

Marginal cost plus profit

Under this method a profit margin is added to variable cost.

Advantages of Marginal cost plus profit Strategy

1.Short term boost in sales

This method is really helpful to give a short term boost to your product sale by adjusting profit to your variable cost and offer reduced price in the market. Some industries are offering a very low percentage of profit therefore by adjusting the profit margin on marginal cost can attract huge demand for your product. The short term raise will also have positive impact on long term sale as some customer will be retained by you as some customer has low tendency for switching for short term gain.

2.Suitable in low fixed cost

This method is very helpful to earn high profit if your fixed cost is low. The high sale volume will increase contribution and after deducting the low fixed cost your book will be showing healthy profit.

3.Raise demand for off peak

This method is really helpful to generate extra profit for off peak hour, a small percentage of profit is added to variable cost and this will result in extra contribution. The off peak usage may also raise the demand of peak hour because of new customer are using the product and those customer will also put some share in peak hour. The famous example for this practice is telecom operator is offering lower rate at off peak time.

Disadvantages of marginal cost plus profit strategy

1.Market force is ignored

This method ignores the market force like the competitor price and demand factor which play very important role in the pricing. The prices cannot be decided in isolation. This is real world and real market and due consideration must be given to market forces.

 2.Fixed cost is ignored

The fixed cost is important in many industries. The profit margin on variable cost is not necessarily will result in overall profit. Especially in the industry which involves high fixed cost the small percentage on variable cost is not going to recover the fixed cost.

3.Skimming price Strategy

This strategy is based on the fact some people are interested to pay high price for a new product introduced in the market. Therefore a high price is charged at the time of introduction and with the passage of time the prices are reduced.

Disadvantage of skimming price strategy

1.Brand image is at stake

The charging very high prices will bring a bad image of the brand for charging unnecessary high price for the product.

2.Future product launch problems

The charging very high prices and then lowering down with the passage of time will have negative impact on future launch of product. The customer will not willing to pay high price for next product with a view that prices will come down sharply after sometime.

3.Not suitable for low price product

This strategy will not work for the lower price product where there are many options available to the customer and lower prices offered to public will not attract the customer as the prices difference is not going to be material for the customer.

4.Not suitable in competitive market

This strategy will not work in high competitive market because in the high competitive market the competitor is going to react quickly .The competitor will get the maximum share by  reducing the prices . This strategy will only work in the high competitive market if your product offers some additional features as well.

5.Not suitable in price conscience market

Some markets are really price conscience so this strategy will not work in those markets. The market where the income level is low there is little chance that strategy will produce the desired result because low income person will not pay extra price for a product rather he would wait for price decline.

4.Market penetration Strategy

The market penetrating focus on the market capture .under these strategy lower prices are offered to the public with a view to raise high demand for the product. This strategy discourages the competition in the market. The prices are low so there is not charm for the competitor to enter in the market.

Advantages of market penetration Strategy

1.High share of market

This strategy is really helpful in getting the high share of the market for a new product. The higher share of market will result in high volumes of sales. According to the basic concept of marginal costing high volume of sales are better than low volumes because with the help of high volume you can earn high contribution and after deducting fixed cost from the contribution the company will earn high profit.

2.Discourages Competition

The lower prices discourage the competitor entry in the market because it is very risky for competitor to enter in a market with low profit margin. The competitor usually prefers the high profit market with reasonable growth opportunity.  The competitor will find it really difficult to capture the market share which is already held by existing company with low prices. Therefore the company will enjoy high profit with high volumes of sales due to monopoly.

Disadvantages of market penetration Strategy

1.High Growing Market

This strategy will not work in high growing market and competitor will react accordingly. The new entry cannot be avoided with low prices if the market has a lot of growth opportunity for example the telecom sector almost in every country of the world four to five companies can get their share even by offering higher prices than competitors.

2.Price is only one Factor

The price is only one of the factors for capturing the market. There are also other factors for example a brand name if branded competitor enter in the market even with the high price there is fair chance that he will lead the market. The other factor is product quality and features for example if your competitor enters in the market with improved product with same price or relatively high price then competitor will get his share from the market.

3.Low price may result in High loses

The lower prices are possible by keeping the profit margin low. This situation may result in heavy loses if there is fall in demand. The profit margin should be sufficient enough to cover the fixed cost as well. Some company’s takes into account only the marginal cost for pricing decision and this situation may lead for heavy losses if the due consideration is not given to fixed cost.