Pricing policy of a company is a strategic decision, one that has long-term implications, should be made with the great care, and cannot be changed easily. It is part of an-overall positioning strategy.
2. Pricing opportunities
If a company’s policy is fixed, then, by its history and market situation, major alteration to strategy will be few. Opportunities will arise with the launching of new products/ brands, and with price changes initiated either by the company or by competitors.
With a new product/ brand, much will depend on the nature and in particular the distinctiveness of the product/brand. A new product/brand is traditionally said to offer a choice of “skimming” or “penetration” pricing. In fact, a product/ brand which is similar to those already on the market and many if not most new product/ brand launches fall into that category is restricted in its pricing to what the market dictates. It is really only a truly distinctive new brand which has the freedom to choose its price level.
“Skimming” is short for skimming the cream form the market; setting a high initial price to maximize revenue while the brand has no or few competitors. Clearly this can be done only if the product offers genuine new benefits which are salient to buyers and for which they are prepared to pay. Often this means a new invention such as a drug, which can be patented. Other examples have been Polaroid cameras, electronic watches and calculator, and new artificial fibers. With industrial products, there must be some reference to existing materials or processes, and early buyers will be those companies which can make genuine savings or improvements using the new product. In consumer markets there may be a segment of buyers who are prepared to pay high prices for novelty value or the prestige of being seen as the innovator, this happened with the first electronic watches, which did not tell the time any better than mechanical ones. Very high prices suggest high profits (granting the economies of production have been worked out correctly); that will attract competitors, and it is fine art to set price levels so as to earn good profits without attracting too much competition too early.
2. Penetration Pricing
The alternative to skimming is to adopt a relatively low price which will develop the market quickly and give a dominating share to the innovator. If the market is expected to develop fast, and competition to enter quickly, then provided that the production costs support it, a penetration strategy makes sense; a dominating market share taken by the leader is extremely difficult to attack. An extreme version of penetration pricing is seen in some electronic components markets, and is sometimes referred to as “riding the experience curve down”. Where manufacturing costs are expected to fall significantly through experience effects, the initial price is set below current production cost; the low price attracts high volumes, which drive down production costs rapidly, allowing lower prices, and so on. Needless to say, this is a high-risk strategy which needs courage as well as great skill in timing and implementation.
3. Price Changes
The other area of opportunity in pricing is price changes, initiated by the company itself or by competitors. In many markets in recent years, cost inflation has meant that most changes are increases and that regular small price increases have become the noun. In competitive markets with little differentiation between products/ brands, there is little opportunity to make any significant change form the level set by the main competition. Sometimes, however, a company can make a tactical decision to delay a price increase (in inflationary times, the equivalent of a price cut) and hope to pick up market share, or being forward an increase and hope to make a little extra profit without losing sales. Good judgment of market conditions is needed.
4. Price Cut
Price cuts occur where input costs are falling. The timing of cuts may be dictated by competitors if you are not the price leader; where there is same freedom, careful timing can be used to gain share or extra profit as mentioned above. Price cutting is often used to attack the market leader, but it is a weapon which should be used with extreme care. The reactions of two sets of people must be gauged: competitors and consumers customers. If a price cut is being used to gain share, it must be a significant one; if it is small, it is unlikely to make many buyers switch; if it is large enough to move the market, the main competitors will react. No one should want a price war, except the company which knows for certain that it will win by driving competitors out of the business; this has happened in some markets such as airlines, but it is perhaps the most risky of all strategies. There is frequently a general weakness of prices in a particular market, caused by over-capacity, slack demand, or a full-scale price war if a major player decides that an advantage can be gained by slashing prices before anyone else. If stocks are high and increasing, this is a temptation, but the decision should not be taken lightly.
A price cut by a competitor may be met by changing other elements of the mix-advertising more heavily, or making special offers, extra quantity packs, premium gifts, etc. If a price cut is met, it may be met boldly, with a swinging cut at least in some areas; but such measures should always be short term, with a defined time limit