Pricing process and strategies explained

Article by: Ben Janse

Last update: April 12, 2023

Pricing: this article explains the concept of pricing in a practical way. The article begins with the definition of pricing and the factors that influence pricing. You will also find information about the objective of this activity and practical examples of both pricing strategies and pricing tactics. Enjoy reading!

What is Pricing?

Pricing is the process by which organizations determine the price of the products and services it sells. This is the price that the consumer ultimately pays. It is influenced by many factors, including:

Manufacturing or production costs
Market developments
Competition
Brand
Quality

Other factors are also discussed in this article. It is a crucial part of product management and is one of the 4Ps of the marketing mix.

Pricing Objectives

From the marketer’s perspective, the ideal price for a product or service is the price closest to the maximum that customers are willing to pay. In an economic sense, this price is a price at which the bulk of the surplus shifts from the consumer to the producer. In any case, a good price strategy balances between the price floor and the price ceiling.

At a minimum, the objectives of people involved in this should take into account the following:

The company’s financial goals in terms of profitability
The degree to which price is consistent with other marketing mix variables
The extent to which consumers are willing to actually pay the price for the product
Meeting the competitors
The type of distribution channel used

Pricing Strategies

Marketers are concerned with developing an overall pricing strategy that is consistent with all of the above objectives. This strategy typically becomes part of the company’s long-term plan.

While the actual price of goods may vary within a certain price range due to reactions to different circumstances, the general approach often remains the same for a period of 3-5 years. It can also concern a longer period; 7-10 years. Broadly speaking, eight approaches to this are identified in academic literature:

Cost-based

With this strategy, a company sets the prices based on the cost of the goods or services being sold. A common example is cost-plus pricing, also called markup pricing, where a standard margin or fixed percentage is added on top of the cost price of a product or service to determine the selling price to the consumer.

Competitive pricing

Here the aim is to optimize a company’s production capacity with the aim of achieving maximum efficiency so that supply and demand can be properly matched through varying prices. In some cases, prices can then be lowered, which makes for a better competitive position.

Revenue-based

With this strategy, the marketer tries to maximize profit, or to cover costs and reach break-even. An example of such a strategy is dynamic pricing.

Customer-oriented

Customer-oriented is a strategy whose goal is to maximize the number of customers. This also includes encouraging opportunities for cross-selling and recognizing customers’ willingness to pay.

Value-based

This strategy involves the use of prices by organizations to indicate the market value of a product. The aim of value-based is to strengthen the positioning strategy in order to, for example, build or maintain a luxury image.

Relationship-based pricing

This method involves setting prices to build and maintain relationships with existing or new customers.

Socially-oriented pricing

Socially oriented revolves around encouraging or discouraging social attitudes and behaviours. A well-known example of this is raising the price of tobacco because of the social dangers it entails.

Optional product

Optional revolves around offering options to the consumer in addition to the initial purchase. A well-known example of this is found in the automotive industry. Usually, a customer chooses a base model car, after which he or she chooses a few options, such as leather upholstery or larger rims.

Pricing Tactics

The strategies mentioned above are the broad approaches to pricing. Once this approach is established, tactics are developed. Decisions on tactics are generally for the short term, rather than the strategies developed for the long term view.

A consideration that is made here is, for example, the need to clear excess stocks. Typically, line managers and other lower-level managers are given the authority to decide on these tactics, provided they remain consistent with the overall strategy.

Some exclusive brands never give a discount, because using too low prices can damage the image. That’s why premium brands more often choose strategies like bundling or giveaways.

Complementary

This pricing tactic revolves around pricing two or more complementary goods to increase sales volume. An example of this is a printer. The printer is competitively priced, but often the customer pays more for the mandatory purchase of the ink cartridges. This is done to compensate for any shortfall for the first product.

Discount

Discount is perhaps the most well-known and popular pricing tactic. The marketer or retailer offers the consumer a discounted price. Discounts come in many forms. Sometimes a consumer gets a discount for buying multiple products at the same time (2 for 1 sale). Loyalty discounts, seasonal discounts or random special offers are also popular.

Everyday low pricing

This form of pricing is popular in discount supermarkets, for example. The consumer is thus tempted not to wait for special offers or discounts.

Geographical

This tactic is used when different markets use different prices for the same product. Considerations that are made here are, for example, the average wage of the consumer or the costs of distribution to some locations.

High-low

High-low pricing refers to the tactic of offering products at a high price during an initial period, followed by offering the same product at a lower price during a specified period. The disadvantage of this tactic is that consumers become aware of these cycles over time and wait until they can buy the products cheaper.

Parity pricing

This pricing tactic refers to the process by which marketers price a product so that it is close to competitors’ prices. Companies can thus distinguish themselves more from other players in the market.

Price bundling

Price bundling, or product bundling, involves offering two or more products or services for one price. There are different types of bundles. Pure bundles are bundles whose goods can only be purchased as a package. Products from mixed bundles can be purchased separately. Bundle prices are usually lower when the products are purchased as a package, as opposed to purchasing the products in the bundle separately.

Penetration

This tactic involves betting the price low during the market entry stage. Low prices and low margins entice consumers to switch to the new provider. This allows a new company to gain part of the market share.

Skimming

Skimming is also often used when entering a new market. This tactic refers to charging high prices to recoup product development costs before competitors enter the market.

Psychological pricing

Psychological pricing is used to make a psychological impact. Price tags appear just below the consumer’s reservation price, for example $9.99, 19.99, or $199.95. This tactic is used in many different environments.

Premium

Premium pricing is a strategy to consistently offer products and services at a high price. The level of this price is close to the top of the maximum price that consumers are willing to pay.

The high price attracts consumers who are aware of their status. The price is also used to reinforce the luxury image of a product.

Product characteristics such as organic, or labels with the specific origin of the product can also be used to achieve this. Part of this price may reflect the increased price of production.

Many people are happy to pay for a premium priced product. They do this mainly because:

People are sensitive to price and believe that a high price is a reflection of quality
These customers believe that owning such a product is a sign of self-esteem
Consumers in this group demand impeccable performance and product features
Their income has risen sharply; many consumers have an ever-expanding source of income

Now It’s Your Turn

What do you think? Do you recognize the explanation about account based marketing? Are the ICPs specifically approached in your work environment? What do you think are the benefits of ABM? And the disadvantages? Which tools and techniques do you think are valuable in this process?

Share your experience and knowledge in the comments box below.

More information

Burgess, B. (2016). Driving B2B growth with account-based marketing. Market Leader, 1, 45-47.
Kumar, G. P., & Rajasekhar, K. (2020). Account based Marketing in B2B industry. J. Interdiscip. Cycl. Res, 7(2), 1154-1161.
Duncan, T., & Moriarty, S. E. (1998). A communication-based marketing model for managing relationships. Journal of marketing, 62(2), 1-13.
Doyle, P. (2009). Value-based marketing: Marketing strategies for corporate growth and shareholder value. John Wiley & Sons.

How to cite this article:
Janse, B. (2022). Pricing. Retrieved [insert date] from Toolshero: https://www.toolshero.com/marketing/pricing/

Original publication date: 04/12/2023 | Last update: 04/12/2023

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Article by:

Ben Janse

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.