Pricing Method: Some Alternatives

Selecting the right pricing method for your product(s) is as important to your business as producing a product that is good quality and that the market wants; as hiring good sales staff; as having control of your costs; and as completing a competitive intelligence analysis.

The pricing method you select can help your business earn sales revenue and gain market share. Pricing is an important marketing mix element.

Four Alternative Pricing Strategies

1. Generic or Economy Pricing

• What it is: Commonly used in the consumer industry, this pricing strategy introduces generic, no name brand items at economy pricing.

• Why and When to use it: Almost like a loss leader strategy, you may wish to use this approach to bring customers to you - they will come for the perceived value of the low price. Make sure that you have other higher value, higher price items to sell. Also make sure you can produce the generic or economy priced products at very low cost; unlike the loss leader approach this pricing should not be at below cost.

2. Differential Pricing

• What it is: Differential pricing is where the same product is priced differently by customer,by area (or both), or by market segment.

• Why and When to use it: You might choose to charge a different price for your product in your 'home' market than a market where you are a secondary or tertiary supplier. You might choose to structure your price differently for large buyers who can buy a much larger volume of your product than smaller buyers. You might choose to sell your product for a different end use and therefore a different market segmentation.

  Each of these differences can translate to differential pricing strategies. This strategy could be used through the growth, maturity and declining stages of the product life cycle.

3. Premium Pricing

• What it is: This price is an indicator of the high value, exclusive nature of the product. Luxury goods are often in this category - high end Jaguar car, Armani, Coach are all examples of high end, luxury goods in their product line categories.

• Why and When to use it: You can only use this premium pricing strategy if you have a premium product and if your market recognizes it as a premium product. It is unlikely that you will get your premium price in the declining stage of your product's life-cycle.

4. Captive Product or Companion Product Pricing

• What it is: Manufacturers of products such as razors or dvd players or tape dispensers will price those products low and then charge higher prices on the companions (razor blades, dvds, tape, etc.).

• Why and When to use it: If you have products that have companions in your product line, you can effectively use this strategy. However try to be first in the market or try to have some unique features and benefits that are not easily duplicated because your competitors will quickly follow your strategy.

These four pricing tactics are alternative strategies to some of the other tactics discussed on this site.

Making your decision in terms of which pricing method to use for your product and in relation to your competitors and to your buyer behavior is key to success in managing your small business operation.

Do not make your decision until you have tested your proposed price elasticity or inelasticity. Do not make your decision until your competitive intelligence indicates the potential and likely responses of your competitors. Learn to understand and predict your buyers' behavior.

This all sounds so very complicated and detailed - and unfortunately it is. Getting the price wrong can cost you sales and/or profit.

Plan your price method to choose the right price strategy for your business.

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