It is very difficult to ascertain precisely the pricing policies and practices followed by a business enterprise because all the policies are not in an explicit form. For instance, a company may follow the practice of charging lower prices to prevent competition in the market, but this may not be admitted publicly. Similarly, there are many other pricing policies and practices which are not laid down expressedly, but may be known by studying the behaviour of business enterprises.
The major pricing strategies which are followed by the business enterprises are discussed below:
1. Competitive pricing.
2. Penetration pricing.
3. One price versus variable pricing.
4. Market skimming pricing.
5. Follow the leader pricing.
6. Discrimination or dual pricing.
7. Premium pricing.
8. Leader pricing.
9. Psychological pricing.
10. One price versus variable pricing.
11. Price lining.
12. Resale price maintenance.
Method # 1. Competitive Pricing:
The management of a firm may decide to fix the price at the competitive level during certain situations. This method is used when the market is highly competitive and the product is not differentiated significantly from the competitive products. This situation resembles the perfect competition under which prices are determined by the forces of demand and supply.
These is no product differentiation, buyers and sellers are well-informed about the market price and market conditions, and the seller has no control over the market price. In such a situation, every firm will follow the price which is in tune with the market conditions.
The market based pricing is also used when a prevailing or a ‘customary price level’ exists. For instance, there are many soft drinks in the market which are sold to the consumers at five rupees only. In such a case, no seller may try to disturb the customary price.
Every manufacturer tries to adjust his cost to the customary price by reducing the quantity of the product. If a manufacturer raises the price above the customary level, there may be a sharp drop in the demand of his products.
Method # 2. Penetration Pricing:
Under this pricing policy, prices are fixed below the competitive level to obtain a larger share of the market and to develop popularity of the brand. Unlike skimming price policy, it facilitates higher volume of sales even during the initial stages of a product’s life cycle. This method of pricing is usually found at the retail level of distribution. Many retailers offer discounts to attract more and more customers. They operate on the principle of low markup and higher volume.
Penetration pricing may also be used at the time of introduction of a new product to prevent the entry of new firms by keeping the profit margin very low. This policy helps in developing the brand preference of the people and is useful in marketing the products which are expected to have a steady long- term market. Penetration pricing is also used to secure market share. The makers of Nirma detergent powder used penetration pricing to enter the market and raise its market share quickly at the cost of Surf.
Penetration pricing is an aggressive pricing strategy and is likely to be successful under the following conditions:
(i) The product has a highly elastic demand, i.e., the quantity sold is highly sensitive to price;
(ii) Production is carried out on a large scale to achieve low cost of production per unit;
(iii) There is a strong competition in the market; and
(iv) There is an inadequate high income market and, thus, skimming- the-cream price policy cannot be sustained.
The merits of penetration pricing are as follows:
(i) This policy facilitates achieving higher sales volume by charging lower prices.
(ii) It is an aggressive pricing strategy that helps in developing brand preference among the customers.
(iii)It helps in discouraging the entry of new substitutes in the market.
(iv) It helps in fighting the main competitor. Nirma could penetrate in the market against surf by following low price policy.
Penetration pricing has some limitations also. Very low price may bring in demand which the firm is unable to meet. Some consumers may think that the low-priced product is of poor quality as it happened in case of NANO car introduced by Tata Motors.
In case costs are underestimated, it may be difficult to raise price later on the cover the unforeseen costs. The choice between skimming and penetrating pricing will depend largely on the ease and speed with which competitors can bring out substitute products.
Method # 3. Market Skimming Pricing:
Under this pricing policy, higher prices are charged during the initial stages of the introduction of a new product. The producer fixes higher price of his product in order to recover his initial investment quickly. He may also fix higher price to reap higher profits during the introduction stage because of fear of competition at a later stage.
This policy has been quite successful in many cases because of the following merits:
(i) Demand is likely to be more inelastic with respect to price in the early stages than it is when the product is fully grown- Promotional elasticity is, on the other hand, quite higher, particularly for the products with high unit price.
(ii) Promotional expenses are quite high during the introductory stage. Skimming price policy would help in recovering such expenses speedily.
(iii) Introducing a new product with a high price is an efficient device for dividing the market into segments that differ in price elasticity of demand. The initial high price serves to skim the cream of the market that is relatively insensitive to price. Price may be reduced subsequently to attract successively more elastic segments of the market.
(iv) Higher initial price can be projected as the symbol of quality. It may be used to give a prestige image to the product. The objective of skimming price policy is to sell to ‘classes’.
(v) A producer may charge higher prices in order to restrict the demand to the level which he can easily meet. He may also use this strategy to avoid the loss resulting from the competition when the entry to that line is quite easy.
(vi) Skimming price policy serves as a strong hedge against a possible mistake in pricing. If an introductory price is too high, it is easier to reduce it. But if it is too low, it is very difficult to raise it.
(vii) Higher profits resulting from higher initial price may be ploughed back into the business for building capacity to meet the increasing demand in future.
Skimming Pricing vs. Penetration Pricing:
Skimming price fixed in the initial stages of the product launch is generally lowered because on entry of competitors in the market and introduction of better substitutes.
Skimming pricing can be distinguished from penetration pricing in respect of the following points:
(i) Penetration pricing in intended enter the market successfully and generate higher sales volume. But skimming pricing is intended to enter the market where no substitutes available and skim the cream from the market.
(ii) Penetration pricing is suitable where customers are price sensitive, but skimming policy is suitable where customers are not price sensitive.
(iii) Penetration pricing is followed where products are not differential, but skimming price policy is followed in case of high product differentiation.
(iv) Penetration pricing is followed where the product has a long life cycle. In case of skimming policy, the life cycle of the product is often short as in case of mobile set, computers, laptop, etc.
Method # 4. Keep-Out Pricing:
As the name suggests, it is pre-emptive pricing policy which aims at discouraging the other firms in the market to offer substitutes. Keep out pricing should be followed for only one product of a firm. It is a very risky venture, particularly, when the product is offered to the public at a price which is less than the actual cost of production and distribution.
This policy can be followed by big firms with huge resources at their command. But once the price at a low level is fixed, it may not be possible to increase it because of the fear of other firms introducing the substitutes.
Method # 5. Follow the Leader Pricing:
This pricing policy is generally used under oligopolistic competition where there are a small number of sellers and any one of them operates on such a scale that an increase or decrease in his turnover will appreciably affect the market price. The commodity produced by the sellers may be standardised or differentiated; the size of each seller’s output in relation to the total supply is the major test of oligopolistic pricing.
Each seller considers the probable effect of variation in his output upon the price and adjusts his production accordingly. He also considers the probable reaction of his competitors to variations in his pricing. Small firms cannot influence the market significantly. They charge the prices which are charged by the major producers.
In such a situation, undercutting of prices is dangerous because of changed reaction by the other producers. Over changing is not possible in such a situation because it is very difficult to sell the product at a price higher than one changed by other producers. Thus, every firm tries to avoid price competition in its own self-interest and in the interest of the industry. However, it is free to capture a larger share of the market through sales promotion, advertising and other promotional activities.
Method # 6. Discriminatory or Dual Pricing (Charging what the Traffic will Bear):
Some business enterprises follow the policy of charging different prices from different customers according to their ability to pay. This policy is very popular with the service enterprises, e.g., legal and medical services. Business enterprises marketing tangible products also use the policy of price discrimination successfully if they are able to divide the market in various segments on the basis of the customer’s capacity to pay.
These days it is not possible to sell the same product at different prices in different market segments because of improved means of transportation and wider communication between the market segments. The manufacturer generally try to differentiate the product through improved packaging and after-sale service.
Thus, they charge different prices for the same product by slightly differentiating the features of the product. Price discrimination is successful if the elasticity of demand in one segment of the market is lower than in another.
Method # 7. Premium or Prestige Pricing:
If a company has a premium product, i.e., superior quality, unique features, and latest technology, it can employ premium distribution channel and promotional programme along with premium pricing strategy. Premium pricing can give rich dividend when buyers are not price conscious and they are willing to pay higher price it they get a better product and wider choice.
Premium pricing is an aggressive pricing strategy. Upper middle-class buyers constitute the target market for premium pricing. In India, this approach is now adopted by renowned marketing organisations. It ensures growth and higher profits through higher customer satisfaction and service.
Method # 8. Leader Pricing:
A firm may cut prices temporarily on a few items in order to attract customers. In other words, ‘loss leaders’ are used to promote higher sales of different products offered by the firm. Leader items are generally well-known i.e., are highly advertised and purchased frequently. The term ‘loss leaders’ is used because a few popular items are offered at prices below normally expected prices.
In fact, this term is a misnomer. The term ‘profit leaders’ would be more descriptive of the goal of the policy. The rationale of the policy is that customers will come to the store to buy the advertised leader items and then stay to buy other regularly priced merchandise. The net result will be increased total sales volume and profits.
Method # 9. Psychological Pricing:
Under this policy, prices are fixed in such a way that they have some kind of psychological influence on the buyers. Customary pricing and price lining are the examples of psychological pricing. Another form of psychological pricing is Odd Pricing, i.e., prices are set at odd amounts such as Rs. 19, Rs. 49, Rs. 99, etc. For example, a customer may pay happily Rs. 299.95 for a pair of shoes and may not like to buy the same pair if it is priced at Rs. 300. Odd pricing is widely used by the publishers of paperbacks.
Method # 10. One Price versus Variable Price Policy:
In case of one-price policy, the seller charges the same price to similar types of customers who purchase similar quantities of the product under essentially the same terms of sale. The price may vary according to the quantity of purchase. However, prices charged for different quantities to different customers are the same.
For example, a seller may sell his product @ Rs. 10.00 per unit if less than one dozen units are purchased and @ Rs. 9.00 per unit if one dozen or more units are purchased. On the other hand, a seller may follow a single price policy under which the price per unit of a produced remains the same regardless of the number of units being purchased.
In case of variable price policy, the seller sells similar quantities to similar buyers at different prices. For instance, a seller may offer the same quantity of goods to old customers at lower rates. It is also possible that the final price is determined by bargaining and haggling between the buyer and seller. Generally, prices of consumer durables such as refrigerators, automobiles, televisions, etc. are negotiated.
One-price policy builds customer confidence in the seller. It also saves time of the buyer and the seller. Persons who have week bargaining power prefer the stores offering one price. A variable price policy has its own plus points. It is liked by the customers who have high bargaining power and have sufficient time for bargaining. This policy also offers the seller flexibility in his dealings with different types of customers.
Method # 11. Price Lining:
Price lining is used extensively by the retailers. The retailers usually offer a good, better and best assortment of merchandise at different price levels. For example, a retailer of readymade shirts may sell shirts at three prices: Rs. 90, Rs. 160 and Rs. 250.
The first price stands for the economy choice, the second for the medium quality and the third for the super-fine quality. Price lining simplifies pricing decisions in the future as retail prices are already set. This helps the retailer to plan his purchases to suit his price lining. It also simplify buying decisions by the customers.
Method # 12. Resale Price Maintenance:
Resale price maintenance (RPM) is the policy under which a manufacturer fixes the price of his product below which his product would not be sold to be consumers or distributors. The manufacturer of a popular brand of a product may enter into an agreement with the distributors of his product under which resale price is fixed by the manufacturer and the distributors will not sell the product below that price.
The resale price maintenance practice is generally followed by the manufacturers of consumer products such as elastic appliances, drugs, tyres and tubes, and sports goods. The basic purpose of this policy is to protect the interest of the manufacturer and to create a good image in the market of the manufacturer and his product.
Resale price maintenance is possible in case of branded products only. A manufacturer of a popular brand of a product may enter into an agreement with the distributors of his product under which resale price is fixed by the manufacturer and the distributors will not sell the product below that price.
The resale price maintenance practice is generally followed by the manufacturers of consumer products such as elastic appliances, drugs, cigarettes, liquor and sports goods. The basic purpose of this policy is to protect the interest of the manufacturer and to create a good image in the market of the manufacturer and his product.
The policy of resale maintenance of often termed as anti-consumer.
It has been criticised on the following grounds:
(i) The policy of resale price maintenance benefits the manufacturers and dealers at the cost of consumers. It deprives the consumers of the benefits that may accrue to him because of price competition among the dealers. Prices are fixed at a higher level because of which consumers have to pay higher prices.
(ii) The policy of price maintenance gives rise to monopolistic tendencies. It tries to kill competition in the market. The consumers may be exploited by the manufacturers and dealers of popular brands.