What is pricing? What are some common pricing strategies?

Question

What is pricing? What are some common pricing strategies?

Answer 1

Price is the dollar amount your customers pay for your product or service. Pricing is more than a number: it is the process of monetizing your social enterprise’s value in the marketplace. Pricing helps define your social enterprise’s profitability, which has implications for the rest of your organization. At its core, good pricing strategy will reflect your enterprise’s overall marketing and business strategy.

There are many pricing strategies, but here are a few that you are likely to recognize:



Premium pricing –

This is a familiar strategy of offering special features and benefits to a sub-set of customers who are willing to pay more for them. You can either follow a premium pricing strategy relative to other products you offer – think about business-class vs. economy seating on airplanes – or relative to your competition – think Starbucks vs. McDonalds coffee.



Price bundling --

This is a tactic of offering several products for one price in a “bundle” to customers. Individually, a customer might value each product differently, but together, she will pay a premium. One example is café pricing – you might price soup for $3 and a sandwich for $5. Price bundling might involve offering a soup & a sandwich for $7. A customer who likes both soup & sandwiches, but doesn’t think each is worth the price you are charging individually, might still buy the combo “deal” for $7. If you didn’t offer the combo “deal”, he might only buy the soup for $3. Thus, by bundling, you encourage your customer to spend more at your café.



Complementary pricing –

Similar to above, but, in this case, you charge rock-bottom prices for one good, and then a premium for a complementary good. For example, you may attract consumers to your café by offering $1 lattes, but then tempt them with $3 gourmet biscotti.



Penetration pricing –

This involves offering customers a low price (sometimes below cost), generally early in your enterprise’s life-cycle. The theory behind penetration pricing is that, over time, your enterprise’s costs go down (the more you do it, the more likely you are to become more efficient at manufacturing your good or offering your service, or the price of technology or raw materials might go down), and thus, you will eventually become profitable. This strategy can be used if you are introducing a “new-to-world” product, and you believe that, by the time any competition enters the market, your costs will have gone down (thus you can afford to have lower prices than your competition).



Experience pricing—

This is similar to the above strategy in that you offer customers a low-price (sometimes below cost) to try your product. However, in this case, it is a one-time discount: you want new customers to “experience” your product because, once they try it, they’ll be “hooked.” Another way of accomplishing this is through giving away free samples.



“Cost-plus” pricing –

Those that have negotiated government contracts might be familiar with a term “cost-plus” pricing, which involves taking your total cost (fixed + variable) per unit and adding a % mark-up, which is supposed to represent a “fair” margin. “Cost-plus” pricing is easy to calculate if you know your true costs, but there are many problems with this approach – it is akin to pricing in a vacuum, and ignores the most important question of the product’s value in the marketplace (competitor’s pricing, value to consumers, opportunity cost, etc.).

Answer 2

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