A pricing strategy is more than the selection of an introductory price for a product or service. It is a road map that offers direction for making pricing decisions throughout the life of the brand. Ideally, pricing strategy should take into account consumer demand, competitive positioning, promotion strategy, the firm's revenue and profit goals, and the costs of production. There are three basic approaches to pricing strategy: price skimming, penetration pricing and status-quo pricing.
In price skimming, a product's price is set to exceed the price of most competitive brands, and will generally reflect the highest level the market will bear. It is most often chosen when the product is new, or when it offers features or benefits perceived as unique in the marketplace. Price skimming is frequently used by firms introducing innovative technologies. Over time, as competition increases and the novelty wears off, the high introductory price is often lowered considerably. This approach has been common in the computer and cell phone industries.
This approach is the opposite of price skimming. The idea is to achieve deep market penetration by setting the product's price as low as possible, generally lower than comparable brands. Because penetration pricing means lower profits per unit, it is normally used in conjunction with a marketing strategy designed to quickly build high sales volume and market share. It can also be effective in discouraging competition, at least in the short term.
Status Quo Pricing
Status-quo pricing aims to match, or closely approximate, the price charged by major competitors. It is frequently used by retailers offering essentially the same product array as other nearby stores. For a small firm with a product that is neither new nor unique, status-quo pricing is a low-risk option. However, this approach must be used with caution over the long term, as production costs and/or competition can increase enough to make status-quo pricing unprofitable.