What are three of the basic pricing strategies, what are examples? What factors must be considered when setting prices? Has price in today's marketplace become the most important component of the...

What are three of the basic pricing strategies, what are examples? What factors must be considered when setting prices? Has price in today's marketplace become the most important component of the marketing mix? What is the difference between sales activity and sales promotion?

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Tamara K. H. | Middle School Teacher | (Level 3) Educator Emeritus

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The three basic pricing strategies can be referred to as skimming, neutral, and penetration.

Price skimming can also be called "riding down the demand curve" ("Price Skimming"). Essentially what happens is that a company will set a relatively high price that exactly matches the product's value. Theoretically, the price is set at the maximum price a consumer is willing to pay for the product.  Over time, the price will then be lowered. Setting an initial high price that matches what a consumer is willing to pay for the product allows a company to recover "sunk costs," or costs on a product that "have already been incurred" and cannot otherwise be recovered ("Price Skimming"). Price setting works best in "emerging markets," or brand new markets, in which consumers "want the newest, most advanced product available," such as the technology market ("Basic Pricing Strategies and When to Use Them"). Price skimming will work in a developing market until competition brings forth a similar product at a lower price. However, price skimming can also work in "declining markets" because consumers will often be willing to pay top dollar for an "older but superior product with a dwindling supply" ("Basic Pricing"). One current example of a company using price skimming is Apple with respect to the iPhone. The price Apple set when it launched the iPhone has remained mostly the same over the years, and the value of the product has most definitely proved to be worth the price, even increasing in value over the years (Kirk, "Android's Penetration Vs. Apple's Skimming Marketing Strategies").

With the neutral pricing strategy, prices are set to match the prices of competitors. One drawback to this strategy is that the product is priced not based on the product's value but on the market price. Since that's the case, a company using neutral pricing will not be able to earn the maximum amount of profits ("Basic Pricing").

Finally, the penetration strategy is also called the "price war" ("Basic Pricing"). With this strategy, pricing is based on the "deepest price cuts" possible; the company strives to market a product at the price that is the lowest in comparison with all competitors.  The object is generally to set the price at one that is lower than the value of the product to draw in new customers ("Penetration Pricing"). Hence, the penetration strategy will only work when the market for the particular product is growing. During the growth stage of a product's life cycle, consumers want the newest, already-been-tested product and are persuaded by the large numbers of sales. The penetration strategy gives a company a chance to develop "relationships with new customers" who want to try a new product but are only willing to try it at a super low price ("Basic Pricing"). Many examples of the price penetration strategy in action can be seen. The most obvious example would be with respect to bargain stores, such as Wal-Mart. Wal-Mart "offer[s] new products" at prices that are much lower than their competitors' prices in the hopes that its customers will "buy more than that one product" once they enter the store (Munroe, "Penetration Pricing Examples").

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