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What are three of the basic pricing strategies and 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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The three basic pricing strategies are price skimming, neutral pricing, and penetration pricing. Price skimming is setting a product's price at the maximum value a customer would be willing to pay. Neutral pricing means matching a product's price to the prices of competitors. Penetration pricing involves setting a product's price as low as possible to create a "price war."

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There are a number of different pricing strategies which account for different competitive landscapes. Pricing strategy is an incredibly important aspect of the marketing mix.

Cost-plus pricing is a simple method in which a company determines the cost to make a product or service and then adds a mark-up to their costs. This is a simple way to ensure a specific profit margin on products. When the cost of the supply chain or the production process increases, the final cost of the product rises proportionally. Examples here include manufacturing products that have very specific input costs.

Competitive pricing is basing the final cost of a product on the cost of competitive products in the marketplace. This pricing strategy is used in industries where there are lots of brands, such as the toothpaste market. Pricing is a huge factor to consumers at the point of purchase, and getting undercut on pricing by a competitor can ruin a business.

Value-based pricing is when a company sets a price based on how much the customer believes the brand is worth. This is a common practice in the fashion industry. Fashion brands will often only release a tiny number of a product in order to charge very high prices for it to drive up demand, even though the value of the input does not equal the value of the final product.

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The three main pricing strategies are price skimming, neutral pricing, and penetration pricing, and they roughly relate to setting high, medium, or low prices. The factors involved in deciding to use each technique are how the market is performing (based on competition) and what your needs are as a company.

Price skimming involves setting the price of the product to the maximum price a customer would pay for it (the natural value of the product). Then, as time goes on, you can “skim” the price by lowering it based on the demand curve. This helps to recoup any extra sunk costs in the product if that is a major business need. This is also useful if you are one of the first entrants into the market with this product or have a major competitive advantage.

Neutral pricing happens when there is an equilibrium in the market, and it is when you set your prices equal to your competitors. By doing this, you set the price at a point you know consumers will buy, and you will also make profit.

Penetration pricing involves undercutting competitors. This often results in a price war. The benefit of this method is that you will, initially, gain a large portion of customers who switch to a cheaper product. After this point, your competitors will change prices, so your firm will need to be prepared to adjust and retain those customers in one way or another.

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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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