Business

Pricing Matrix Defined

Setting the price for the products you want to sell or the services you want to offer sounds like a small piece of a larger picture, but the truth is that it contributes to the most important factor that you will need to consider.

The most important and critical part of the marketing mix is indeed Pricing. Pricing is very complex and subtle task so you have to make decision with a sound mind. Setting price is the most crucial stage and can lead to either good sales or losing both customers and revenue.

Pricing Strategy

Before organizations sell their products and services, they consider using different pricing strategies that are in line with the current market demand. Pricing strategies help organizations discover ideal and finest price of the product.

Pricing strategies can be complex at times but there are some basic rules for pricing:

  1. The final price must cover your costs, expenses and profits.
  2. Prices must be established to satisfy sales
  3. The most useful and capable way to lower price is to lower cost.

Besides these, one must considers other factors while setting prices e.g. your target consumer, your financial and strategic product, your core business objectives and competitors activity. Etc.

Pricing Matrix

The biggest question organizations face these days is the product pricing. In such a scenario where the marketplace is increasingly crowded, organizations are in a competition on how to price a product so that it can become successful and bypass their competitors. Fortunately, the pricing matrix presents a simple way to address the pricing dilemma.

There are four quadrants in a pricing matrix. By determining the position of your service or product as per your competition, organizations are able to utilize the quality and price of their items to place them where they stand in the market.

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Each quadrant plays an integral role in how a product has to be placed in market and what gains can be ripped from them.

Let’s take a closer look as well as advantages and disadvantages of each quadrant of the pricing matrix

Price Skimming

Price skimming is a pricing strategy in which an organization sets a relatively high price for a product or service at first, and then lowers the price over time. It is a secular version of price discrimination as well as yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.

Pros:  This strategy is used to optimize profits. It ensures that costs are covered.

Cons:  Timing plays an important part in utilizing this strategy. If you keep the price high for too long, customers might lose interest.

Premium Pricing

Premium pricing is more of a psychological pricing strategy that sets prices of luxury products to the expectation of niche segments of customers who connect higher prices with superior quality. This strategy is based on your belief that the product will attract image-conscious and aspirational buyers.

Pros:  High profit margin. Enhanced brand identity.

Cons:  Units and branding costs will be high, sales volumes will be low. Risk of being undercut by discount rivals.

Economy Pricing

If you produced a product which had lower overheads and costs than that of your competitors, you should be considering the strategy called economic pricing. Why? Because the low cost base will allow you to sell at a discounted price which will able you to capture high market share

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Pros:  Economic pricing strategy helps organizations to survive during times of unstableness and imbalances. Selling similar item at lower price can give you an edge over your competitors.

Cons:  Not suitable for smaller businesses as they are less likely to achieve volume of sales needed to be successful for this strategy.

Penetration Pricing

If you are launching a new product into the market where demand tends to fluctuate significantly as price changes, then you should opt for penetration pricing strategy. This strategy heavily relies on the expectation that customers will naturally switch to your lower-cost and high quality product, which will able you to penetrate market very quickly.

Pros: Fastest way to win market share.

Cons: It could be hard to raise prices as customers can show resistance. As the initial price of product id low, the profit margin can distress until the prices are increased.

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