Pricing Structure
Key Takeaways
- Pricing structure is essential for determining the profitability of a business.
- Different types of pricing structures include market penetration, price skimming, psychology pricing, premium pricing, and economy pricing.
- Building a pricing structure involves understanding business objectives, conducting market research, knowing customers, and understanding competitors.
- Understanding customer preferences helps determine the best price points.
What is a pricing structure?
A pricing structure is an organizational tool that outlines the pricing of products across brands and categories, providing a strong foundation for pricing strategy.
It is designed to logically space price points and interrelate products and SKUs, allowing for effective pricing decisions.
To ensure proper positioning of price points within a product hierarchy, firms should utilize a pricing rule for all SKUs. This ensures that prices are correctly grouped and ranked, allowing for pricing strategy to be maximized.
Furthermore, a good pricing structure should take into account the influence of other factors such as market dynamics, customer demand, and economic factors. This allows firms to adjust pricing accordingly and maximize profits.
Ultimately, a well-structured pricing system can be the difference between success and failure in the market.
Types of Pricing Structure
Pricing structures are a major part of any business strategy, and there are a variety of models.
Market penetration pricing is when businesses set prices low to quickly capture a large market share.
Price skimming is when businesses set prices high to reflect a product’s features or quality.
Psychology pricing is when prices are set so that customers perceive them as being lower than they actually are.
Premium pricing is when businesses charge a premium for luxury products or services.
Lastly, economy pricing is when businesses set prices low, but without sacrificing quality.
1) MARKET PENETRATION
By utilizing market penetration through low prices, companies are able to target cost-conscious customers and secure a foothold in the market, often leading to large profits generated by mass sales. This strategy is unlike traditional pricing models, which focus on maximizing profit margins per product. With a market penetration strategy, companies are sacrificing short-term profit margins in order to acquire market share and gain a competitive advantage.
Companies that use this pricing strategy must have a well-defined target audience and the ability to produce and distribute products in mass quantities in order to realize the desired returns. The following table illustrates the key benefits of this pricing strategy and how it may be applied in specific situations:
| Benefits | Situation |
|---|---|
| Gain market share | New market entry |
| Anchor on price | Competing with established products |
| Increase sales | Low-cost products |
| Secure loyalty | High-end products |
| Discourage competitors | Re-pricing products |
2) PRICE SKIMMING
Utilizing the price skimming strategy, companies can initially set a high price for their product or service and gradually lower it over time to target various customer segments.
This strategy allows companies to capitalize on early adopters who are willing to pay a higher price for the product or service, while also allowing them to target more cost-conscious buyers at a later stage.
Sales may be lower compared to market penetration strategy, but profits may be more consistent.
Companies that use price skimming often have a strong research base and have invested heavily in their products.
This allows them to price their products or services at a premium initially, and then gradually lower the price as the product or service reaches maturity.
3) PSYCHOLOGY PRICING
Psychology pricing is a marketing strategy that uses slightly discounted prices to create a perception of the product or service being cheaper than similar products. It is a form of price skimming, where the retailer reduces the price of a product in order to attract more customers.
This strategy is used to increase sales of the discounted product, as well as other products.
The following are some variations of psychology pricing:
- Pricing slightly below a round number
- Offering seasonal discounts on limited products
- Offering a ‘buy one, get one free’ deal
- Discount pricing for a limited time
- Increasing the perceived value of the product
4) PREMIUM PRICING
Premium pricing is a strategy in which a company charges a higher price than its competitors for a product due to its superior quality. This strategy is often used to create demand for the product due to its uniqueness or being the first to market.
By leveraging the exceptional quality of its product, the company can take advantage of the premium pricing strategy to generate guaranteed profits.
The high price tag associated with the product has the potential to attract customers who are willing to pay a premium for the superior quality. They may be satisfied with the product and become repeat customers, which can create a solid customer base and provide a stable source of revenue.
Premium pricing also can act as a deterrent for customers who would normally purchase a lower-priced product, as they may be discouraged by the higher price tag and look elsewhere.
5) ECONOMY PRICING
Economy pricing is a pricing strategy that involves setting prices for products lower than those of the competition, allowing customers to purchase goods and services at a lower cost.
This pricing structure is typically used by companies that target the lower economic segment of the market and prioritize affordability.
Companies may choose to make compromises with product quality in order to keep prices down.
In some cases, companies offer variations of the same product in the same portfolio, with different prices to accommodate customers with different budgets.
Economy pricing is a popular strategy among companies that target the lower economic segment, as it allows them to attract more customers.
Building a pricing structure
Creating a pricing structure is an essential part of any business.
It is important to understand business objectives, conduct market research, know the customers, understand the relation between demand and supply, and to be familiar with the competitors.
A well-crafted pricing structure can help make a business successful and profitable.
This discussion will focus on the importance of each of these elements in building a pricing structure.
1. BUSINESS OBJECTIVES
Objectives provide an overall direction for the pricing structure and help determine the required profits and product pricing.
Examples of objectives include increasing cash flow, gaining a larger market share, and improving customer satisfaction.
Time-bound objectives should be established in order to provide a clear timeline for pricing structure development.
This will enable the company to establish realistic goals and be able to evaluate progress in a timely manner.
By doing so, the company can measure the success of the pricing structure and make necessary adjustments.
2. MARKET RESEARCH
Conducting market research is essential in order to gain a comprehensive understanding of the current market and industry in order to set appropriate product pricing.
It involves:
- Thoroughly researching the market
- Understanding the market and industry
- Identifying competitors based on pricing and quality
- Analyzing the pricing of other products
All of the above steps are crucial to ensure that the pricing of a company’s products is in line with what is available in the market.
Market research also helps companies understand the pricing strategies of competitors and identify and capitalize on opportunities to increase their market share.
3. KNOW THE CUSTOMERS
Gaining a thorough understanding of customer preferences and needs is essential for success in the industry.
To effectively create a pricing structure that works for customers, businesses must first recognize their target market and the preferences of that market.
This involves researching customer trends, likes and dislikes, seasonal variations, and difficulties they may have with current offerings.
Additionally, businesses should consider local laws and policies that may affect customer decisions and preferences.
Businesses can use this information to create a pricing structure that meets customer needs.
By understanding what customers want, businesses can determine the best price points and tailor their offerings accordingly.
Additionally, an understanding of customer preferences can help businesses design pricing strategies that are attractive, competitive, and profitable.
With a better understanding of customers, businesses can create pricing structures that are attractive, competitive, and profitable.
4. DEMAND-SUPPLY RELATION
Analyzing the relationship between demand and supply is essential to make informed decisions in the industry. The interplay between the two determines the price of a product, and the pricing structure of a company. When demand is higher than supply, prices tend to rise, thereby resulting in increased profits. On the other hand, when supply is higher than demand, prices tend to fall, resulting in reduced profits.
The following table provides a summary of the effect of the demand-supply interplay on pricing and profits:
| Demand-Supply Relationship | Price | Profits |
|---|---|---|
| Demand > Supply | Higher | Higher |
| Supply > Demand | Lower | Lower |
5. KNOW THE COMPETITORS
It is essential to have an understanding of the competitive landscape in order to make informed decisions in the industry.
Knowing the pricing structure and nature of offerings of competitors is a key element to such an understanding.
It is also important for a company to identify the drawbacks of the competitors in order to differentiate its own product.
Being able to use competitor pricing to determine pricing of own product can help the company to stay competitive and viable in the market.
Doing a thorough analysis of the market conditions and competitors is important to achieve success in the industry.
6. CREATION AND EXECUTION OF PRICING STRUCTURE
Crafting a pricing strategy that is competitive, attractive, and profitable is essential for success in the industry. There are multiple pricing methods that can be employed, such as skimming pricing, penetration pricing, premium pricing, psychological pricing, discount pricing, value-based pricing, and promotional pricing.
The pricing structure chosen should be based on the company’s goals, the products or services offered, and the industry in which the business operates. The pricing structure should also take into consideration the competitive landscape and the pricing of competitors.
After the pricing structure is established, it should be implemented and monitored to ensure that it is achieving the desired results. Additionally, the pricing structure should be evaluated periodically to ensure it remains competitive and attractive to customers.
Pricing structure Vs. Pricing strategy
Pricing structure and pricing strategy are two distinct yet related concepts. Comparing the two reveals that while pricing structure is focused on product features and customer use, pricing strategy seeks to make the product competitive in the face of potential buyers, creating a powerful incentive for them to purchase.
| Pricing Structure | Pricing Strategy |
|---|---|
| Focus on product features and customer use | Make the product competitive in the face of potential buyers |
| Establish a pricing plan | Focus on pricing competitiveness in the market |
| Set prices for each product | Establish the product as attractive to potential buyers |
The pricing structure establishes a pricing plan and sets prices for each product, while the pricing strategy focuses on pricing competitiveness in the market and making the product attractive to potential buyers. Thus, the pricing structure is necessary to set the stage for the pricing strategy, and the two must be aligned to create a successful pricing system. The pricing structure should also be flexible enough to respond to the changing market dynamics and customer needs.
To ensure the best possible pricing system, companies must understand both the pricing structure and pricing strategy and how they are interrelated. Companies should also be mindful of the impact of pricing on their overall business objectives and ensure that they are in line with the company’s goals. By taking a holistic approach to pricing, companies can ensure that their pricing system is both profitable and sustainable.
Why pricing structures are so important?
Developing an effective pricing structure is essential for companies to ensure that the right customers are aware of the value of their product and can benefit from it.
A well-structured pricing system should be designed to complement the pricing strategy and help to identify the target market.
Different product features may be more appealing to different customers, especially when the product has a wide range of applications.
By creating a pricing structure that is attractive to a certain demographic, it will ensure that customers who are likely to benefit from the product are drawn in while those who may not be a good fit are repelled.
Furthermore, a well-developed pricing structure can influence the customer’s perception of the value of the company’s offering and should make the differences between tiers clear when using tiered pricing.
Having a pricing structure that is properly tailored to a company’s target market can help to ensure that customers get the most value out of the product and are willing to pay the appropriate price.
Conclusion
Pricing structures are vital to the success of any business, as they help to ensure that revenue targets are met and profits are maximized.
It is essential to understand the various types of pricing structures that exist, as well as the differences between pricing structures and pricing strategies.
By taking the time to build a pricing structure that is tailored to the specific needs of a business, owners can ensure that profits are maximized while still providing customers with access to the products and services they need.