Define and discuss the pros and cons of three of the following pricing strategies: penetration pricing, price skimming, target return on investment (ROI) pricing, competitor-based pricing, and value pricing.

Question

What will be an ideal response?

Answer 1

Penetration pricing utilizes a cost leadership advantage to compete aggressively on price. It can both draw customers from competitors and prevent new competitors from entering a market (e.g., as part of a new product introduction) making it an ideal strategy to achieve market share objectives. The downside of penetration pricing is that customers often associate price with quality and may be left with the wrong impression of a product or companies benefits.

Price skimming attempts to leverage the high quality or exclusivity of a product to enter a market at a high price point. Price skimming maximizes initial profits while lending prestige to a product to capture market share. A challenge of this strategy is to manage multi-year marketing plans to accommodate a decrease in demand and increase in competition which will drive pricing down.

Target return on investment (ROI) pricing first establishes a bottom-line profit requirement and then prices in order to achieve the target. With proper consideration of other market considerations such as price elasticity of demand (i.e., price sensitivity), marketing managers can effectively drive pricing to reach a firm's profit objectives. Target ROI pricing can be challenging due to the difficulty in determining price sensitivity. Another downside of a target ROI pricing strategy, if focused too heavily on profit maximization alone, is the potential for unethical pricing if a firm decides to greatly overprice products in short supply in the market just to maximize profits.

Competitor-based pricing requires thorough research of competitors' offerings and pricing in an attempt to discern competitors' pricing strategies. Based on the research, a marketing manager can make informed decisions to price below the competitors to gain market share or perhaps to enter the market with the goal of pricing that creates a neutral set point relative to competitors (also called stability pricing). Attempts to price too high or low based solely on competitive information can backfire and lead to customer value concerns or price wars.

Value pricing strives to use pricing in relationship to the overall bundle of benefits sought by the customer. By promoting the differential advantage of the totality of a product (e.g., image, service, quality, etc.), the marketing manager can set pricing to create an acceptance of the product's value proposition. Value pricing can not only attract customers but often leads to product loyalty. Value pricing is complex and marketing managers must be careful not to overpromise and underdeliver which creates poor value perceptions and can alienate customers.