Advantages and Disadvantages of Pricing Strategies (2024)

On the surface, a product's price seems like a reasonably straightforward piece of information, communicating how much a customer needs to pay to bring an item home. But pricing strategies can be complex and sophisticated, taking into account everything from production costs to consumer attitudes. The advantages of a pricing policy lies in its ability to make your product appealing to customers, while also covering your costs. The disadvantages of pricing strategies come into play when they are not successful, either by not sufficiently appealing to customers or by not providing you with the income you need.

Geographical Pricing Advantages and Disadvantages

Geographical pricing is the practice of varying price tags based on where you sell your products. A geographical pricing strategy can grow out of a need to recoup shipping costs, which tend to grow higher as you send your offerings further afield. Or, your products may have a higher perceived value in another region, because of rarity or cache. Sometimes, obstacles to operating in a certain area may require you to raise prices to break even, such as working in areas that have prohibitive regulatory structures. Geographical pricing offers the advantage of allowing you to earn more in certain situations. This is disadvantageous, because it adds extra layers of bookkeeping, because you need to keep track of different prices in different places.

Competitive Pricing Strategy Advantages

A competitive pricing strategy positions your product in reference to other options on the market. You set your price after considering the prices of comparable products, using the product to send a message about whether your offering is a better value or of higher quality. Competition-based pricing advantages and disadvantages include the opportunity to leverage a simple tool to send a powerful message, and the danger of locking into a price that makes it hard to break even, as you undersell the competition.

Value Based Pricing Strategies

Value-based pricing can be part of a competition-based strategy, as you use price to communicate that your product has features or workmanship that make it worth more than the competition's offerings. But you can base price on value, without worrying about what competition charges. If you offer something unique or uniquely appealing, you may be able to write your own playbook when it comes to price, as long as you're able to find the customers who understand that your product is worth more and that they have the money to pay for it. Alternatively, you can incorporate value into your price by charging a fair price for a high-quality item. The benefits of pricing with value in mind are that value is somewhat subjective, so you can craft a marketing message that supports your price's value claims.

Skimming and Penetration Pricing

Skimming and market penetration are pricing strategies based on a product's newness. When a product has cache, fans are willing to pay more, so that they are among the first to use the product Releasing long anticipated products in limited quantities can help add to the buzz that makes passionate customers happy to pay more. By releasing a product that has a high price, initially, you can make the most of this initial enthusiasm. Once consumers have grown accustomed to having the product on the market and more people own it, you can reduce the price to entice a more diverse pool of buyers.

Penetration pricing takes the opposite approach, offering an initially low price to encourage customers to buy and familiarize themselves with the product. Skimming and penetration pricing offer the advantage of attracting attention when your product is especially fresh and interesting. However, these pricing strategies have the disadvantage of not being long-term strategies, because newness always fades.

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