March 2nd, 2010 by Joern Meissner
There are three basic pricing strategies: skimming, neutral, and penetration. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing. Knowing these strategies and teaching them to your sales staff, and letting them know which one they should be using, allows for a unity within the company and a defined, company-wide pricing policy.
- Skimming Strategy
Skimming is the process of setting high prices based on value. Instead of basing your prices on your competition, a skimming price comes from within the company and the (financial) value your product represents to your customer. This strategy can be employed in emerging markets, where certain customers will always want the newest, most advanced product available. It also works well in a mature market, where customers have already realized the value of your product and are willing to pay for what they see as a worthwhile investment. Surprisingly, skimming also works in declining markets, as your diehard customers are willing to pay big bucks for what they see as an older but superior product with a dwindling supply.
- Neutral Strategy
In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. The major benefit of a neutral pricing strategy is that it works in all four periods in the lifecycle. The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. Essentially, neutral pricing is the safe way to the play the pricing game.
- Penetration Strategy
A penetration strategy is the price war; this strategy goes for the deepest price cuts, driving at every moment to have your price be the lowest on the market. Penetration strategies only work in one of the four lifecycle periods: growth. During growth, your sales are continuing to expand, as your customers want the newest product but still a product that has already tested by others in the emerging period. This is when your average customer buys a product and when the sales numbers will be the biggest. A penetration strategy works here, and only here, because you’re attracting customers to a new but proven product with cheap productions. You’re developing relationships with new customers willing to try the new product but who will only come for a lower price.
Penetration strategies fail in the other lifecycle periods by leaving possible profits in the hands of the customers. In an emerging market, your product is brand new and customers who want it first should (and will) pay for that right. In a mature market, a price war will simply start the process of endless and useless competition, destroying your profit margin. In a declining market, only those who still must have your product will purchase it, and just like in an emerging period, they should (and will) pay for that right.
Knowing which pricing strategy works best for your company is an essential tool for any pricing manager and can only be found by recognizing the lifecycle of your products. If your entire sales force is on the same page in recognizing product lifecycles and utilizing pricing strategies, your company will likely see greater returns.
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Posted in Pricing
Tags: Competition, Customer Retention, Lifecycle, Neutral Pricing, Neutral Pricing Strategy, Penetration, Penetration Pricing, Penetration Pricing Strategy, Penetration Strategy, Pricing, Pricing Strategy, Product Lifecycle, Skimming, Skimming Pricing, Skimming Pricing Strategy, Skimming Strategy, Strategy, Success
FAQs
A Neutral pricing strategy is designed to keep your prices similar to your competitors not much higher or lower. It's a safe place to hang out, right in the middle of the pack. Neutral pricing allows you to focus on competing in other ways beyond price.
What are the disadvantages of neutral pricing? ›
The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you're also not going to gain market share.
What are the three basic pricing strategies? ›
Value based pricing - Price based on it's perceived worth. Competitor based pricing - Price based on competitors pricing. Cost plus pricing - Price based on cost of goods or services plus a markup.
What is a price neutral position? ›
Neutral is an agnostic position in terms of price movements and so is neither bullish nor bearish. Sideways markets or other neutral trends can be taken advantage of through neutral trading strategies. The use of derivatives such as delta-neutral options positions can achieve a neutral portfolio.
What is the best strategy for a neutral market? ›
Popular examples of neutral options strategies include ratio spreads, calendar spreads, covered call/put, and short straddle. For instance, in a cover call strategy, traders own a stock and sell call options against it. Additionally, a covered put involves selling put options while shorting the stock simultaneously.
What is a neutral price system? ›
Prices are neutral because neither producers nor consumers can impact prices; this means that consumers can buy whatever they want and producers can make and sell whatever they want.
What does it mean to say prices are neutral? ›
The term refers to situations in which nominal prices are resistant to change even when shifts in the economy suggest that doing so would be optimal.
What are the advantages and disadvantages of pricing? ›
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.
What is the main disadvantage of cost based pricing? ›
Companies that rely purely on cost-based pricing run the risk of becoming complacent. Because cost-based pricing ignores customer demand, competitors, and sales volumes, businesses may be unmotivated to reduce costs or make the production process more efficient.
What are the 3 C's of pricing strategy? ›
The 3 C's of Pricing Strategy
Setting prices for your brand depends on three factors: your cost to offer the product to consumers, competitors' products and pricing, and the perceived value that consumers place on your brand and product vis-a-vis the cost.
What is the simplest pricing strategy? Since you only need to add up the cost to make your product and add a percentage to it, cost-plus pricing is the simplest form of pricing to use.
What is the most used pricing strategy? ›
Cost Plus Pricing
In practice, most companies use this method by calculating the cost of production and determine the profit margin they want. To use this strategy, add a limited percentage to your product production costs.
What is market-neutral pricing strategy? ›
A market-neutral strategy is a type of investment strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in one or more markets while attempting to completely avoid some specific form of market risk.
What is neutral value pricing? ›
Neutral pricing, the most common pricing strategy, means that you price so that your customers are relatively indifferent between your product and your competitor's product after all features and benefits, including price, are taken into account.
What is cost neutral pricing? ›
Cost neutral means the cost is not higher than the revenue it generates.
What is non pricing strategy? ›
Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship".
What does neutral market mean? ›
What Is Market Neutral? A market-neutral strategy is a type of investment strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in one or more markets while attempting to completely avoid some specific form of market risk.
What is a non uniform pricing strategy? ›
A nonuniform price schedule is a tariff for one or more goods in which the consumer's total outlay does not simply rise proportionately with the amounts of the goods he purchases; quantity discounts and quantity premia are permitted.
March 2nd, 2010 by 
Joern Meissner 
