Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a productpricingstrategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.
Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.
Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.
A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.
Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.
A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.
Key Concepts in Pricing Strategies:
Premium Pricing:
Setting a higher price for products compared to competitors to convey a sense of quality or exclusivity.
Price Skimming:
Initially setting a high price for a new product and gradually lowering it over time to maximize early profits.
Productized Services:
Transforming a product into a service with clearly defined parameters and pricing, often associated with subscription-based models.
Menu Costs:
Costs incurred by businesses when changing prices, analogous to restaurants reprinting menus due to price changes.
Price Floor:
The lowest legal price a good or service can be sold for, often seen in contexts like minimum wage.
Predatory Pricing:
Setting low prices to eliminate competition and maintain a dominant market position, often causing short-term losses.
Price Ceiling:
A limit on how high a price can be charged for a product or service, typically imposed by government regulations.
Bye-Now Effect:
The tendency for consumers to associate the word “bye” with “buy,” influencing purchasing decisions.
Anchoring Effect:
The tendency to rely on an initial piece of information (anchor) when making subsequent decisions, such as pricing.
Pricing Setter:
A company with market influence and power that can independently set prices, driving substantial sales without losing market share.
Pricing Strategies Examples And Case Studies
Premium Pricing:
Apple’s iPhone: Apple uses premium pricing for its iPhones, positioning them as high-quality and innovative devices compared to other smartphone brands.
Rolex Watches: Rolex is known for its luxury watches that command premium prices due to their reputation for quality and status.
Luxury Hotels and Resorts: High-end hotels like The Ritz-Carlton and Four Seasons employ premium pricing to offer luxurious accommodations and services.
Designer Clothing Brands: Brands like Gucci, Louis Vuitton, and Prada use premium pricing to market their fashion products as exclusive and fashionable.
Price Skimming:
New Electronic Gadgets: When a new smartphone or gaming console is released, it’s often priced at a premium to attract early adopters before gradually lowering the price to reach a broader audience.
Video Game Consoles: Companies like Sony and Microsoft may start with higher prices for their new gaming consoles and later reduce them as the product lifecycle progresses.
Streaming Services: Streaming platforms like Netflix initially launch with higher subscription fees and gradually introduce lower-tier plans to cater to different customer segments.
Electric Cars: Electric vehicle manufacturers may introduce their models at higher prices to capture the interest of eco-conscious consumers and then adjust prices over time.
Productized Services:
Subscription Boxes: Services like Blue Apron and Birchbox offer productized subscription boxes with fixed prices, delivering curated products to customers regularly.
Website Design Services: Companies offer productized web design packages with predefined features and prices, making it easier for clients to choose a suitable option.
Social Media Management: Agencies offer productized social media management services with different pricing tiers based on the number of platforms and level of service.
Copywriting Services: Freelancers may offer productized writing packages with clear pricing for different word counts and deliverables.
Menu Costs:
Fast Food Chains: When fast food chains adjust their menu prices due to inflation or other factors, they incur costs related to reprinting menus and updating digital displays.
Retail Clothing Stores: Retailers may need to update price tags and labels when changing prices for clothing items, leading to expenses related to physical store operations.
E-commerce Websites: Online retailers face costs associated with updating prices, descriptions, and images on their websites when making pricing changes.
Energy Companies: Utility providers may incur costs related to updating billing systems and communicating new pricing structures to customers.
Price Floor:
Minimum Wage: Governments establish a minimum wage to ensure that workers are paid a certain hourly rate, preventing wages from falling below a specified level.
Agricultural Products: Governments may set price floors for crops like corn or wheat to ensure farmers receive a fair income, especially during times of market fluctuations.
Artists and Performers: Some countries have price floors for performers, ensuring that artists are paid fairly for their creative work in various industries.
Airfare Regulations: Some regions may impose price floors on airfare to prevent airlines from selling tickets below a certain price, aiming to maintain competition and avoid price wars.
Predatory Pricing:
Ride-Sharing Services: A dominant ride-sharing company may lower prices significantly in certain markets to drive competitors out and establish a monopoly.
Online Retailers: E-commerce giants might use predatory pricing to undercut smaller online retailers and capture a larger share of the market.
Telecom Providers: Established telecom companies may offer temporary discounts that make it challenging for new entrants to compete and gain a foothold.
Food Delivery Apps: A well-funded food delivery app might lower delivery fees to a point where smaller competitors struggle to maintain profitability.
Price Ceiling:
Rent Control: Some cities impose price ceilings on rental properties to prevent landlords from charging exorbitant rents, ensuring affordable housing options for residents.
Healthcare Services: Governments or regulatory bodies might set price ceilings on certain medical procedures to ensure accessibility and prevent overcharging.
Gasoline Pricing: In some regions, governments may impose price ceilings on gasoline to protect consumers from sudden price spikes in times of high demand.
Basic Necessities: Price ceilings might be imposed on essential goods like food staples or utilities to prevent inflation from affecting vulnerable populations.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
