Question

Talk about the pros and cons to different pricing strategies (for example complex, hard to implement, amount of producer surplus generated).

Answer 1

The different pricing strategies pursued by companies are as follows:

· Dynamic Pricing Strategy: This is basically a differential pricing structure where the product is priced differently in different markets and different segments. The differential pricing can be based on customer profile or demand, even competition.

• Advantages:
  • It is a flexible pricing structure
  • It is a good strategy to react to market
• Disadvantages:
  • Overall transparency in the pricing structure gets compromised
  • Trust and relationship of customers with the company can get affected

· Price Skimming: This strategy is all about keeping the prices of the product above market average at the launch of the product and gradually lowering the price as the product gets established in the market.

• Advantages:
  • The return on investment is quite high
  • The company is able to establish its brand in the market quite effectively
• Disadvantages:
  • The product is not appealing for the overall masses, at its launch
  • The early adopters of the product may also get hesitant in investing their hard-earned money on the product

· Premium Pricing: The company launches its product as a premium product by pricing it way above the market average as well as competition. Through this strategy, the company tries to project that the product is better in quality as well as functionality than the others in the market.

• Advantages:
  • Facilitates the revenues and profit margin of the company
  • The brand image of the company improves in the minds of the customers
• Disadvantages:
  • The product may become unaffordable for the middle and lower income class
  • The company may become vulnerable to cutting edge tactics of competitors where the competitors may price their product lower so as to gain customer attention

· Penetration Pricing: The company strategically prices its product at a low price than the market average to facilitate its penetration and establishment in the new market.

• Advantages:
  • Attracting customer attention to the company’s product becomes easy
  • Company can easily gain a substantial market share in the industry
  • Business strategy of the company gets facilitated by economies of scale
• Disadvantages:
  • This pricing structure can be risky for company
  • The lower pricing strategy can trigger a price war in the industry

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