Pricing Structure: Examples & Overview

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  • 0:00 Pricing Framework
  • 0:20 Pricing Objectives
  • 2:04 Pricing Strategies
  • 3:31 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Companies use different pricing structures to achieve different objectives. In this lesson, you'll learn about some different pricing structures and be provided examples.

Pricing Framework

Price is simply the value you give in exchange for a product or service. Price is not static; it can change depending on the circumstances. Things such as regulatory requirements, competition, consumer reaction, and your overall objectives and strategy for increasing sales will affect your pricing.

Pricing Objectives

Pricing objectives are aligned with the company's overall goals. Let's take a quick look at some pricing objectives (structures):

Competitive pricing is just matching the price of your product with the price set by the industry leader. Since prices will be about the same, you will focus on other product attributes to differentiate your product, such as quality and customer service.

Prestige pricing involves pricing your product high so that only wealthier customers can afford it. You attempt to use the high price and limited availability to enhance your product's image, causing the product to be viewed as a status symbol. A classic prestige product is a Rolex watch or Bentley.

Profitability pricing is designed to maximize your profit. The formula to achieve this is profits = revenue - expenses (P = R - E). You have to monitor price and volume of sales carefully, as setting the price too high will reduce sales volume, resulting in lower profits. If you have a large market share, this is a viable option. It can be argued that oil exporting countries use this technique.

Volume pricing is when you forgo the highest price possible in exchange for sales volume with a particular customer. You anticipate that increases in sales volume will more than make up for the lower profit margins. Volume purchases also increase customer loyalty and reinforce your name, as the product is used longer. Volume pricing is common in industrial transactions. For example, you may order tens of thousands of screws at a deep discount or order hundreds of tons of refined iron to manufacture steel.

Pricing Strategies

Pricing strategies are designed to achieve more specific goals on a one-off basis. Let's take a look at some strategies:

Penetration pricing is a strategy where you aggressively price your product substantially lower than competitor products with the objective of quickly obtaining a large market share. This strategy is often employed when a company enters a new market. Once the market share objective and customer loyalty has been established, the price may be gradually increased.

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