Five pricing strategies: a choosing table for a small firm's launch

A small workshop about to sell its first product can fix the price in three ways: add a margin to cost, look at rivals' prices, or guess what customers will pay. The five-strategy framework in the library says these are three viewpoints to weigh together, and adds two more that apply only to new products (Kotler et al., 2021). This post turns the framework into a table and a worked example.

What are the five pricing strategies?

According to the summary in the library, taken from the textbook Principles of Marketing by Kotler, Armstrong and Opresnik (2021), there are five (Kotler et al., 2021). Value-based pricing starts from the buyer's perception of value, not the seller's cost. Cost-based pricing starts from the cost of production, distribution and selling plus a fair return for effort and risk. Competition-based pricing starts from rivals' strategies, costs, prices and offers. Skimming sets a high initial price to skim layers of revenue from the market. Penetration sets a low price for a new product.

The book puts the first three under the main pricing strategies (chapter 10) and the last two under new-product pricing (chapter 11), and treats the first three as three viewpoints to weigh together (Kotler et al., 2021). Price is one of the four Ps of the Marketing mix (4Ps); the five strategies speak only to this one P.

What does each need you to watch?

In the library's summary, each comes with a note from the book (Kotler et al., 2021). Value-based pricing is customer-oriented: price is set to match the value customers perceive. The library places the Caterpillar example, holding a high price because customers believe its machines give more value over their lifetime, in the competition-based column; I read it as an example of customer-perceived value, since it is about value, and that reading is mine. Cost-based pricing has a limitation: cost-plus ignores demand and rivals' prices. Skimming needs product quality and image that support the price, and buyers who want to buy at that price. Penetration trades a low price for many buyers and a large share; see penetration pricing.

The library does not say how to choose among the five. The rest of the post is my own way of using them, laid over a hypothetical example.

A practical way to hold the three viewpoints together, in my own words and not the book's: treat each as a question you must be able to answer before launch. What does it cost me to make and sell one? What would my target customer pay, and how do I know? What are rivals charging, and what are they offering for it? If you can answer all three, the price you choose is a decision; if one is blank, it is a guess.

A lunch-box workshop: three viewpoints, three prices

A hypothetical example, every number mine; none is market data. A small workshop is preparing to sell insulated lunch-box sets to office workers. Variable cost per set is VND 120,000 (materials 70, labour 30, packing and delivery 20). The fixed cost of the launch (design, tooling) is VND 60m. Rival products are listed at VND 150,000 to 250,000. A hypothetical survey of 40 people in the target group says about 60 per cent would pay 220,000.

The cost-based 156,000 sits inside rivals' range but well below the 220,000 customers say they would pay; going by cost alone, and if customers pay what they say, the workshop leaves VND 64,000 a set on the table. And 156,000 leaves only VND 36,000 of margin a set, so recovering the VND 60m fixed cost needs about 1,667 sets. This is how cost-plus hides demand, as the book warns.

Skim or penetrate at launch?

For a new product, the other two strategies give two scenarios, both my assumptions. Skimming: price VND 249,000, margin VND 129,000 a set, 800 sets sold in the first six months. Penetration: price VND 169,000, margin VND 49,000 a set, 2,000 sets sold.

The two scenarios are close in money after six months, so the decision turns on what the table leaves out. For skimming, the book's question is whether quality and image can support VND 249,000 and whether buyers want it at that price (Kotler et al., 2021); in the example customers said 220,000, so 249,000 is already above the survey, and that is where the risk lies. For penetration, the workshop trades a low price for many buyers and share (Kotler et al., 2021); it is worth it only if the extra 1,200 sets bring something else, such as repeat purchases or a new customer group. Those last two points are my inference.

A break-even check on the same numbers: at 249,000 each set leaves VND 129,000, so the VND 60m fixed cost is covered after about 465 sets; at 169,000 each set leaves 49,000, so it takes about 1,225 sets. Skimming therefore breaks even at well under the 800 sets assumed, while penetration needs most of its assumed 2,000 to get there. That is a small point in skimming's favour, but it rests entirely on the assumed volumes.

Five rules for choosing

I assembled the five rules below; the library's summary has no such list.

1. Set the floor from variable cost. A price under VND 120,000 loses money on every set sold, so do not go below it unless it is a deliberate, limited decision, such as clearing old stock.
2. Ask real buyers, not acquaintances. What people say they would pay is only an indicator, so try selling for real to a small group before you print a price list.
3. Read rivals' prices to explain yours, not to copy them. If you charge more than rivals, you must be able to say why customers accept it, and if you charge less, why you can afford to.
4. For a new product, skim when the product can carry a high price and penetrate when the low price buys something specific, such as repeat purchases or a share you have counted in advance.
5. Write down the date you will review the price. A launch price is a hypothesis, not a promise, and a review date is what keeps it from becoming a habit.

These rules suit a single product, a market with rivals and a firm that can test prices. They do not suit a price fixed by contract or regulation, or a subscription business, where the problem differs: see Recurring revenue and the churn problem. Charging by usage (see usage-based pricing and the post on Rolls-Royce charging by the hour) is a different way of collecting revenue and is not one of the five strategies.

Going deeper: what the post rests on

The only source for this post is the textbook Principles of Marketing, 18th edition (global edition), by Kotler, Armstrong and Opresnik (2021). The post does not use the book's own text: there is no lawful access to a copy, and pirated ones are not used. So every description of the five strategies, the Caterpillar example, the notes, the chapter numbers and the grouping comes from the site's library summary, and the post gives no page numbers. It does not know what else the book says, for instance on break-even calculation or price sensitivity.

The lunch-box workshop, the 40-person survey, the two launch scenarios and the five rules are mine; they use no real market data and have not been tested on any business. The post does not say which strategy is best; it only gives one way of running the numbers.