Price gouging is a pejorative term referring to when a seller spikes the prices of goods, services or commodities to a level much higher than is considered reasonable or fair, and is considered exploitative, potentially to an unethical extent. Usually this event occurs after a demand or supply shock: common examples include price increases of basic necessities after hurricanes or other natural disasters. In precise, legal usage, it is the name of a crime that applies in some jurisdictions of the United States during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits. In the former Soviet Union, it was simply included under the single definition of speculation.
The term is similar to profiteering but can be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.
The term is not in widespread use in mainstream economic theory, but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. Alternatively, it may refer to suppliers’ benefiting to excess from a short-term change in the demand curve.
Predatory pricing (also undercutting) is a risky and dubious pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. Theoretically if competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The so called predatory merchant then theoretically has fewer competitors or is even a de facto monopoly.
Nowadays predatory pricing is considered anti-competitive in many jurisdictions and is illegal under competition laws. However, it can be difficult to prove that prices dropped because of deliberate predatory pricing rather than legitimate price competition. In any case, competitors may be driven out of the market before the case is ever heard.
A business can use a variety of pricing strategies when selling a product or service. The price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market.
Pricing is one of the most vital and highly demanded component within the theory of marketing mix. It helps consumers to have an image of the standards the firm has to offer through their products, creating firms to have an exceptional reputation in the market. The firm’s decision on the price of the product and the pricing strategy impacts the consumer’s decision on whether or not to purchase the product. When firms are deciding to consider applying any type of pricing strategy they must be aware of the following reasons in order to make an appropriate choice which will benefit their business. The competition within the market today is extremely high, for this reason, businesses must be attentive to their opponent’s actions in order to have the comparative advantage in the market. The technology of internet usage has increased and developed dramatically therefore, price comparisons can be done by customers through online access. Consumers are very selective regarding the purchases they make due to their knowledge of the monetary value. Firms must be mindful of these factor and price their products accordingly.
Different Types of Pricing Strategy
Pricing is one of the four elements of the marketing mix, along with product, place and promotion. Pricing strategy is important for companies who wish to achieve success by finding the price point where they can maximize sales and profits. Companies may use a variety of pricing strategies, depending on their own unique marketing goals and objectives.
Premium pricing strategy establishes a price higher than the competitors. It’s a strategy that can be effectively used when there is something unique about the product or when the product is first to market and the business has a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle.
A penetration pricing strategy is designed to capture market share by entering the market with a low price relative to the competition to attract buyers. The idea is that the business will be able to raise awareness and get people to try the product. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of-mouth and create awareness amid a crowded market category.
Economy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whose brand is based on this strategy. Aldi, a food store, is another example of economy pricing strategy. Companies take a very basic, low-cost approach to marketing–nothing fancy, just the bare minimum to keep prices low and attract a specific segment of the market that is very price sensitive.
A valuation technique which assigns a low price to selected products. Economy pricing is widely used in the retail food business for groceries such as canned and frozen goods sold under generic food brands where marketing and production costs have been kept to a minimum.
Businesses that have a significant competitive advantage can enter the market with a price skimming strategy designed to gain maximum revenue advantage before other competitors begin offering similar products or product alternatives.
Psychological pricing strategy is commonly used by marketers in the prices they establish for their products. For instance, $99 is psychologically “less” in the minds of consumers than $100. It’s a minor distinction that can make a big difference.
Status Quo Pricing
Status quo pricing is when you choose to sell your products at a set price that everyone else sells their product for. This pricing is used when no one wants to “rock the boat” and possibly set off a price war.