Companies that base their list prices solely on costs, rather than on values placed on the product by their customers, may lose profits. Three types of demand-based pricing strategies are status pricing, penetration pricing, and market pricing.
A status pricing strategy uses a demand-oriented approach to pricing rather than a cost-oriented approach. Status pricing means the list prices may be set well above costs of production. This strategy may be effective in fashion markets where successful product differentiation has created inelastic demand. A "status" price reflects the intrinsic and extrinsic values the customer places on the product. Status pricing may also be used to maximize profits at the product introduction stage when costs are high and demand may be fairly inelastic.
Market penetrationpricing means prices are set slightly above costs to maximize sales volume. Penetration pricing has a positive effect on profits when demand is fairly elastic and there are economics of scale in production. The strategic plan may call for an increase in market share through sales growth at the expense of profits. A larger market share contributes to a firm's overall resource base as well as increasing its visibility in the market. There may be long-run payoffs for short-run limitations on profits.
Market pricing means product prices are set to match competitor’s prices. Market pricing tends to maintain the status quo in market share and profits. A firm may be operating at optimum capacity where further growth could involve prohibitive investment in production facilities or management. Complacency is a risk associated with this strategy, which may reduce an apparel firm's ability to compete. Firms that use market pricing may use nonprice competition such as cooperative advertising, special packaging, customer service. Brand names, trademarks, and celebrity endorsements to build market share while not being directly price competitive.
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