To understand a pricing matrix, let's do a quick arts and crafts project. Grab a black sheet of paper. Draw a large square on the page. Now dissect that square in half with a vertical line down the middle of the square. Now bisect that square in half with a horizontal line down the middle of the square. You should now have four squares on you page. Label the x axis (horizontal line) as quality. Label the y axis (vertical line) as price. Label the square in the upper right hand corner as "Penetration". Label the square in the lower right hand corner as "Premium". Label the upper left hand corner as "Economy". Label the lower left hand corner as "Skimming". You have now created your very own pricing matrix.



Economy pricing: Low quality and low price. This would be the no-frills pricing, think of Wal-Mart or Southwest Airlines. Compare this to Nordstrom and first class on Virgin Airlines.

Penetration pricing: High quality and low price. This strategy entails initially setting a lower than market price to gain entry into the market. Think back to when the Japanese initially introduced cars into the U.S. market. They were cheaper cars, but with equal or better equality. Now Toyota is poised to become the number one selling car manufacturer in the U.S.

Price skimming: Low quality and high price. With this strategy a company will set a relatively high price initially and then reduce the price over time. Over time, they are able to get consumers at every price point. The perfect example of this is the Apple iPhone, it was originally $499 when it was introduced. Apple is now introducing the second version on July 11th at a price of $199.

Premium pricing: High quality and high price. Every luxury brand follows this pricing strategy, which is keeping the price of a product or service high, so that buyers will favorably perceive it as superior or exclusive. Think of Coach or Bentley or even the Ritz Carlton.

How to use the matrix:

Step One: Determine where you are on the grid. You might have products or services that fall in one or more categories.

Step Two: Determine which quadrants your competitors fall into

Step Three: Determine holes in the market. Do you and your competitors fall under the premium and penetration quadrant? Then, there might be opportunities in the economy and skimming quadrants. What products or services could you introduce to take advantage of these "holes" in the marketplace.

Step Four: Determine if you can have products or services that would fall into every quadrant. For example, Toyota has a Toyota Corolla (Economy), a Prius (Skimming), and Lexus (Premium).

How do you know if a change in pricing strategy will be successful?

Well you don't know what is going to be successful. The best thing is to do your research upfront before investing too much in a new pricing strategy or product or service. The three biggest questions are:

1. Is there a market for it?

2. How can I reach that market?

3. Do you have the talent and resources in order to reach that market?

So give some thought to your pricing strategy. What is the cost of increased market share, more customers, higher revenue, and increased profits - priceless.

Sources Pricing matrix picture - www.marketingteacher.com

Copyright (c) 2008 Aisha Jones Scheffel