Pricing strategy for commodities, especially right at the time of introduction is another important element of the marketing strategy. Typically in commodities, there is a range of brands available for a wide spectrum of prices. Generally there are one or two price leaders in a market. As we go lower in the price spectrum, the number of brands increases at each price level. After introduction of the brand, most of companies follow market-based pricing strategy for commodities.

Types of Pricing strategy for commodities adopted by companies

Below are the various pricing strategies adopted by commodity companies. Cost plus pricing and competition based pricing are the most prevalent ones in the market and easy to ascertain. Value based pricing needs some research into the usage patterns of the product by the consumer and can change with geography. Penetration pricing and price skimming are used during production introduction phase.

Initial Pricing strategy for commodities

Initial pricing is determined by what does the company want to achieve. If it wants quick sales numbers, then pricing at the lower spectrum makes sense (penetration pricing). However, so strong are the perceptions in the minds of wholesalers, retailers and customers formed about a product that it is very difficult to drastically change price relative to alternatives/ competitors after a certain period. Prices of commodities are always determined with respect to the price leaders. The price gap with the price leader remains more or less the same for long period despite the market seeing price fluctuations several times. Also, it is prudent to initially make more profits when the competition is not intense (price skimming).

Price Leader vs Volume Leader- Whom to follow

There are generally two types of markets, one where the price leaders are also the volume leaders and second where the lower-priced brands command the major market share and the premium priced brands have limited presence. Penetrating the market and getting some early sales is easier in the first scenario than in the second. However, positioning in the premium segment requires a whole lot of marketing effort. The switching costs are higher for consumers in the premium segment. The brand equity and thus loyalty of premium brands is already high. Company will have to invest heavily in advertisement as it will help in image building.

In markets dominated by low price leader, without a comparable price, entering the market itself is an uphill task. However, at low price, the new entrant might not be profitable as its costs might be higher than an established player in the market. The pricing strategy for commodities have to be such that the users see that the new product is giving a better value to the customers despite a higher price. Influencers like contractors and architects in case of building materials will have to be lured to promote the new brand. To operate at low price means that the input costs also have to be low, which means that all cost centers have to be very efficient.

Discounts for channel partners- Important aspect of pricing strategy for commodities

The pricing strategy for commodities becomes more complicated because of the various types of discounts floated by competitors. Often the billing price of the company has no correlation with the existing wholesale prices in the market. What is more important is the landing cost for the wholesalers. As part of the pricing strategy, companies need to closely monitor their wholesale and retail price. This will help to maintain the desired positioning in the market. Companies need to periodically adjust the billing price and discounts. This ensures that price fluctuations do not affect the wholesalers and retailers earnings per unit. They need to conduct marketing activities appropriate to maintain the brand positioning in the market.

Pricing strategy for commodities must also consider the influence of a few stakeholders in the market. Companies must also ensure that a big wholesaler does not disturb the prices in the market as it shakes the confidence of small retailers in the control mechanisms of the company. There should not be arbitrage opportunity for the wholesalers by way of bringing material from one region and selling in another. This becomes important because commodity prices vary drastically every few kilometers due t high freight involved in their transportation.