File Name: pricing policies and strategies .zip
Pricing is the process where a business sets a specific price for selling its products and services. This price is arrived at after considering a few things, such as how much it cost to manufacture the products or services, the marketplace and conditions; the business brand; the competition ; the quality of the goods and services; and how much they can get the products or services for.
- 8 pricing strategies to maximize your profits
- Pricing Policies for New Products
- Pricing Policy and Strategy
8 pricing strategies to maximize your profits
A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy.
Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability for each unit sold or from the market overall. It can also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Pricing strategies can bring both competitive advantages and disadvantages to its firm and often dictate the success or failure of a business; thus, it is crucial to choose the right strategy.
Method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs. Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs the product's contribution margin per unit , and on one's assumptions regarding the relationship between the product's price and the number of units that can be sold at that price.
The product's contribution to total firm profit i. In cost-plus pricing, a company first determines its break-even price for the product. This is done by calculating all the costs involved in the production such as raw materials used in its transportation etc. Then a markup is set for each unit, based on the profit the company needs to make, its sales objectives and the price it believes customers will pay.
Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, the direct material cost, direct labor cost, and overhead costs for a product are added up and added to a markup percentage to create a profit margin in order to derive the price of the product.
Price skimming occurs when goods are priced higher so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly sold at a high price.
This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price sensitivity—this can be attributed to: their need for the product outweighing their need to economize; a greater understanding of the product's value; or simply having a higher disposable income. This strategy is employed only for a limited duration to recover most of the investment made to build the product.
To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.
Method of pricing where the seller offers at least three products, and where two of them have a similar or equal price. The two products with the similar prices should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make people compare the options with similar prices; as a result, sales of the more attractive high-priced item will increase. Differential pricing occurs when firms set various prices for the same product depending on their consumer's portfolio, geographic areas, demographic segments and the intensity of competition in the region.
A form of deceptive pricing strategy that sells a product at the higher of two prices communicated to the consumer on, accompanying, or promoting the product. Freemium is a revenue model that works by offering a product or service free of charge typically digital offerings such as software while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium".
It has become a highly popular model, with notable successes. Methods of services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products. A retail pricing strategy where retail price is set at double the wholesale price.
In a competitive industry, it is often not recommended to use keystone pricing as a pricing strategy due to its relatively high profit margin and the fact that other variables need to be taken into account.
A limit price is the price set by a monopolist to discourage economic entry into a market. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.
The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response.
This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain high level of labor for a long period of time.
In this strategy price of the product becomes the limit according to budget. A loss leader or leader is a product sold at a low price i. This would help the companies to expand its market share as a whole. Loss leader strategy is commonly used by retailers in order to lead the customers into buying products with higher marked-up prices to produce an increase in profits rather than purchasing the leader product which is sold at a lower cost.
When a "featured brand" is priced to be sold at a lower cost, retailers tend not to sell large quantities of the loss leader products and also they tend to purchase less quantities from the supplier as well to prevent loss for the firm. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor.
Businesses often set prices close to marginal cost during periods of poor sales. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all. Odd-Even pricing is often used by sellers to portray their products to be either cheaper or more expensive then their actual value.
Sellers competing for price-sensitive consumers, will fix their product price to be odd. Contrarily, sellers competing for consumers with low price sensitivity, will fix their product price to be even. Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero.
The buyer can also select an amount higher than the standard price for the commodity. Giving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. While most uses of pay what you want have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use.
Penetration pricing includes setting the price low with the goals of attracting customers and gaining market share. The price will be raised later once this market share is gained. A firm that uses a penetration pricing strategy prices a product or a service at a smaller amount than its usual, long range market price in order to increase more rapid market recognition or to increase their existing market share.
This strategy can sometimes discourage new competitors from entering a market position if they incorrectly observe the penetration price as a long range price. Companies do their pricing in diverse ways. In small companies, prices are often set by the boss.
In large companies, pricing is handled by division and the product line managers. In industries where pricing is a key influence, pricing departments are set to support others in determining suitable prices. Penetration pricing strategy is usually used by firms or businesses who are just entering the market.
In marketing it is a theoretical method that is used to lower the prices of the goods and services causing high demand for them in the future. This strategy of penetration pricing is vital and highly recommended to be applied over multiple situations that the firm may face. Such as, when the production rate of the firm is lower when compared to other firms in the market and also sometimes when firms face hardship into releasing their product in the market due to extremely large rate of competition.
In these situations it is appropriate for a firm to use the penetration strategy to gain consumer attention. Predatory pricing, also known as aggressive pricing also known as "undercutting" , intended to drive out competitors from a market. It is illegal in some countries.
Companies or firms that tend to get involved with the strategy of predatory pricing often have the goal to place restrictions or a barrier for other new businesses from entering the applicable market. This strategy may contradict anti—trust law, attempting to establish within the market a monopoly by the imposing company.
Using this strategy, in the short term consumers will benefit and be satisfied with lower cost products. In the long run, firms often will not benefit as this strategy will continue to be used by other businesses to undercut competitors margins, causing an increase in competition within the field and facilitating major losses.
Method of pricing where an organization artificially sets one product price high, in order to boost sales of a lower priced product. Let's say there are two products, beef and pork. The organization may increase the price of beef so that it becomes expensive in the eyes of the customers. Subsequently pork becomes cheaper. Customers will then opt for cheaper pork.
Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the not necessarily justifiable tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction.
Moreover, a premium price may portray the meaning of better quality in the eyes of the consumer. Consumers are willing to pay more for trends, which is a key motive for premium pricing, and are not afraid on how much a product or service costs. The novelty of consumers wanting to have the latest trends is a challenge for marketers as they are having to entertain their consumers.
The aspiration of consumers and the feeling of treating themselves is the key factor of purchasing a good or service. Consumers are looking for constant change as they are constantly evolving and moving. These are important drivers and examples of premium pricing, which help guide and distinguish of how a product or service is marketed and priced within today's market. Price discrimination is the practice of setting a different price for the same product in different segments to the market.
For example, this can be for different classes, such as ages, or for different opening times. Price discrimination may improve consumer surplus. When a firm price discriminates, it will sell up to the point where marginal cost meets the demand curve.
There are three conditions needed for a business to undertake price discrimination, these include:. Firms need to ensure they are aware of several factors of their business before proceeding with the strategy of price discrimination.
Firms must have control over the changes they make regarding the price of their product by which they can gain profitability depending on the amount of sales made. The price can be increased or decreased at any point depending on the fluctuation of the rate of buyers and consumers.
Pricing Policies for New Products
A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability for each unit sold or from the market overall. It can also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Pricing strategies can bring both competitive advantages and disadvantages to its firm and often dictate the success or failure of a business; thus, it is crucial to choose the right strategy.
A pricing strategy considers factors like competitor actions, market conditions, consumer trends, and other variable costs to account for the pricing model of the goods. Businesses must decide on a pricing strategy before advertising products to customers. In this list, we will review the five most commonly used approaches to pricing and decide what fits your business needs. Think of it in this way. You have five competitors who sell the same product as you, and you categorize them from the most high-end brand to the affordable brands.
Pricing Policy and Strategy
Managers should start setting prices during the development stage as part of strategic pricing to avoid launching products or services that cannot sustain profitable prices in the market. This approach to pricing enables companies to either fit costs to prices or scrap products or services that cannot be generated cost-effectively. Through systematic pricing policies and strategies, companies can reap greater profits and increase or defend their market shares. Setting prices is one of the principal tasks of marketing and finance managers in that the price of a product or service often plays a significant role in that product's or service's success, not to mention in a company's profitability.
Your business has the perfect new product or service for your customers. You even have a landing page ready and great campaign ideas to boot. However, the next step isn't releasing it into the wild—it's choosing the right blend of pricing strategies to keep your profit margin at its max. There's always a fine line between prices that are too high and too low. Charging too much can increase profit but limit sales, while charging too little can boost your sales volume but limit profit.
Steps in Pioneer Pricing
HBR first published this article in November as a practical guide to the problems involved in pricing new products. Particularly in the early stages of competition, it is necessary to estimate demand, anticipate the effect of various possible combinations of prices, and choose the most suitable promotion policy. To update his original statement, Mr. Dean has written a retrospective comment, which appears at the end of this article. He amplifies his earlier article with insights from intervening years and in light of such developments as inflation. How to price a new product is a top management puzzle that is too often solved by cost theology and hunch.
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