There are many ways in which the price Price in economics and business is the result of an exchange and from that trade we assign a numerical monetary value to a good, service or asset. If Alice trades Bob 4 apples for an orange, the price of an orange is 4 apples. Inversely, the price of an apple is 1/4 oranges of a product The noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce (prə doos' or -dyoos') from the Latin prōdūce(re), (to) lead or bring forth. Since 1575, the word "product" has referred to anything produced. Since 1695, the word has can be determined. The following are the foremost strategies that businesses are likely to use.
Competition-based pricing
Setting the price based upon prices of the similar competitor Competition is a combat between individuals, groups, nations, animals, etc. for territory, a niche, or allocation of resources. It arises whenever two or more parties strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For example, animals compete over water products.
Competitive pricing is based on three types of competitive product:
- Products have lasting distinctiveness from competitor's product. Here we can assume
- The product has low price elasticity.
- The product has low cross elasticity.
- The demand of the product will rise.
- Products have perishable distinctiveness from competitor's product, assuming the product features are medium distinctiveness.
- Products have little distinctiveness from competitor's product. assuming that:
- The product has high price elasticity.
- The product has some cross elasticity.
- No expectation that demand of the product will rise.
The pricing is done based on these three factors.
Cost-plus pricing
Main article: cost-plus pricing Cost-plus pricing is a pricing method used by companies. It is used primarily because it is easy to calculate and requires little information. There are several varieties, but the common thread in all of them is that one first calculates the cost of the product, then includes an additional amount to represent profit. Cost-plus pricing is oftenCost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
Price = Cost of Production + Margin of Profit.
Creaming or skimming
Selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. 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 DVD, also known as "Digital Versatile Disc" is an optical disc storage media format. Its main uses are video and data storage. DVDs are of the same dimensions as compact discs but store more than six times as much data players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product/service. These early adopters are relatively less price sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration.[1]
Limit pricing
Main article: Limit price A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. 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 makeA limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. 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 strategic behavior 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.
Loss leader
Main article: loss leader A loss leader or leader is a product sold at a low price to stimulate other, profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. The price can even be so low that the product is sold at a loss. A loss leader is often a popular article. Sometimes leader is now used as a synonym for lossLoss Leader:
In the majority of cases, this pricing strategy is illegal under EU and US Competition rules. No market leader would wish to sell below cost unless this is part of its overall strategy. The idea of selling at a loss may appear to be in the public interest and therefore not often challenged. Only when the leader pushes up prices, it then becomes suspicious. Loss leadership can be similar to predatory pricing or cross subsidisation; both seen as anticompetitive practices.
Market-oriented pricing
Setting a price based upon analysis and research compiled from the targeted market. Also with the cost price.
Penetration pricing
Main article: penetration pricingThe price is deliberately set at low level to gain customer's interest and establishing a foot-hold in the market.[2]
Price discrimination
Main article: price discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where marketSetting a different price for the same product in different segments to the market. For example, this can be for different ages or for different opening times, such as cinema tickets. Market orientated pricing is also a very simple form of pricing used by very new businesses. What it involves is, setting the price of your product/service according to research conducted on your target market.
Premium pricing
Main article: Premium pricing 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 tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality andPremium 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 or represent exceptional quality and distinction.
Predatory pricing
Main article: predatory pricing Predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter theAggressive pricing intended to drive out competitors from a market. It is illegal in some places.
Contribution margin-based pricing
Main article: contribution margin-based pricing Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs , 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 firmContribution 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.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).
Psychological pricing
Main article: psychological pricing Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £6.95 . The theory is this drives demand greater than would be expected if consumers were perfectlyPricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.
Dynamic pricing
Main article: dynamic pricingA flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
Price leadership
Main article: price leadership Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to play a certain strategy without explicitly saying so. This is also known as price leadership, as firms may stay within the law but still tacitly collude by monitoring each other's prices and keeping them the same. Usually, this occursAn observation made of oligopic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following.
Target pricing
Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
Absorption pricing
Method of pricing in which all costs are recovered. The price of the product includes the variable cost Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost of each item plus a proportionate amount of the fixed costs In economics, fixed costs are business expenses that are not dependent on the activities of the business They tend to be time-related, such as salaries or rents being paid per month. This is in contrast to variable costs, which are volume-related . A form of cost plus pricing
Marginal-cost pricing
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 labour. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.
References
- ^ Kent B. Monroe, The Pricing Strategy Audit, 2003, Cambridge Strategy Publications, p.40 ISBN 978-0-273-64938-0
- ^ Kent B. Monroe, The Pricing Strategy Audit, 2003, Cambridge Strategy Publications, p.41 ISBN 978-0-273-64938-0
Categories: Pricing Categories: Marketing | Business | Market structure and pricing | Marketing Categories: Business | Service industries | Business economics
dribblegirl
Sat, 30 May 2009 13:51:03 GM
I m writing this article in the hopes of shedding some light regarding retail and on premise . pricing strategies. . It is a part of our company mission to Educate & empower the world, one bottle at a time . ...
