Pricing Strategy Essay Example for Free

Pricing Strategy EssayPricing refers to the process of setting a legal injury for a produce or service and more(prenominal) than any other element of your securities industrying mix, will have the longgest impact on the bar of net profit you make.Developing an effective determine outline is a critical element of food marketing because price is the only element of the marketing mix that creates sales revenue the other elements create fol scurvys and sales hoi polloi.An effective set strategy will help youmeet your profit objectivesmeet or bastinado your competitors tollsretain or increase your market sh atomic number 18match the image or reputation of your business, product or service match your offer to market demandTo arrive at a impairment for your product or service youll need toEstablish what it be to offer and deliver your products. Without this knowledge, youll have no idea whether your equipment casualtys are sufficient to non only cover all your be s, but to return a profit. Few businesses have failed because their legal injurys are too high, however, umpteen have folded because their prices werent high enough to cover costs or generate a profit. Conduct market research to establish what price your competitors are charging and what is the optimum price customers would be willing to stomach for your product. Your price will inevitably fall somewhere amongst that which is too low to produce a profit and that which is too high to generate any demand.The pricing structureA pricing structure consists of a base (or list) price and a variety of price modifiers which depend on the type of product you are change and the type of market in which you operate.The most common price modifiers are outlined beneathQuantity discount an incentive to buy more.Settlement discount an incentive to pay quickly.Promotional discount a discount for a specific tip of time.Seasonal discount an incentive to clear seasonally sensitive stock.Cash rebate an after-sale incentive linked to a specified target.Ranging allowance give to a re trafficker in return for them stocking your product.Promotional allowance for participation in a promotional campaign.Delivery payment an essence you charge for delivering the product.Credit card fee an amount you charge on credit card purchases.At the end of the day, your objective should be to achieve the best possible price for your products or function taking into accountThe assess they provide for your customers ie how they satisfy their needs and wants in terms of features, gathers, utility value and prestige. Your cost structure what is your break-even point and how lots profit do you want to make? Go to the Financial section for more information on calculating your break-even point and determining profit targets. The belligerent environment what do your competitors charge for convertible products and services? Your competitive advantage do the products or services prov ide advantages that warrant a price gift? The economic and market environment what is the level of demand in your industry?A business merchantman use a variety of pricing strategies when selling a product or service. The terms can be set to maximize profitability for each social unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Businesses whitethorn benefit from raseing or raising prices, depending on the needs and behaviors of customers and clients in the particular market. Finding the right pricing strategy is an burning(prenominal) element in running a successful business.1Method of pricing in which all costs are recovered.The price of the product includes the variable cost of each item plus a pro pileate amount of the fixed costs.Contribution margin-based pricingeditMain word Contribution margin-based pricingContribution margin-based pricing maximizes the profit derived from anindividual product, based on the difference between the products price and variable costs (the products contribution margin per unit), and on ones assumptions regarding the relationship between the products price and the number of units that can be sold at that price. The products 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).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 exertion, marketing and distribution of the product. 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. For example, if the company needs a 15 percent profit margin and the break-even price is $2.59, the price will be set at $2.98 ($2.59 x 1.15).2Creaming or skimmi ngeditIn most skimming, goods are sold at higher(prenominal) prices 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 busy to reimburse the cost of investment of the original research into the product commonly used in electronic markets when a new range, such as videodisc players, are firstly dispatched into the market at a high price. This strategy is often used to target early adopters of a product or service. archeozoic adopters generally have a relatively lower price-sensitivity this can be attributed to their need for the product outweighing their need to economise a greater understanding of the products value or simply having a higher disposable income. It will maximize profits for the better of the company.This strategy is employed only for a limited length to recover most of the investment made to build the product. To gain further market shar e, a seller must use other pricing manoeuvre such as economy or penetration. This mode can have some setbacks as it could leave the product at a high price against the competition.3Decoy pricingeditMethod of pricing where the seller offers at least three products, and where 2 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, and as a result sales of the most attractive choice will increase.4FreemiumeditMain article FreemiumFreemium is a business model that works by crack a product or service loosen of charge (typically digital offerings such as software, content, games, web services or other) while charging a bonus 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 premiu m. It has become a highly popular model, with notable success.High-low pricingeditMethod of pricing for an organization where the goods or 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 are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.5Limit pricingeditMain article Limit priceA limit price is the price set by a monopoliser 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 big 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 usuall y big than would be optimal for a monopolist,but might still produce higher economic profits than would be earned under perfect competition.The trouble 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 firms 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.Loss leadereditMain article Loss leaderA loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to broaden its marke t share as a whole.Marginal-cost pricingeditIn business, the utilization 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 peripheral 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 desire 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.Market-oriented pricingedit saddle horse a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance if the competitors are pricing their products at a lower price, then its up to them to either price their goodsat an above price or below, depending on what the company wants to achieve.Odd pricingeditIn this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the vendees/consumers no gap for bargaining as the prices have the appearance _or_ semblance to be less and yet in an actual sense are too high, and takes advantage of human psychology. A good example of this can be noticed in most supermarkets where instead of pricing at $10, it would be written as $9.99. This pricing policy is common in economies using the free market policy.Pay what you wanteditMain article Pay what you wantPay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the co mmodity.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 pricingeditMain article Penetration pricingPenetration 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.6Predatory pricingeditMain article Predatory pricingPredatory pricing, also cognize as aggressive pricing (also known as undercutting), think to drive out competitors from a market. It isillegal in some countries.Premium decoy pricingeditMethod of pricing where an organization artificially sets one product price high, in order to boost sales of a lower priced product.Premium pricingeditMain article Premium pricingPremi um pricing is the practice of memory 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 exceeding reputation, are more reliable or desirable, or represent exceptional quality and distinction.Price discriminationeditMain article Price discriminationPrice 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 leaderseditMain article Price leadershipAn observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers. mental pricingeditMain article Psychological pricingPricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.00. There are certain price points where people are willing to buy a product. If the price of a product is $100 and the company prices it as $99, then it is calledpsychological pricing. In most of the consumers mind $99 is psychologically less than $100. A minor distinction in pricing can make a big difference in sales. The company that succeeds in finding psychological price points can improve sales and maximize revenue.Target pricing businesseditPricing 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 travel 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.Time-based pricingeditMain article Time-based 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 customers 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 p aid different ticket prices for the same flight.7Value-based pricingeditMain article Value-based pricingPricing a product based on the value the product has for the customer and not on its costs of production or any other factor. This pricing strategy is frequently used where the value to the customer is many times the cost ofproducing the item or service. For instance, the cost of producing a software CD is about the same independent of the software on it, but the prices vary with the sensed value the customers are expected to have. The perceived value will depend on the alternatives open to the customer. In business these alternatives are using competitors software, using a manual work around, or not doing an activity. In order to employ value-based pricing you have to know your customers business, his business costs, and his perceived alternatives.It is also known as perceive-value pricing.Other pricing approacheseditOther pricing strategies include Yield Management, Congestion pricing and Variable pricing.Nine laws of price sensitivity and consumer psychologyedit In their book, The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden outline nightclub laws or factors that influence how a consumer perceives a given price and how price-sensitive they are likely to be with respect to different purchase decisions. 89They areReference Price Effect buyers price sensitivity for a given product increases the higher the products price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors. Difficult Comparison Effect buyers are less sensitive to the price of a known or more reputable product when they have difficulty comparing it to potential alternatives. Switching Costs Effect the higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives. Price-Quality Effect buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include image products, exclusive products, and products with minimal cues for quality. Expenditure Effect buyers are more price-sensitive when the expense accounts for a large percentage of buyers available income or budget.End-Benefit Effect the effect refers to therelationship a given purchase has to a larger overall benefit, and is divided into two parts Derived demand The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the components price.Shared-cos t Effect the smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be. Fairness Effect buyers are more sensitive to the price of a product when the price is outside the range they perceive as fair or reasonable given the purchase context. The Framing Effect buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.