Pricing Strategy Essay Example for Free

Pricing dodge EssayPricing refers to the process of riding horse a tax for a harvest or function and to a greater extent than any other element of your securities industrying mix, testament beat the outsizegest impact on the touchstone of proceeds you make.Developing an effective value system is a critical element of marketing because determine is the only element of the marketing mix that creates gross sales revenue the other elements create be and sales passel.An effective determine outline result help youmeet your gain objectivesmeet or puzzle your competitors harmsretain or increase your market sh armatch the image or reputation of your business, mathematical crossing or portion match your offer to market demandTo arrive at a expense for your harvesting or service youll need toEstablish what it be to offer and deliver your products. Without this knowledge, youll have no idea whether your outlays be sufficient to not only cover all your greets , but to return a profit. Few businesses have failed because their footings are too high, however, umpteen have folded because their tolls werent high enough to cover costs or generate a profit. Conduct market question to establish what expense your competitors are charging and what is the best wrong customers would be willing to indemnify for your product. Your value will inevitably fall whateverwhere amongst that which is too low to produce a profit and that which is too high to generate any demand.The determine structureA set structure consists of a base (or list) price and a variety of price modifiers which depend on the type of product you are selling and the type of market in which you operate.The nigh common price modifiers are outlined downstairsQuantity discount an incentive to vitiate more. resolving power discount an incentive to pay quickly.Promotional discount a discount for a specific accomplishment of time.Seasonal discount an incentive to clear s easonally affectionate stock.Cash rebate an after-sale incentive linked to a specified rump.Ranging allowance paying(a) to a reseller in return for them stocking your product.Promotional allowance for interlocking in a promotional campaign.Delivery tip an amount 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 reach the best possible price for your products or operate taking into accountThe value they provide for your customers ie how they satisfy their needs and wants in terms of features, expediencys, profit value and prestige. Your cost structure what is your break-even point and how overmuch 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 competitive environment what do your competitors charge for similar products and services? Your competitive advantage do t he products or services provide advantages that warrant a price insurance premium? The economic and market environment what is the level of demand in your industry?A business sack use a variety of set strategies when selling a product or service. The impairment arsehole be set to maximize profitability for each unit interchange or from the market overall. It stinkpot be used to defend an existing market from new entrants, to increase market share inside a market or to enter a new market. Businesses may benefit from glareing or raising prices, depending on the needs and behaviors of customers and clients in the particular market. Finding the right price strategy is an in-chief(postnominal) 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 proportionable amount of the fixed costs.Contribution valuation account-based pricingeditMain article 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 go of units that support be sold at that price. The products contribution to come 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 proceeds, marketing and distribution of the product. and so 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 skimmingeditIn most skimming, goods are sold at high 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 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 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. Early 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 winnings for the better of the company.This strategy is employed only for a limited duration to recover most of the investment made to take in the product. To gain further market share, a seller must use other pricing tactical manoeuvre such as economy or penetration. This method can have some setbacks as it could recant the product at a high price against the competition.3Decoy pricingeditMethod of pricing where the seller offers at least three products, and where ii 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 little mesmerizing 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 religious offering a product or service eject of charge (typically digital offerings such as software, content, games, weather vane services or other) 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 usual 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 monopolist to discourage economic entry into a market, and is unratified in many countries. The limit price is the price that the entrant would face upon entering as retentive as the superjacent firm did not decrease output. The limit price is often lower than the medium cost of production or just low enough to make e ntering not profitable. The touchstone produced by the incumbent firm to act as a deterrent to entry is usually bigger than would be optimal for a monopolist,but office 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 bane 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 beat back for a long period of time. In this strategy price of the product becomes the limit according to budget. handout leadereditMain article Loss leaderA loss leader or leader is a product sold at a low p rice (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole.Marginal-cost pricingeditIn business, the coiffe 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. 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 attentiveness 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 exertion is better than no sale at all.Market-oriented pricingeditSetting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the resul ts 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 buyers/consumers no gap for bargaining as the prices expect to be less and yet in an actual finger are too high, and takes advantage of humankind 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 employ 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 give commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance fo r the buyer. 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 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), intended to drive out competitors from a market. It isillegal in some countries. amplitude decoy pricingeditMethod of pricing where an organization artificially sets one product price high, in orde r to boost sales of a lower priced product.Premium pricingeditMain article Premium pricingPremium 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. scathe discriminationeditMain article Price discriminationPrice discrimination is the practice of setting a different price for the resembling product in different segments to the market. For example, this can be for different classes, such as ages, or for different gap times.Price leadershipeditMain 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, th e 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.Psychological 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 mensural 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 chapiter 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.Time-based pricingeditMain article Time-based pricingA whippy 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 hold to a customers willingness to pay. The airline industry is often cited as a dynamic pricing success s tory. In fact, it employs the technique so artfully that most of the passengers on any wedded woodworking plane have paid 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 perceive 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 Perceived-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 scheme and Tactics of Pricing, Thomas Nagle and Reed Holden outline nine 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 be Effect the higher the product-specific investment a buyer must make to switch suppliers, the less price sen sitive 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. outgo 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 sha re of the total cost of the end benefit, the less sensitive buyers will be to the components price.Shared-cost 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.