Thursday, December 9, 2010

Price Determination , Pricing Strategies

Price Determination

Determination of the prices depends internal and external factors. Pricing goals represents internal policy. Also,
 price policy should be aligned on several other factors.
 Price Determination

Demand is the key determinant for market oriented company. Demand is the starting point for all activities. 
Simply, the average customer will be demanding different product quantities, depending on price. Law of the 
market says that demand and price are counter proportional ( price increase leads to demand decrease and vice 
versa ).

Competition has a significant influence to price determination of market oriented companies. Prices need to be 
adjusted in order to address the competition. Every company should research market and competition, prior to 
launch of the new product. Survey should include direct competitors but also the substitutes. Based on market 
survey and the strength of the company the prices can be the same, lower or higher.

Costs – While demand and competition are external factor, the costs are internal. The costs must be embedded in 
every stage of price determination process. There are several methods of cost embedding into price:
1.) Costs Plus – company calculates the costs and increase price for the specific profit.
2.) Markup – price based on cost increased for amount of specific markup percentage.
3.) Target Return Method – calculated required markup, in order to achieve return on investment.
4.) Profit Maximizing is the price where the marginal profit equals marginal cost.
5.) Breakeven Analysis – is the number of units sold that generates profit that can cover cost. This point does not 
have profit nor lost.

Life Cycle pricing approach analysis the current phase of product life in market.
1.) Entering phase usually requires higher sales prices in order to payback initial development costs. Also 
customers are willing to pay more for a new product.
2.) Growth phase is bringing the market stabilization. Prices are more or less stabile.
3.) Saturation phase leads to price decline, due to competition entrance and loss of consumer's interest
4.) Declining phase is the last part of product life cycle. Prices are still going down.

Sales Channels have the different shopping occasion. Consequently the pricing is adjusted to sales channel. For 
example, the same products is cheaper in hypermarket than on petrol station.
vernment is usually do not interfere into price determination. Exceptionally it may limit maximal prices for a 
certain products. Still, government is influencing pricing, since the taxes & custom duties are the part of the price.

Pricing Strategies

There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations.

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply.Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

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