Pricing Strategies
Pricing Strategies
Competition based pricing
Setting the price based upon prices of the similar competitor products.
Competitive pricing is based on three types of competitive products: * Products having lasting distinctiveness from competitor’s product. Here we can assume * The product has low price elasticity. * The product has low cross elasticity. * The demand for 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 products. Assuming that: * The product has high price elasticity of demand. * The product has some cross elasticity of demand. * No expectation that the demand of the product will rise.
Cost plus pricing
Cost 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 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.
AC + Profit markup
It is lower than profit maximizing level of pricing
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 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. 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
Competition based pricing
Setting the price based upon prices of the similar competitor products.
Competitive pricing is based on three types of competitive products: * Products having lasting distinctiveness from competitor’s product. Here we can assume * The product has low price elasticity. * The product has low cross elasticity. * The demand for 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 products. Assuming that: * The product has high price elasticity of demand. * The product has some cross elasticity of demand. * No expectation that the demand of the product will rise.
Cost plus pricing
Cost 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 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.
AC + Profit markup
It is lower than profit maximizing level of pricing
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 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. 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