A business may use various pricing strategies when selling a product or service. Price can be set to maximize profitability for each unit sold or from the market as a whole. It can be used to protect the existing market from new entrants, to increase market share or to enter a new segment.
Pricing as part of the marketing mix
The pricing method is one of the most important and sought-after components in marketing theory. This helps consumers to understand the standards that the company offers its products, as well as to recognize companies that have an exceptional reputation in the market.
The firm’s decision about the price of the product and pricing strategy affects the decision of the consumer about whether to buy it or not. When companies decide to consider applying any pricing strategy, they should be aware of the following reasons in order to make the right choice that will benefit their business. Market methods for calculating prices today are tied to competition, which is extremely high, so manufacturers must be attentive to the actions of their opponent in order to have a comparative advantage in the market.
The frequency and popularity of using the Internet has significantly increased and is developing, so price comparisons can be made by customers through online access. Consumers are very picky about the purchases they make because of their knowledge of monetary value. Firms should be mindful of this factor and appraise their products accordingly.
Pricing Methods =
Pricing absorption
The cost method of calculating the price at which all investments are reimbursed. The price of the product includes the variable cost of each item plus a proportional amount of fixed costs.
Margin Price Contribution
Pricing based on margin contribution maximizes the profit received from an individual product, based on the difference between its cost and variable costs (product contribution margin per unit), as well as on the basis of assumptions about the relationship between the price of the product and the number of units that can be sold at it. The contribution of the product to the total profit of the company is maximized when choosing a price that sums up the following: (marginal profit per unit) X (number of units sold).
When pricing on the principle of "costs plus" the first price of the company determines the breakeven indicator for the product. This is done by calculating all costs associated with production, such as raw materials purchased and used during transportation, marketing and distribution of the product. Then, a mark-up is set for each unit, based on the profit that the company should receive, its sales goals and the value that, in its opinion, the customers will pay. An example of a pricing method: if a company requires a profit of 15% and a break-even price of $ 2.59, the price will be set at $ 3.05 ($ 2.59 / (1-15%)).
Skimming
In most skimming products have a higher cost, so break-even requires less sales. Consequently, marketing a product at a high price, the victim of high sales for high profits, is the “skimming” of the market.
This method of calculating the price of a product is usually used to recover the cost of investing the original research in the product: it is usually used in electronic markets when a new range, such as DVD players, is first sold at a high price. This strategy is often used to target the “first consumers” of a product or service.
Early users tend to have relatively low price sensitivity - this can be explained:
- their need for a product exceeds their desire to save;
- better understanding of product value;
- just have a higher disposable income.
This strategy is used only for a limited period of time to return most of the investment made in creating the product. In order to gain further market share, the seller must use other pricing tactics, such as savings or penetration. This method may have some disadvantages, as it can leave the product at a high price compared to competitors.
Pricing bait
A method of calculating the price of a product in which the seller offers at least three of its names, and two of them have the same or equal price. Two products with the same prices should be the most expensive, and one of them should be less attractive than the other. This strategy will force people to compare options with similar prices, and as a result, sales of more attractive, expensive products will increase.
Double ticket
The form of a deceitful method of calculating prices. At the same time, the product is sold at the higher of the two prices communicated to the consumer when accompanying or promoting it.
Freemium
This is an income model that works by offering a product or service for free (usually digital offers, such as software, content, games, web services, etc.), while charging a fee for advanced features, functionality or related products and services. The word freemium is a portmanto that combines two aspects of a business model: “free” and “premium”. This has become a very popular model with notable success.
High price
The methods for calculating the price of services offered by an organization are regularly evaluated higher than that of competitors, but with the help of promotions, advertisements and / or coupons lower prices for key products are offered. The cost reduction is intended to attract customers to the organization where the client is offered an advertising product, as well as the usual more expensive counterparts.
Keyston
Retail pricing pricing method, in which the cost is set twice as high as the wholesale price. For example, if the price of a product for a retailer is £ 100, then for sale it is £ 200.
In the competitive industry, it is often not recommended to use this method as a pricing strategy due to the relatively high profit margin and the fact that other variables need to be taken into account.
Price limit
This cost is set by the monopolist to prevent competitors from entering the market economically and is illegal in many countries. The marginal price is an indicator that a participant will encounter at the entrance until the existing company reduces production.
It is often lower than the average cost of production, or simply low enough to make it profitable. The amount produced by the operating company as a constraining factor for entry is usually greater than would be optimal for the monopolist, but it can still bring higher economic profits than would be obtained in conditions of perfect competition.
The problem with limit pricing as a strategy is that as soon as a participant enters the market, the amount used as a threat to deter entry is no longer the best response of an existing firm. This means that in order for price restrictions to be an effective deterrent to entry, the threat must be somewhat trustworthy.
One of the ways to achieve this goal is for the existing company to force itself to produce a certain quantity of goods, regardless of whether the entry takes place or not. An example of this would be if a firm enters into a union agreement to use a certain (high) level of labor for a long period of time. In this strategy, the price of the product becomes the limit in accordance with the budget.
Leader
A loss leader is a product sold at a low price (that is, at cost or lower) to stimulate other profitable sales. This will help companies expand their market share as a whole.
A leader loss strategy is commonly used by retailers to encourage buyers to buy products with higher margins to increase profits, rather than those sold at a lower price. When the cost of the “recommended brand” is offered inexpensively, retailers generally do not sell large volumes of loss leader products, and they tend to purchase less from the supplier to prevent losses for the firm. Supermarkets and restaurants are a great example of retailers that have a leader loss strategy.
Marginal cost
In business, the practice of setting the price of a product equal to the additional cost of production of an additional similar unit. In accordance with this policy, the manufacturer charges for each piece of goods sold a fee only for the added value to the total cost of materials and direct labor.
Companies often set prices close to marginal cost during periods of poor sales. If, for example, the marginal cost of an item is $ 1.00 and the normal selling price is $ 2.00, the firm selling the item can lower the price to $ 1.10 if demand decreases. A business would choose this approach because an extra profit of 10 cents per transaction is better than no sales at all.
Cost plus prices
This is a cost-based method for pricing goods and services. With this approach, direct material investments, labor costs and overhead costs for the product are summed up and added to the mark-up percentage (to create a rate of return) to get the best price.
Odd options
In this type of pricing, the seller seeks to fix the price, the last figures of which are slightly lower than the round number (also called, slightly lower than the pricing). This is to ensure that buyers / consumers do not have a gap for negotiations, since prices are apparently lower, but in reality they are too high and take advantage of human psychology. A good example of this can be seen in most supermarkets, where instead of the price of 10 pounds, it will be recorded as £ 9.99.
Pay what you want
This is a pricing system where buyers pay any desired amount for a given product, sometimes including zero. In some cases, a minimum price and / or recommended price may be set and indicated as a guide for the buyer. The latter can also choose an amount in excess of the standard price of the goods.
Giving buyers the freedom to pay what they want may seem pointless to the seller, but in some situations it can be very successful. While most uses of the board were in recession or for special promotions, efforts are underway to expand its utility for wider and more regular use.
Guaranteed maximum price contract
Calculation of the NMCC by the method of comparable market prices is a cost-type agreement (also known as an open book contract) in which the contractor is compensated for actual investments, plus a fixed fee depending on the maximum price.
The contractor is responsible for cost overruns, unless GMP has been increased through a formal change order (only as a result of additional customer capabilities and not cost overruns, errors or omissions). Savings resulting from underestimation of costs are returned to the owner.
Settlement using the comparable market price method differs from a negotiated price contract (also known as a lump sum), where cost savings are usually saved by the contractor and essentially become an additional profit.
Penetration
Penetration pricing includes setting a low price to attract customers and gain market share. Cost will be increased later as soon as this market share is increased.
A firm that uses a penetration pricing strategy evaluates a product or service less than its regular long-distance market price in order to gain market acceptance or increase its existing market share. This strategy can sometimes dissuade new competitors from entering a market position if they incorrectly perceive the price of penetration as an option for a long range.
A comparable penetration pricing strategy is usually used by firms or enterprises that are just entering the market. In marketing, this is a theoretical method that is used to lower prices for goods and services that cause high demand for them in the future. This penetration pricing strategy is vital and is recommended for use in various situations that a firm may encounter. For example, when the level of production is lower compared to competitors.
