Pricing strategies - Wikipedia

A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, ... Pricingstrategies FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Approachtosellingaproductorservice SalesbeingmadeatSoulardMarket,St.Louis,Missouri,drawingbyMargueriteMartyn,1912 Abusinesscanuseavarietyofpricingstrategieswhensellingaproductorservice.Todeterminethemosteffectivepricingstrategyforacompany,seniorexecutivesneedtofirstidentifythecompany'spricingposition,pricingsegment,pricingcapabilityandtheircompetitivepricingreactionstrategy.[1]Pricingstrategiesandtacticsvaryfromcompanytocompany,andalsodifferacrosscountries,cultures,industriesandovertime,withthematuringofindustriesandmarketsandchangesinwidereconomicconditions.[2] Pricingstrategiesdeterminethepricecompaniessetfortheirproducts.Thepricecanbesettomaximizeprofitabilityforeachunitsoldorfromthemarketoverall.Itcanalsobeusedtodefendanexistingmarketfromnewentrants,toincreasemarketsharewithinamarketortoenteranewmarket.Pricingstrategiescanbringbothcompetitiveadvantagesanddisadvantagestoitsfirmandoftendictatethesuccessorfailureofabusiness;thus,itiscrucialtochoosetherightstrategy. Contents 1Modelsofpricing 1.1Absorptionpricing 1.2Contributionmargin-basedpricing 1.3Costpluspricing 1.4Creamingorskimming 1.5Decoypricing 1.6Differentialpricing 1.7Doubleticketing 1.8Freemium 1.9High-lowpricing 1.10Keystonepricing 1.11Limitpricing 1.12Lossleader 1.13Marginal-costpricing 1.14Odd-Evenpricing 1.15Paywhatyouwant 1.16Penetrationpricing 1.17Predatorypricing 1.18Premiumdecoypricing 1.19Premiumpricing 1.20Pricediscrimination 1.21Priceleadership 1.22Psychologicalpricing 1.23Slidingscale 1.24Targetpricingbusiness 1.25Time-basedpricing 1.26Time-sensitivepricing 1.27Value-basedpricing 1.28Variablepricingstrategies 1.29Yieldmanagementstrategies 1.30Performance-basedpricing 2Ninelawsofpricesensitivityandconsumerpsychology 3References Modelsofpricing[edit] Absorptionpricing[edit] Methodofpricinginwhichallcostsarerecovered.Thepriceoftheproductincludesthevariablecostofeachitemplusaproportionateamountofthefixedcosts. Contributionmargin-basedpricing[edit] Mainarticle:Contributionmargin-basedpricing Contributionmargin-basedpricingmaximizestheprofitderivedfromanindividualproduct,basedonthedifferencebetweentheproduct'spriceandvariablecosts(theproduct'scontributionmarginperunit),andonone'sassumptionsregardingtherelationshipbetweentheproduct'spriceandthenumberofunitsthatcanbesoldatthatprice.Theproduct'scontributiontototalfirmprofit(i.e.tooperatingincome)ismaximizedwhenapriceischosenthatmaximizesthefollowing: (contributionmarginperunit)×(numberofunitssold) Incost-pluspricing,acompanyfirstdeterminesitsbreak-evenpricefortheproduct.Thisisdonebycalculatingallthecostsinvolvedintheproductionsuchasrawmaterialsusedinitstransportationetc.,marketinganddistributionoftheproduct.Thenamarkupissetforeachunit,basedontheprofitthecompanyneedstomake,itssalesobjectivesandthepriceitbelievescustomerswillpay.Forexample,ifthecompanyneedsa15percentprofitmarginandthebreak-evenpriceis$2.59,thepricewillbesetat$3.05($2.59/(1-15%)).[3] Costpluspricing[edit] Mainarticle:Cost-pluspricing Costpluspricingisacost-basedmethodforsettingthepricesofgoodsandservices.Underthisapproach,thedirectmaterialcost,directlaborcost,andoverheadcostsforaproductareaddedupandaddedtoamarkuppercentage(tocreateaprofitmargin)inordertoderivethepriceoftheproduct. Creamingorskimming[edit] Mainarticle:Priceskimming Priceskimmingoccurswhengoodsarepricedhighersothatfewersalesareneededtobreakeven.Sellingaproductatahighprice,sacrificinghighsalestogainahighprofitistherefore"skimming"themarket.Skimmingisusuallyemployedtoreimbursethecostofinvestmentoftheoriginalresearchintotheproduct:commonlyusedinelectronicmarketswhenanewrange,suchasDVDplayers,arefirstlysoldatahighprice.Thisstrategyisoftenusedtotarget"earlyadopters"ofaproductorservice.Earlyadoptersgenerallyhavearelativelylowerpricesensitivity—thiscanbeattributedto:theirneedfortheproductoutweighingtheirneedtoeconomize;agreaterunderstandingoftheproduct'svalue;orsimplyhavingahigherdisposableincome. Thisstrategyisemployedonlyforalimiteddurationtorecovermostoftheinvestmentmadetobuildtheproduct.Togainfurthermarketshare,asellermustuseotherpricingtacticssuchaseconomyorpenetration.Thismethodcanhavesomesetbacksasitcouldleavetheproductatahighpriceagainstthecompetition.[4] Decoypricing[edit] Methodofpricingwheretheselleroffersatleastthreeproducts,andwheretwoofthemhaveasimilarorequalprice.Thetwoproductswiththesimilarpricesshouldbethemostexpensiveones,andoneofthetwoshouldbelessattractivethantheother.Thisstrategywillmakepeoplecomparetheoptionswithsimilarprices;asaresult,salesofthemoreattractivehigh-priceditemwillincrease. Differentialpricing[edit] Differentialpricingoccurswhenfirmssetvariouspricesforthesameproductdependingontheirconsumer'sportfolio,geographicareas,demographicsegmentsandtheintensityofcompetitionintheregion.[5] Doubleticketing[edit] Aformofdeceptivepricingstrategythatsellsaproductatthehigheroftwopricescommunicatedtotheconsumeron,accompanying,orpromotingtheproduct.[6] Freemium[edit] Mainarticle:Freemium Freemiumisarevenuemodelthatworksbyofferingaproductorservicefreeofcharge(typicallydigitalofferingssuchassoftware)whilechargingapremiumforadvancedfeatures,functionality,orrelatedproductsandservices.Theword"freemium"isaportmanteaucombiningthetwoaspectsofthebusinessmodel:"free"and"premium".Ithasbecomeahighlypopularmodel,withnotablesuccesses. High-lowpricing[edit] Methodsofservicesofferedbytheorganizationareregularlypricedhigherthancompetitors,butthroughpromotions,advertisements,andorcoupons,lowerpricesareofferedonkeyitems.Thelowerpromotionalpricesdesignedtobringcustomerstotheorganizationwherethecustomerisofferedthepromotionalproductaswellastheregularhigherpricedproducts.[7] Keystonepricing[edit] Aretailpricingstrategywhereretailpriceissetatdoublethewholesaleprice.Forexample,ifacostofaproductforaretaileris£100,thenthesalepricewouldbe£200.Inacompetitiveindustry,itisoftennotrecommendedtousekeystonepricingasapricingstrategyduetoitsrelativelyhighprofitmarginandthefactthatothervariablesneedtobetakenintoaccount.[8] Limitpricing[edit] Mainarticle:Limitprice Alimitpriceisthepricesetbyamonopolisttodiscourageeconomicentryintoamarket.Thelimitpriceisthepricethattheentrantwouldfaceuponenteringaslongastheincumbentfirmdidnotdecreaseoutput.Thelimitpriceisoftenlowerthantheaveragecostofproductionorjustlowenoughtomakeenteringnotprofitable. Thequantityproducedbytheincumbentfirmtoactasadeterrenttoentryisusuallylargerthanwouldbeoptimalforamonopolist,butmightstillproducehighereconomicprofitsthanwouldbeearnedunderperfectcompetition. Theproblemwithlimitpricingasastrategyisthatoncetheentranthasenteredthemarket,thequantityusedasathreattodeterentryisnolongertheincumbentfirm'sbestresponse.Thismeansthatforlimitpricingtobeaneffectivedeterrenttoentry,thethreatmustinsomewaybemadecredible.Awaytoachievethisisfortheincumbentfirmtoconstrainitselftoproduceacertainquantitywhetherentryoccursornot.Anexampleofthiswouldbeifthefirmsignedaunioncontracttoemployacertain(high)leveloflaborforalongperiodoftime.Inthisstrategypriceoftheproductbecomesthelimitaccordingtobudget. Lossleader[edit] Mainarticle:Lossleader Alossleaderorleaderisaproductsoldatalowprice(i.e.atcostorbelowcost)tostimulateotherprofitablesales.Thiswouldhelpthecompaniestoexpanditsmarketshareasawhole.Lossleaderstrategyiscommonlyusedbyretailersinordertoleadthecustomersintobuyingproductswithhighermarked-uppricestoproduceanincreaseinprofitsratherthanpurchasingtheleaderproductwhichissoldatalowercost.Whena"featuredbrand"ispricedtobesoldatalowercost,retailerstendnottoselllargequantitiesofthelossleaderproductsandalsotheytendtopurchaselessquantitiesfromthesupplieraswelltopreventlossforthefirm.[9]Supermarketsandrestaurantsareanexcellentexampleofretailfirmsthatapplythestrategyoflossleader.[10][furtherexplanationneeded] Marginal-costpricing[edit] Inbusiness,thepracticeofsettingthepriceofaproducttoequaltheextracostofproducinganextraunitofoutput.Bythispolicy,aproducercharges,foreachproductunitsold,onlytheadditiontototalcostresultingfrommaterialsanddirectlabor.Businessesoftensetpricesclosetomarginalcostduringperiodsofpoorsales.If,forexample,anitemhasamarginalcostof$1.00andanormalsellingpriceis$2.00,thefirmsellingtheitemmightwishtolowerthepriceto$1.10ifdemandhaswaned.Thebusinesswouldchoosethisapproachbecausetheincrementalprofitof10centsfromthetransactionisbetterthannosaleatall. Odd-Evenpricing[edit] Odd-Evenpricingisoftenusedbysellerstoportraytheirproductstobeeithercheaperormoreexpensivethentheiractualvalue.Sellerscompetingforprice-sensitiveconsumers,willfixtheirproductpricetobeodd.Agoodexampleofthiscanbenoticedinmostsupermarketswhereinsteadofpricingmiloat£5,itwouldbewrittenas£4.99.Contrarily,sellerscompetingforconsumerswithlowpricesensitivity,willfixtheirproductpricetobeeven.Forexample,ofteninupscaleretailstores,handbagswillbepricedat£1250insteadof£1249.99.[11] Paywhatyouwant[edit] Mainarticle:Paywhatyouwant Paywhatyouwantisapricingsystemwherebuyerspayanydesiredamountforagivencommodity,sometimesincludingzero.Insomecases,aminimum(floor)pricemaybeset,and/orasuggestedpricemaybeindicatedasguidanceforthebuyer.Thebuyercanalsoselectanamounthigherthanthestandardpriceforthecommodity. Givingbuyersthefreedomtopaywhattheywantmayseemtonotmakemuchsenseforaseller,butinsomesituationsitcanbeverysuccessful.Whilemostusesofpaywhatyouwanthavebeenatthemarginsoftheeconomy,orforspecialpromotions,thereareemergingeffortstoexpanditsutilitytobroaderandmoreregularuse. Penetrationpricing[edit] Mainarticle:Penetrationpricing Penetrationpricingincludessettingthepricelowwiththegoalsofattractingcustomersandgainingmarketshare.Thepricewillberaisedlateroncethismarketshareisgained.[12] Afirmthatusesapenetrationpricingstrategypricesaproductoraserviceatasmalleramountthanitsusual,longrangemarketpriceinordertoincreasemorerapidmarketrecognitionortoincreasetheirexistingmarketshare.Thisstrategycansometimesdiscouragenewcompetitorsfromenteringamarketpositioniftheyincorrectlyobservethepenetrationpriceasalongrangeprice.[13] Companiesdotheirpricingindiverseways.Insmallcompanies,pricesareoftensetbytheboss.Inlargecompanies,pricingishandledbydivisionandtheproductlinemanagers.Inindustrieswherepricingisakeyinfluence,pricingdepartmentsaresettosupportothersindeterminingsuitableprices. Penetrationpricingstrategyisusuallyusedbyfirmsorbusinesseswhoarejustenteringthemarket.Inmarketingitisatheoreticalmethodthatisusedtolowerthepricesofthegoodsandservicescausinghighdemandfortheminthefuture.Thisstrategyofpenetrationpricingisvitalandhighlyrecommendedtobeappliedovermultiplesituationsthatthefirmmayface.Suchas,whentheproductionrateofthefirmislowerwhencomparedtootherfirmsinthemarketandalsosometimeswhenfirmsfacehardshipintoreleasingtheirproductinthemarketduetoextremelylargerateofcompetition.Inthesesituationsitisappropriateforafirmtousethepenetrationstrategytogainconsumerattention.[14] Thistechniqueisverycommonininternetcompanies,whichoftendon'tturnaprofituntilthey'veacquiredmonopolystatus,ifthen,insteadputtingalltheirmoneyintoexpandingmarketshare.Itisverycheaptoreuseapieceofsoftware,oncewritten,sotherearesubstantialeconomiesofscalethatfavourthisapproach,asdoesthesocialtrapeffect[15](it'shardtoleaveFacebook). Predatorypricing[edit] Mainarticle:Predatorypricing Predatorypricing,alsoknownasaggressivepricing(alsoknownas"undercutting"),intendedtodriveoutcompetitorsfromamarket.Itisillegalinsomecountries. Companiesorfirmsthattendtogetinvolvedwiththestrategyofpredatorypricingoftenhavethegoaltoplacerestrictionsorabarrierforothernewbusinessesfromenteringtheapplicablemarket.Thisstrategymaycontradictanti–trustlaw,attemptingtoestablishwithinthemarketamonopolybytheimposingcompany.[16]Predatorypricingmainlyoccursduringpricecompetitionsinthemarketasitiseasiertoobfuscatetheact.Usingthisstrategy,intheshorttermconsumerswillbenefitandbesatisfiedwithlowercostproducts.Inthelongrun,firmsoftenwillnotbenefitasthisstrategywillcontinuetobeusedbyotherbusinessestoundercutcompetitors'margins,causinganincreaseincompetitionwithinthefieldandfacilitatingmajorlosses.[17]Thisstrategyisdangerousasitcouldbedestructivetoafirmintermsoflossesandevenleadtocompletebusinessfailure. Premiumdecoypricing[edit] Methodofpricingwhereanorganizationartificiallysetsoneproductpricehigh,inordertoboostsalesofalowerpricedproduct.Let'ssaytherearetwoproducts,beefandpork.Theorganizationmayincreasethepriceofbeefsothatitbecomesexpensiveintheeyesofthecustomers.Subsequentlyporkbecomescheaper.Customerswillthenoptforcheaperpork. Premiumpricing[edit] Mainarticle:Premiumpricing Premiumpricingisthepracticeofkeepingthepriceofaproductorserviceartificiallyhighinordertoencouragefavorableperceptionsamongbuyers,basedsolelyontheprice.Thepracticeisintendedtoexploitthe(notnecessarilyjustifiable)tendencyforbuyerstoassumethatexpensiveitemsenjoyanexceptionalreputation,aremorereliableordesirable,orrepresentexceptionalqualityanddistinction.Moreover,apremiumpricemayportraythemeaningofbetterqualityintheeyesoftheconsumer. Consumersarewillingtopaymorefortrends,whichisakeymotiveforpremiumpricing,andarenotafraidofhowmuchaproductorservicecosts.Thenoveltyofconsumerswantingtohavethelatesttrendsisachallengeformarketersastheyarehavingtoentertaintheirconsumers.[18] Theaspirationofconsumersandthefeelingoftreatingthemselvesisthekeyfactorofpurchasingagoodorservice.Consumersarelookingforconstantchangeastheyareconstantlyevolvingandmoving. Examplesofpremiumpricing: Ethicalconsumption Fairtraders Voluntarism Theseareimportantdriversandexamplesofpremiumpricing,whichhelpguideanddistinguishofhowaproductorserviceismarketedandpricedwithintoday'smarket.[18] Pricediscrimination[edit] Mainarticle:Pricediscrimination Pricediscriminationisthepracticeofsettingadifferentpriceforthesameproductindifferentsegmentstothemarket.Forexample,thiscanbefordifferentclasses,suchasages,orfordifferentopeningtimes. Pricediscriminationmayimproveconsumersurplus.Whenafirmpricediscriminates,itwillselluptothepointwheremarginalcostmeetsthedemandcurve.Therearethreeconditionsneededforabusinesstoundertakepricediscrimination,theseinclude: Accuratelysegmentthemarket Preventresale Havemarketpower Therearethreedifferenttypesofpricediscriminationwhichrevolvearoundthesamestrategyandsamegoal –maximizeprofitbysegmentingthemarket,andextractingadditionalconsumersurplus.[citationneeded] First-degreepricediscrimination Thebusinesschargeseveryconsumerexactlyhowmuchtheyarewillingtopayfortheproduct. Second-degreepricediscrimination Thebusinessusesvolumediscountswhichallowsbuyerstopurchaseahigherinventoryatareducedprice.Whilethisbenefitsthehigh-inventorybuyer,itobviouslyhurtsthelow-inventorybuyerwhoisforcedtopayahigherprice.Thisbuyermaythenbelesscompetitiveinthedownstreammarket. Third-degreepricediscrimination Thisoccurswhenfirmssegmentthemarketintohighdemandandlowdemandgroups.[citationneeded] Firmsneedtoensuretheyareawareofseveralfactorsoftheirbusinessbeforeproceedingwiththestrategyofpricediscrimination.Firmsmusthavecontroloverthechangestheymakeregardingthepriceoftheirproductbywhichtheycangainprofitabilitydependingontheamountofsalesmade.Thepricecanbeincreasedordecreasedatanypointdependingonthefluctuationoftherateofbuyersandconsumers.Pricediscriminationstrategyisnotfeasibleforallfirmsastherearemanyconsequencesthatthefirmsmayfaceduetotheaction.Forexample:ifafirmsellsaproducttotheircustomerforacheaperpriceandthatcustomerresellstheproductdemandingahigherpricefromanotherbuyerthenthechancesofthefirmfailingtomakeahigherprofitispredictedbecausetheycouldhavesoldtheirproductatahigherratethanthere-sellerandmadefurtherprofit.[19] Priceleadership[edit] Mainarticle:Priceleadership Anobservationmadeofoligopolisticbusinessbehaviorinwhichonecompany,usuallythedominantcompetitoramongseveral,leadsthewayindeterminingprices,theotherssoonfollowing.Thecontextisastateoflimitedcompetition,inwhichamarketissharedbyasmallnumberofproducersorsellers. Psychologicalpricing[edit] Mainarticle:Psychologicalpricing Pricingdesignedtohaveapositivepsychologicalimpact.Forexample,thereareoftenbenefitstosellingaproductat$3.95or$3.99,ratherthan$4.00.Ifthepriceofaproductis$100andthecompanypricesitat$99,thenitisusingthepsychologicaltechniqueofjust-belowpricing.Inmostconsumers'minds,$99givestheimpressionofbeingconsiderablylessthan$100.Aminordistinctioninpricingcanmakeabigdifferenceinsales.Thecompanythatsucceedsinfindingappropriatepsychologicalpricepointscanimprovesalesandmaximizerevenue.[20] Slidingscale[edit] Theeconomicconceptofslidingscaleatitsmostbasic:peoplepayastheyareabletoforservices,eventsanditems.Thosewithaccesstomoreresourcespaymoreandthusprovidethecushionforthosewithlessaccesstopayless,creatingasustainableeconomicunderpinningforsaidservices,eventsanditems.[21] Targetpricingbusiness[edit] Pricingmethodwherebythesellingpriceofaproductiscalculatedtoproduceaparticularrateofreturnoninvestmentforaspecificvolumeofproduction.Thetargetpricingmethodisusedmostoftenbypublicutilities,likeelectricandgascompanies,andcompanieswhosecapitalinvestmentishigh,likeautomobilemanufacturers. Targetpricingisnotusefulforcompanieswhosecapitalinvestmentislowbecause,accordingtothisformula,thesellingpricewillbeunderstated.Alsothetargetpricingmethodisnotkeyedtothedemandfortheproduct,andiftheentirevolumeisnotsold,acompanymightsustainanoverallbudgetarylossontheproduct. Time-basedpricing[edit] Mainarticle:Time-basedpricing AflexiblepricingmechanismmadepossiblebyadvancesininformationtechnologyandemployedmostlybyInternet-basedcompanies.Byrespondingtomarketfluctuationsorlargeamountsofdatagatheredfromcustomers–rangingfromwheretheylivetowhattheybuytohowmuchtheyhavespentonpastpurchases–dynamicpricingallowsonlinecompaniestoadjustthepricesofidenticalgoodstocorrespondtoacustomer'swillingnesstopay.Theairlineindustryisoftencitedasadynamicpricingsuccessstory.Infact,itemploysthetechniquesoartfullythatmostofthepassengersonanygivenairplanehavepaiddifferentticketpricesforthesameflight.[22]Asof2018,severalthird-partytoolshaveallowedmerchantstotakeadvantageofatimebaseddynamicpricingincludingPricemole,[23]SweetPricing,[24]BeyondPricing,[25]etc. Time-sensitivepricing[edit] Time-sensitivepricingisacost-basedmethodforsettingpricesforgoodsthathaveashortshelflife.Carefulconsiderationhastobetakentothe"UseBy"and"BestBefore"datesoftheproducts,inrelationtothe"MarkUp"or"Return"oftheproducts.ThatistosaytheshorterperiodoftimeshouldhavealowerMark-up/Returnmargin,thusincreasingtheTurnover/salesoftheproduct,anddecreasingtheWastage/lossofproducts. Value-basedpricing[edit] Mainarticle:Value-basedpricing Pricingaproductbasedonthevaluetheproducthasforthecustomerandnotonitscostsofproductionoranyotherfactor. Thispricingstrategyisfrequentlyusedwherethevaluetothecustomerismanytimesthecostofproducingtheitemorservice.Forinstance,thecostofproducingasoftwareCDisaboutthesameindependentofthesoftwareonit,butthepricesvarywiththeperceivedvaluethecustomersareexpectedtohave.Theperceivedvaluewilldependonthealternativesopentothecustomer.Inbusinessthesealternativesareusingacompetitor'ssoftware,usingamanualworkaround,ornotdoinganactivity.Inordertoemployvalue-basedpricing,onemustknowitscustomers'business,one'sbusinesscosts,andone'sperceivedalternatives.Itisalsoknownasperceived-valuepricing. Value-basedpricinghavemanyeffectsonthebusinessandconsumeroftheproduct.Value-basedpricingisafundamentalbusinessactivityandistheprocessofdevelopingproductstrategiesandpricingthemproperlytoestablishtheproductwithinthemarket.Thisisakeyconceptforarelativelynewproductwithinthemarket,becausewithoutthecorrectprice,therewouldbenosale.Havinganoverlyhighpriceforanaverageproductwouldhavenegativeeffectsonthebusinessastheconsumerwouldnotbuytheproduct.Havingalowpriceonaluxuryproductwouldalsohaveanegativeimpactonthebusinessasinthelongrunthebusinesswouldnotbeprofitable.Thiscanbeseenasapositivefortheconsumerastheyarenotneedingtopayextremepricesfortheluxuryproduct.[26] Therehasbeenanevidentchangeinthemarketingareawithinabusinessfromcostpluspricingtothevalue. Variablepricingstrategies[edit] Variablepricingstrategysumsupthetotalcostofthevariablecharacteristicsassociatedintheproductionoftheproduct.Examplesofvariablecharacteristicsare:interestrates,location,date,andregionofproduction.Thesumtotalofthefollowingcharacteristicsisthenincludedwithintheoriginalpriceoftheproductduringmarketing.Variablepricingenablesproductpricestohaveabalance"betweensalesvolumeandincomeperunitsold".[27]Variablepricingstrategyhastheadvantageofensuringthesumtotalofthecostbusinesseswouldfaceinordertodevelopanewproduct.However,variablepricingstrategyexcludesthecostoffixedpricing.Fixedpricingincludesthepriceofdedicationreceivedfrommanufacturesintheproductionofdevelopingtheproductandotherinvolvementoffactors.[28] Yieldmanagementstrategies[edit] Yieldmanagementisastrategywhichaimstomonitorconsumerbehaviourtogainandachievemaximumprofitthroughsellinggoodsandservicesthatareperishable.Thetheorybehindthisstrategyistofocusonthefollowingaspects:buyingbehaviourpatternsofconsumers,externalenvironmentalfactorsandmarketpricetosuccessfullygainthemostprofit.[29]Thisstrategyofyieldmanagementiscommonlyusedbythefirmsassociatedwithintheairlinesindustry.Forexample,acustomermaypurchaseanairlineticketinthedaytimefor$600andanothercustomermaypurchasethesameairlineticketonthesamedayintheeveningfor$800–thereasonbeingthatduringthedaytimetheairlinecontainedmanyseatsthatweresparewhichneededtobeoccupiedandsold.Thus,pricesweredecreasedinordertoattractandmanipulatethecustomersintobuyinganairlineticketwithgreatdealsoroffers.However,duringtheeveningtimemostseatswerefilledandthefirmdecidedtoincreasethepriceoftheairlineticketforthedesperatecustomerswhoneededtopurchasethespareseatsthatwereavailable.[30]Thistypeofstrategyisavigilantwayofconnectingwiththetargetconsumersaswellasflourishingthebusiness. Performance-basedpricing[edit] Apricingstrategyinwhichthesellerispaidbasedontheeffectivenessofitsproductorservice.[31]Examplesofsellerswhooftenuseperformance-basedpricingarerealestateagents,onlineadvertisingplatforms,andpersonalinjuryattorneys.Performance-basedpricingincreasestheriskofthesellerbutitcreatesopportunitiesforgreaterrewards.Sellerswhousethispricingstrategyhaveanadvantageinattractingcustomers.Performance-basedpricinghasfewerchancestoworkifthedesiredoutcomeisnotclearlydefinedandquantifiedbetweenthetwoparties.[32] Ninelawsofpricesensitivityandconsumerpsychology[edit] Intheirbook,TheStrategyandTacticsofPricing,ThomasNagleandReedHoldenoutlinenine"laws"orfactorsthatinfluencehowaconsumerperceivesagivenpriceandhowprice-sensitivetheyarelikelytobewithrespecttodifferentpurchasedecisions.[33][34] Theyare: ReferencePriceEffect–buyer'spricesensitivityforagivenproductincreasesthehighertheproduct'spricerelativetoperceivedalternatives.Perceivedalternativescanvarybybuyersegment,byoccasion,andotherfactors. DifficultComparisonEffect–buyersarelesssensitivetothepriceofaknownormorereputableproductwhentheyhavedifficultycomparingittopotentialalternatives. SwitchingCostsEffect–thehighertheproduct-specificinvestmentabuyermustmaketoswitchsuppliers,thelessprice-sensitivethatbuyeriswhenchoosingbetweenalternatives. Price-QualityEffect–buyersarelesssensitivetopricethemorethathigherpricessignalhigherquality.Productsforwhichthiseffectisparticularlyrelevantinclude:imageproducts,exclusiveproducts,andproductswithminimalcuesforquality. ExpenditureEffect–buyersaremoreprice-sensitivewhentheexpenseaccountsforalargepercentageofbuyers'availableincomeorbudget. End-BenefitEffect–theeffectreferstotherelationshipagivenpurchasehastoalargeroverallbenefit,andisdividedintotwoparts:Deriveddemand:Themoresensitivebuyersaretothepriceoftheendbenefit,themoresensitivetheywillbetothepricesofthoseproductsthatcontributetothatbenefit.Priceproportioncost:Thepriceproportioncostreferstothepercentofthetotalcostoftheendbenefitaccountedforbyagivencomponentthathelpstoproducetheendbenefit(e.g.,thinkCPUandPCs).Thesmallerthegivencomponentsshareofthetotalcostoftheendbenefit,thelesssensitivebuyerswillbetothecomponents'price. Shared-costEffect–thesmallertheportionofthepurchasepricebuyersmustpayforthemselves,thelessprice-sensitivetheywillbe. FairnessEffect–buyersaremoresensitivetothepriceofaproductwhenthepriceisoutsidetherangetheyperceiveas"fair"or"reasonable"giventhepurchasecontext. TheFramingEffect–buyersaremoreprice-sensitivewhentheyperceivethepriceasalossratherthanaforgonegain,andtheyhavegreaterpricesensitivitywhenthepriceispaidseparatelyratherthanaspartofabundle. 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^Nagle,ThomasandHolden,Reed.TheStrategyandTacticsofPricing.PrenticeHall,2002.Pages84-104. ^MindofMarketing,"Howyourpricingandmarketingstrategyshouldbeinfluencedbyyourcustomer'sreferencepoint" AuthoritycontrolGeneral IntegratedAuthorityFile(Germany) Other MicrosoftAcademic 2 Retrievedfrom"https://en.wikipedia.org/w/index.php?title=Pricing_strategies&oldid=1056529649" Categories:PricingHiddencategories:CS1errors:missingperiodicalArticleswithshortdescriptionShortdescriptionisdifferentfromWikidataWikipediaarticlesneedingclarificationfromNovember2017AllarticleswithunsourcedstatementsArticleswithunsourcedstatementsfromMay2021ArticleswithGNDidentifiersArticleswithMAidentifiersArticleswithmultipleidentifiers Navigationmenu Personaltools NotloggedinTalkContributionsCreateaccountLogin Namespaces ArticleTalk Variants expanded collapsed Views ReadEditViewhistory More expanded collapsed Search Navigation MainpageContentsCurrenteventsRandomarticleAboutWikipediaContactusDonate Contribute 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