Specific Pricing Strategies | Boundless Marketing - Lumen ...

Hi-low price: High-low pricing (or hi-low pricing) is a type of pricing strategy adopted by companies, usually small- and medium-sized retail firms, where a ... Skiptomaincontent BoundlessMarketing Pricing Searchfor: SpecificPricingStrategies NewProductPricing Withanewproduct,competitiondoesnotexistorisminimal,hencethegeneralpricingstrategiesdependondifferentfactors. LearningObjectives Compareandcontrastpenetrationpricingandskimmingpricing KeyTakeaways KeyPoints Penetrationpricingisthepricingtechniqueofsettingarelativelylowinitialentryprice,oftenlowerthantheeventualmarketprice,toattractnewcustomers.Thestrategyworksontheexpectationthatcustomerswillswitchtothenewbrandbecauseofthelowerprice. Skimminginvolvesgoodsbeingsoldathigherpricessothatfewersalesareneededtobreakeven.Bysellingaproductatahighprice,sacrificinghighsalestogainahighprofitistherefore“skimming”themarket. Thedecisionofbeststrategytousedependsonanumberoffactors.Apenetrationstrategywouldgenerallybesupportedbytheopportunitytokeepcostslow,andtheanticipationofquickmarketentrybycompetitors.Askimmingstrategyismostappropriatewhentheoppositeconditionsexist. KeyTerms marketpenetration:havinggainedpartofamarketinwhichsimilarproductsalreadyexist MarketShare:Thepercentageofsomemarketheldbyacompany. Withatotallynewproduct,competitiondoesnotexistorisminimal.Twogeneralstrategiesaremostcommonforsettingprices: (1)Penetrationpricing Intheintroductorystageofanewproduct’slifecyclemeansacceptingalowerprofitmarginandtopricerelativelylow.Suchastrategyshouldgenerategreatersalesandestablishthenewproductinthemarketmorequickly.Penetrationpricingisthepricingtechniqueofsettingarelativelylowinitialentryprice,oftenlowerthantheeventualmarketprice,toattractnewcustomers.Thestrategyworksontheexpectationthatcustomerswillswitchtothenewbrandbecauseofthelowerprice.Penetrationpricingismostcommonlyassociatedwithamarketingobjectiveofincreasingmarketshareorsalesvolume,ratherthantomakeprofitintheshortterm.Theadvantagesofpenetrationpricingtothefirmareasfollows: Itcanresultinfastdiffusionandadoption.Thiscanachievehighmarketpenetrationratesquickly.Thiscantakethecompetitorsbysurprise,notgivingthemtimetoreact. Itcancreategoodwillamongtheearlyadopterssegment.Thiscancreatemoretradethroughwordofmouth. Itcreatescostcontrolandcostreductionpressuresfromthestart,leadingtogreaterefficiency. Itdiscouragestheentryofcompetitors.Lowpricesactasabarriertoentry. Itcancreatehighstockturnoverthroughoutthedistributionchannel.Thiscancreatecriticallyimportantenthusiasmandsupportinthechannel. Itcanbebasedonmarginalcostpricing,whichiseconomicallyefficient. Apenetrationstrategywouldgenerallybesupportedbythefollowingconditions:price-sensitiveconsumers,opportunitytokeepcostslow,theanticipationofquickmarketentrybycompetitors,ahighlikelihoodforrapidacceptancebypotentialbuyers,andanadequateresourcebaseforthefirmtomeetthenewdemandandsales. Pricing:Companiesandbusinessessetpricesatcertainlevelsinordertoattractcustomers. (2)Skimming Skimminginvolvesgoodsbeingsoldathigherpricessothatfewersalesareneededtobreakeven.Sellingaproductatahighpriceandsacrificinghighsalestogainahighprofitistherefore“skimming”themarket.Skimmingisusuallyemployedtoreimbursethecostofinvestmentoftheoriginalresearchintotheproduct.Itiscommonlyusedinelectronicmarketswhenanewrange,suchasDVDplayers,arefirstlydispatchedintothemarketatahighprice.Thisstrategyisoftenusedtotarget“earlyadopters”ofaproductorservice.Earlyadoptersgenerallyhavearelativelylowerprice-sensitivityandthiscanbeattributedtotheirneedfortheproductoutweighingtheirneedtoeconomize,agreaterunderstandingoftheproduct’svalue,orsimplyhavingahigherdisposableincome. Thisstrategyisemployedonlyforalimiteddurationtorecovermostoftheinvestmentmadetobuildtheproduct.Togainfurthermarketshare,asellermustuseotherpricingtacticssuchaseconomyorpenetration.Thismethodcanhavesomesetbacksasitcouldleavetheproductatahighpriceagainstthecompetition.Askimmingstrategywouldgenerallybesupportedbythefollowingconditions: Havingapremiumproduct.Inthiscase,“Premium”doesnotjustdenotehighcostofproductionandmaterials-italsosuggeststhattheproductmayberareorthatthedemandisunusuallyhigh.AnexamplewouldbeaUSD500ticketfortheWorldSeriesoranUSD80,000pricetagforalimited-productionsportscarsuchasthis. Havinglegalprotectionviaapatentorcopyrightmayalsoallowforanexcessivelyhighprice.IntelandtheirPentiumchippossessedthisadvantageforalongperiodoftime.Inmostcases,theinitialhighpriceisgraduallyreducedtomatchnewcompetitionandallownewcustomersaccesstotheproduct. ProductLinePricing Linepricingistheuseofalimitednumberofpricepointsforalltheproductofferingsofavendor. LearningObjectives Describethecharacteristicsoflinepricing KeyTakeaways KeyPoints Linepricingisbeneficialtocustomersbecausetheywantandexpectawideassortmentofgoods,particularlyshoppinggoods.Manysmallpricedifferencesforagivenitemcanbeconfusing. Fromtheseller’spointofview,linepricingissimplerandmoreefficienttouse.Theproductandservicemixcanthenbetailoredtoselectpricepoints. Linepricingsuffersduringinflationaryperiods,wheresuchastrategycanbeinflexible. KeyTerms pricepoint:Pricepointsarepricesatwhichdemandforagivenproductissupposedtostayrelativelyhigh. shoppinggoods:Goodsthatrequiremorethoughtandcomparisonthanconveniencegoods.Consumerscomparemultipleattributessuchasprice,style,quality,andfeatures. productlinepricing:thepracticeofchargingdifferentamountforgoodsorservicesthatarevariationsonabasegoodorservice basing-pointpricing:goodsshippedfromadesignatedcityarechargedthesameamount Linepricingistheuseofalimitednumberofpricesforalltheproductofferingsofavendor.Thisisatraditionstartedintheoldfiveanddimestoresinwhicheverythingcosteither5centsor10cents.Itsunderlyingrationaleisthattheseamountsareseenassuitablepricepointsforawholerangeofproductsbyprospectivecustomers.Ithastheadvantageofeaseofadministering,butthedisadvantageofinflexibility,particularlyintimesofinflationorunstableprices. FiveandDimeStores:Traditionalfiveanddimestoresfollowedalinepricingstrategy.Allofthegoodswereeither$0.05or$0.10.Thedollarstoreisamodernequivalent. Linepricingservesseveralpurposesthatbenefitbothbuyersandsellers.Customerswantandexpectawideassortmentofgoods,particularlyshoppinggoods.Manysmallpricedifferencesforagivenitemcanbeconfusing.Iftieswerepricedat$15,$15.35,$15.75,andsoon,selectionwouldbemoredifficult.Thecustomerwouldnotbeabletojudgequalitydifferencesasreflectedbysuchsmallincrementsinprice.Sohavingrelativelyfewpricesreducesthiskindofconfusion. Fromtheseller’spointofview,linepricingholdsseveralbenefits: Itissimplerandmoreefficienttouserelativelyfewerprices.Theproductandservicemixcanthenbetailoredtoselectpricepoints. Itcanresultinasmallerinventorythanwouldotherwisebethecase.Itmightincreasestockturnoverandmakeinventorycontrolsimpler. Ascostschange,thepricescanremainthesame,butthequalityinthelinecanbechanged.Forexample,youmayhaveboughta$20tie15yearsago.Youcanbuya$20tietoday,butitisunlikelythattoday’s$20tieisofthesamefinequalityasitwasinthepast. PsychologicalPricing Psychologicalpricingisamarketingpracticebasedonthetheorythatcertainpriceshavemeaningtomanybuyers. LearningObjectives Explainthetypesofpsychologicalpricing KeyTakeaways KeyPoints Productsandservicesfrequentlyhavecustomarypricesinthemindsofconsumers.Acustomarypriceisonethatcustomersidentifywithparticularitems. Oddpricesappeartorepresentbargainsorsavingsandthereforeencouragebuying.Thus,marketersoftenuseoddpricesthatendinfiguressuchas5,7,8,or9. Asomewhatrelatedpricingstrategyiscombinationpricing,suchastwo-for-oneorbuy-one-get-one-free.Consumerstendtoreactverypositivelytothesepricingtechniques. KeyTerms customaryprice:Apricethatcustomersidentifywithparticularitems. PricePoints:Pricepointsarepricesatwhichdemandforagivenproductissupposedtostayrelativelyhigh. Price,asisthecasewithcertainotherelementsinthemarketingmix,hasmultiplemeaningsbeyondasimpleutilitarianstatement.Onesuchmeaningisoftenreferredtoasthepsychologicalaspectofpricing.Inferringqualityfrompriceisacommonexampleofthepsychologicalaspectofprice.Forinstance,abuyermayassumethatasuitpricedat$500isofhigherqualitythanonepricedat$300. Productsandservicesfrequentlyhavecustomarypricesinthemindsofconsumers.Acustomarypriceisonethatcustomersidentifywithparticularitems.Forexample,formanydecadesafive-stickpackageofchewinggumcostfivecentsandasix-ouncebottleofCoca-Colaalsocostfivecents.Candybarsnowcost60centsormore,whichisthecustomarypriceforastandard-sizedbar.Manufacturerstendtoadjusttheirwholesalepricestopermitretailerstousecustomarypricing. Anothermanifestationofthepsychologicalaspectsofpricingistheuseofoddprices.Wecallpricesthatendinsuchdigitsas5,7,8,and9“oddprices.”Examplesofoddpricesinclude:$2.95,$15.98,or$299.99.Oddpricesareintendedtodrivedemandgreaterthanwouldbeexpectedifconsumerswereperfectlyrational. OddPricing:Oddpricesendwithdigitslike5,7,8,and9.Theyareintendedtodrivedemandhigher. Psychologicalpricingisonecauseofpricepoints.Foralongtime,marketingpeoplehaveattemptedtoexplainwhyoddpricesareused.Itseemedtomakelittledifferencewhetheronepaid$29.95or$30.00foranitem.Perhapsoneofthemostoftenheardexplanationsconcernsthepsychologicalimpactofoddpricesoncustomers.Theexplanationisthatcustomersperceiveevenpricessuchas$5.00or$10.00asregularprices.Oddprices,ontheotherhand,appeartorepresentbargainsorsavingsandthereforeencouragebuying.Thereseemstobesomemovementtowardevenpricing;however,oddpricingisstillverycommon.Asomewhatrelatedpricingstrategyiscombinationpricing,suchastwo-for-oneorbuy-one-get-one-free.Consumerstendtoreactverypositivelytothesepricingtechniques. Thepsychologicalpricingtheoryisbasedononeormoreofthefollowinghypotheses: Consumersignoretheleastsignificantdigitsratherthandotheproperrounding.Eventhoughthecentsareseenandnottotallyignored,theymaysubconsciouslybepartiallyignored. Fractionalpricessuggesttoconsumersthatgoodsaremarkedatthelowestpossibleprice. Whenitemsarelistedinawaythatissegregatedintopricebands(suchasanonlinerealestatesearch),thepriceendingisusedtokeepaniteminalowerband,tobeseenbymorepotentialpurchasers. PricingDuringDifficultEconomicTimes Duringarecession,companiesmustconsidertheiruniquesituationandwhatvaluetheyprovidecustomerswhendevisingapricingstrategy. LearningObjectives Discusspricingstrategiesduringdifficulteconomictimes KeyTakeaways KeyPoints Manycompaniesaretemptedtoslashpricesduringarecession,butthisstrategyshouldbecarefullyconsidered. Cuttingpricescandegradethevalueofthebrand,leadtoapricewar,andalsoleadcustomerstoputoffbuyingwhentimesaregoodinexpectationofpricecutswhentimesarebad. Unliketraditionalbrandsthataredesignedwithtargetconsumersinmind,fighterbrandsarecreatedspecificallytocombatacompetitorthatisthreateningtotakemarketshareawayfromacompany’smainbrand. Whenthestrategyworks,afighterbrandnotonlydefeatsalow-pricedcompetitor,butalsoopensupanewmarket. KeyTerms recession:Aperiodofreducedeconomicactivity fighterbrand:Apricingstrategywhereacompanypricesitemslowerthanthecompetitioninordertoprotectorgainmarketshare. PricingDuringDifficultEconomicTimes Everycompanyhasauniquepricingstrategyduringaboomperiod,basedontheirownproduct,market,andmanagerialdecisionmaking.However,duringarecession,manycompaniesmaybetemptedtoabandonthesestrategies.Afterall,ifcustomersarelesswillingtospendmoney,simplisticlogicsuggeststhat,bycuttingprices,youcanattractmorecustomers.However,thisstrategyshouldbeapproachedwithcaution. Cuttingpricescanquietencustomercomplaintsandhelpboostsalesforatime,butcanhavelonger-termeffectsonprofitability,andweakenthebrand’simage.Reductionscanalsoleadcustomerstoexpectdiscountswhenevertheeconomydips,causingthemtowaittomakepurchasesinthefuture. Amodelofpricingbasedon‘rational’economictheorysuggeststhatpricesaresetbytheforcesofsupplyanddemand,andindividualcompaniesinaperfectlycompetitivemarketmustfollowtheequilibriumprice.However,reallifeisnotsosimple;peopledonotalwaysactintheprescribedlogic.Sometimespricesgoupandpeoplebuymore,andviceversa. Asmartpricingstrategyduringarecessioncanbecomeacompetitiveadvantage.Byknowingwhatvalueacompanydeliverstoitscustomers,itcanpricemoreconfidentlyandnotpanicintoslashingpriceswhenitdoesnotnecessarilyneedto.Price-cuttingmayevenleadtopricewarswherenobodywins.Ifcutsmustbemade,companiesshouldfocusoncuttingthepricesoflow-valueitemsandretaininghigh-valueproducts. PriceCuts:Slashingpricesonlowvaluegoods(whilemaintainingpricesonhighvaluegoods)isapotentialpricingstrategyduringdifficulteconomictimes. Similarly,priceincreasesduringarecessioncanalsobeabadidea.Manyfirmstrytorecoverhighercoststhroughpriceincreases,whichcanturnawaycustomers.Customerslockedintocontractsmayhavenoregressifacompanyraisespricesonthem,butittarnishestheseller’sreputationandwillmakethecustomerthinktwicewhenthetimecomestorenew. Ultimately,thepricingstrategybecomesevenmoreimportantduringarecession,andcompaniesmustconsiderallthesefactorswhenattemptingtoadjust.Itisimportanttoprotectthebrand,notalienatecustomers,andrememberwhatvaluethecompanyoffersinordertogetthroughthedifficulteconomicperiodunscathed. FighterBrands Inmarketing,afighterbrand(sometimescalledafightingbrand)isalowerpricedofferinglaunchedbyacompanytotakeon,andideallytakeout,specificcompetitorsthatareattemptingtounder-pricethem.Unliketraditionalbrandsthataredesignedwithtargetconsumersinmind,fighterbrandsarecreatedspecificallytocombatacompetitorthatisthreateningtotakemarketshareawayfromacompany’smainbrand. Thestrategyismostoftenusedindifficulteconomictimes.Ascustomerstradedowntolowerpricedoffersbecauseofeconomicconstraints,manymanagersatmid-tierandpremiumbrandsarefacedwithaclassicstrategicconundrum:Shouldtheytacklethethreathead-onandreduceexistingprices,knowingitwillreduceprofitsandpotentiallycommoditizethebrand?Orshouldtheymaintainprices,hopeforbettertimestoreturn,andinthemeantimelosecustomerswhomightnevercomeback?Withbothalternativesoftenequallyunpalatable,manycompanieschoosethethirdoptionoflaunchingafighterbrand. FighterBrands:TheCeleronmicroprocessorisacasestudyofasuccessfulfighterbrand. Whenthestrategyworks,afighterbrandnotonlydefeatsalow-pricedcompetitor,butalsoopensupanewmarket.TheCeleronmicroprocessor,shownhere,isacasestudyofsuccessfulfighterbrand.DespitethesuccessofitsPentiumprocessors,Intelfacedamajorthreatfromlesscostlyprocessorsthatwerebetterplacedtoservetheemergingmarketforlow-costpersonalcomputers,suchastheAMDK6.IntelwantedtoprotectthebrandequityandpricepremiumofitsPentiumchips,butitalsowantedtoavoidAMDgainingafootholdonthelowerendofthemarket.SoitcreatedCeleronasacheaper,lesspowerfulversionofitsPentiumchipstoservethismarket. EverydayLowPricing Everydaylowpriceisapricingstrategyofferingconsumersalowpricewithouthavingtowaitforsalepriceeventsorcomparisonshopping. LearningObjectives TranslatethemeaningoftheEDLP(everydaylowprice)pricingstrategy KeyTakeaways KeyPoints Everydaylowpricingsavesretailstorestheeffortandexpenseneededtomarkdownpricesinthestoreduringsaleevents,aswellastomarkettheseevents. One1994studyofan86-storesupermarketgrocerychainintheUnitedStatesconcludedthata10%EDLPpricedecreaseinacategoryincreasedsalesvolumeby3%,whilea10%Hi-Lowpriceincreaseledtoa3%salesdecrease. TraderJoe’sisanexampleofsuccessfulEDLP.Itisuniquebecauseitdoesnotmarketitselflikeothergrocerystoresdo,norarecustomersrequiredtoobtainmembershiptoenjoyitslowprices–atTraderJoe’s,itseverydaylowpricesareavailabletoeveryone. KeyTerms supermarket:alargeself-servicestorethatsellsgroceriesand,usually,medications,householdgoodsand/orclothing Hi-lowprice:High-lowpricing(orhi-lowpricing)isatypeofpricingstrategyadoptedbycompanies,usuallysmall-andmedium-sizedretailfirms,whereafirmchargesahighpriceforanitemandlatersellsittocustomersbygivingdiscountsorthroughclearancesales. Everydaylowprice(EDLP)isapricingstrategypromisingconsumersalowpricewithouttheneedtowaitforsalepriceeventsorcomparisonshopping. EDLPsavesretailstorestheeffortandexpenseneededtomarkdownpricesinthestoreduringsaleevents,aswellastomarkettheseevents.EDLPisbelievedtogenerateshopperloyalty.Itwasnotedin1994thattheWal-MartretailchaininAmerica,whichfollowsanEDLPstrategy,wouldbuy“featureadvertisements”innewspapersonamonthlybasis,whileitscompetitorswouldadvertise52weeksperyear. Procter&Gamble,Wal-Mart,FoodLion,Gordmans,andWinn-DixiearefirmsthathaveimplementedorchampionedEDLP.One1992studystatedthat26%ofAmericansupermarketretailerspursuedsomeformofEDLP,meaningtheother74%wereHi-Lopromotion-orientedoperators. One1994studyofan86-storesupermarketgrocerychainintheUnitedStatesconcludedthata10%EDLPpricedecreaseinacategoryincreasedsalesvolumeby3%,whilea10%Hi-Lowpriceincreaseledtoa3%salesdecrease;butthatbecauseconsumerdemandatthesupermarketdidnotrespondmuchtochangesineverydayprice,anEDLPpolicyreducedprofitsby18%,whileHi-Lopricingincreasedprofitsby15%. Anexampleofasuccessfulbrand(otherthantheinfamousWal-Mart)thatusestheEDLPstrategyisTraderJoe’s.TraderJoe’sisaprivate-brandlabelthatconductsaNichemarketingstrategydescribingitselfasthe“neighborhoodstore.”Thefirmhasbeengrowingatasteadypace,offeringawidevarietyoforganicandnaturalfooditemsthatarehardtofind,enablingthebusinesstoenjoyadistinctivecompetitiveadvantage. TraderJoe’s:TraderJoe’sisuniquebecauseitdoesn’trequiremembershipforitscustomerstoenjoyitslowprices. ApartfromthemanystrengthsofTraderJoe’s,themostprominentistheircommitmenttoqualityandlowerprices.Thecompanyhasworkedhardtomanagethiseconomicimageofvalueforitsproductsthatcompetitors,evengiantretailstores,areunabletomeet.TraderJoe’sisnotanordinarystore.Itisuniquebecauseitdoesnotmarketitselflikeothergrocerystoresdonordoesitrequireitscustomerstotakeoutamembershiptoenjoyitslowprices. AtTraderJoe’s,itseverydaylowpricesareavailabletoeveryone.Thefirmstatesthat“everypennywesaveiseverypennyourcustomersaves”(TraderJoe’s2010). High/LowPricing High-lowpricingisastrategywheremostgoodsofferedarepricedhigherthancompetitors,butlowerpricesareofferedonotherkeyitems. LearningObjectives RecognizethemechanismofHigh/Lowpricingstrategies KeyTakeaways KeyPoints Thelowerpromotionalpricesaredesignedtobringcustomerstotheorganizationwherethecustomerisofferedthepromotionalproductaswellastheregularhigherpricedproducts. Thebasictypeofcustomersforthefirmsadoptinghigh-lowpricedonothaveaclearideaaboutwhataproduct’spricewouldtypicallybeorhaveastrongbeliefthat“discountsales=lowprice”. Thewaycompetitionprevailsintheshoeandfashionindustryisthroughhigh-lowpricestrategies. KeyTerms everydaylowprice:Everydaylowprice(“EDLP”)isapricingstrategypromisingconsumersalowpricewithouttheneedtowaitforsalepriceeventsorcomparisonshop. belief:mentalacceptanceofaclaimastruthregardlessofsupportingorcontraryempiricalevidence High-lowpricingisamethodofpricingforanorganizationwherethegoodsorservicesofferedbytheorganizationareregularlypricedhigherthancompetitors.However,throughpromotions,advertisements,andorcoupons,lowerpricesareofferedonotherkeyitemsconsumerswouldwanttopurchase.Thelowerpromotionalpricesaredesignedtobringcustomerstotheorganizationwherethecustomerisofferedthepromotionalproductaswellastheregularhigherpricedproducts. High-lowpricingisatypeofpricingstrategyadoptedbycompanies,usuallysmallandmediumsizedretailfirms.Thebasictypeofcustomersforthefirmsadoptinghigh-lowpricewillnothaveaclearideaaboutwhataproduct’spricewouldtypicallybeorhaveastrongbeliefthat“discountsales=lowprice.”Customersforfirmsadoptingthistypeofstrategyalsohavestrongpreferenceinpurchasingtheproductssoldinthistypeorbythiscertainfirm.Theyareloyaltoaspecificbrand. High-LowPricingStrategies:Manybigfirmsareusinghigh-lowpricingstrategies,especiallyintheshoeindustry(ex:Reebok,Nike,andAdidas). Therearemanybigfirmsusingthistypeofpricingstrategy(ex:Reebok,Nike,Adidas).Thewaycompetitionprevailsintheshoeindustryisthroughhigh-lowprice.Alsohigh-lowpricingisextensivelyusedinthefashionindustrybycompanies(ex:Macy’sandNordstrom)Thispricingstrategyisnotonlyintheshoeandfashionindustrybutalsoinmanyotherindustries.However,intheseindustriesoneortwofirmswillnotprovidediscountsandworksonfixedrateofearnings.Thosefirmswillfolloweverydaylowpricestrategyinordertocompeteinthemarket. OtherPricingStrategies Onepricingstrategydoesnotfitall,thusadaptingvariouspricingstrategiestonewscenariosisnecessaryforafirmtostayviable. LearningObjectives Describevariouspricingstrategies KeyTakeaways KeyPoints Cost-pluspricingisthesimplestpricingmethod.Thefirmcalculatesthecostofproducingtheproductandaddsonapercentage(profit)tothatpricetogivethesellingprice. Dynamicpricingallowsonlinecompaniestoadjustthepricesofidenticalgoodstocorrespondtoacustomer’swillingnesstopay.Theairlineindustryisoftencitedasasuccessstory.Mostofthepassengersonanygivenairplanehavepaiddifferentticketpricesforthesameflight. Non-pricecompetitionmeansthatorganizationsusestrategiesotherthanpricetoattractcustomers.Advertising,credit,delivery,displays,privatebrands,andconvenienceareallexamplesoftoolsusedinnon-pricecompetition. KeyTerms marketingmix:Abusinesstoolusedinmarketingproducts;oftencrucialwhendeterminingaproductorbrand’suniquesellingpoint.OftensynonymouswiththefourPs:price,product,promotion,andplace. economiesofscale:Thecostadvantagesthatanenterpriseobtainsduetoexpansion.Asthescaleofoutputisincreased,factorssuchasfacilitysizeandusagelevelsofinputscausetheproducer’saveragecostperunittofall. Pricingstrategiesforproductsorservicesencompassthreemainwaystoimproveprofits.Thebusinessownercancutcosts,sellmore,orfindmoreprofitwithabetterpricingstrategy.Whencostsarealreadyattheirlowestandsalesarehardtofind,adoptingabetterpricingstrategyisakeyoptiontostayviable.Therearemanydifferentpricingstrategiesthatcanbeutilizedfordifferentsellingscenarios: Cost-PlusPricing Cost-pluspricingisthesimplestpricingmethod.Thefirmcalculatesthecostofproducingtheproductandaddsonapercentage(profit)tothatpricetogivethesellingprice.Thismethodalthoughsimplehastwoflaws:ittakesnoaccountofdemandandthereisnowayofdeterminingifpotentialcustomerswillpurchasetheproductatthecalculatedprice. LimitPricing Alimitpriceisthepricesetbyamonopolisttodiscourageeconomicentryintoamarket,andisillegalinmanycountries.Thelimitpriceisthepricethattheentrantwouldfaceuponenteringaslongastheincumbentfirmdidnotdecreaseoutput.Thelimitpriceisoftenlowerthantheaveragecostofproductionorjustlowenoughtomakeenteringnotprofitable.Thequantityproducedbytheincumbentfirmtoactasadeterrenttoentryisusuallylargerthanwouldbeoptimalforamonopolist,butmightstillproducehighereconomicprofitsthanwouldbeearnedunderperfectcompetition. DynamicPricing Aflexiblepricingmechanismmadepossiblebyadvancesininformationtechnology,andemployedmostlybyInternetbasedcompanies.Byrespondingtomarketfluctuationsorlargeamountsofdatagatheredfromcustomers–rangingfromwheretheylivetowhattheybuytohowmuchtheyhavespentonpastpurchases–dynamicpricingallowsonlinecompaniestoadjustthepricesofidenticalgoodstocorrespondtoacustomer’swillingnesstopay.Theairlineindustryisoftencitedasasuccessstory.Infact,itemploysthetechniquesoartfullythatmostofthepassengersonanygivenairplanehavepaiddifferentticketpricesforthesameflight. DynamicPricing:Dynamicpricingallowsonlinecompaniestoadjustthepricesofidenticalgoodstocorrespondtoacustomer’swillingnesstopay. Non-PriceCompetition Non-pricecompetitionmeansthatorganizationsusestrategiesotherthanpricetoattractcustomers.Advertising,credit,delivery,displays,privatebrands,andconvenienceareallexamplesoftoolsusedinnon-pricecompetition.Businesspeopleprefertousenon-pricecompetitionratherthanpricecompetition,becauseitismoredifficulttomatchnon-pricecharacteristics. PricingAboveCompetitors Pricingabovecompetitorscanberewardingtoorganizations,providedthattheobjectivesofthepolicyareclearlyunderstoodandthatthemarketingmixisusedtodevelopastrategytoenablemanagementtoimplementthepolicysuccessfully.Pricingabovecompetitiongenerallyrequiresaclearadvantageonsomenon-priceelementofthemarketingmix.Insomecases,itispossibleduetoahighprice-qualityassociationonthepartofpotentialbuyers.Suchanassumptionisincreasinglydangerousintoday’sinformation-richenvironment.ConsumerReportsandothersimilarpublicationsmakeobjectiveproductcomparisonsmuchsimplerfortheconsumer.Therearealsohundredsofdot.comcompaniesthatprovideobjectivepricecomparisons.Thekeyistoprovetocustomersthatyourproductjustifiesapremiumprice. PricingBelowCompetitors Whilesomefirmsarepositionedtopriceabovecompetition,otherswishtocarveoutamarketnichebypricingbelowcompetitors.Thegoalofsuchapolicyistorealizealargesalesvolumethroughalowerpriceandprofitmargins.Bycontrollingcostsandreducingservices,thesefirmsareabletoearnanacceptableprofit,eventhoughprofitperunitisusuallyless.Suchastrategycanbeeffectiveifasignificantsegmentofthemarketisprice-sensitiveand/ortheorganization’scoststructureislowerthancompetitors.Costscanbereducedbyincreasedefficiency,economiesofscale,orbyreducingoreliminatingsuchthingsascredit,delivery,andadvertising.Forexample,ifafirmcouldreplaceitsfieldsalesforcewithtelemarketingoronlineaccess,thisfunctionmightbeperformedatlowercost.Suchreductionsofteninvolvesomelossineffectiveness,sothetradeoffmustbeconsideredcarefully. 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