Value in our society is most commonly expressed in dollars and cents. Thus, price is typically the amount of money exchanged for a product. After a consumer has used a product, the consumer may decide that its actual value was less than its perceived value at the time it was purchased. The price paid for a product is based on the expected satisfaction that the customer will receive and not necessarily the actual satisfaction of the customer.
Although price is usually a dollar amount, it can be anything with perceived value. When products are exchanged for each other, the trade is called barter. If a student exchanges this book for a math book at the end of the term, that student has engaged in barter. Price is important in determining how much a firm earns. The prices charged customers times the number of units sold equals the gross revenue for the firm.
Revenue is what pays for every activity of the company production, finance, sales, distribution, and so forth. The money that is left over if any is profit.
Managers strive to charge a price that will allow the firm to earn a fair return on its investment and will maximize return on investment to the highest extent while still maintaining a fair return.
The chosen price must be neither too high nor too low, and the price must equal the perceived value to target consumers. If consumers think the price is too high, sales opportunities will be lost.
Lost sales mean lost revenue. If the price is too low, consumers may view the product as a great value, but the company may not meet its profit goals. Sometimes, as in the case of services, a price that is too low will cause the product to viewed as less than credible and lose sales for the company.
Managers use various pricing strategies when determining the price of a product, as this section explains. Price skimming and penetration pricing are strategies used in pricing new products; other strategies such as leader pricing and bundling may be used for established products as well.
The practice of introducing a new product on the market with a high price and then lowering the price over time is called price skimming. As the product moves through its life cycle, the price usually is lowered because competitors are entering the market. As the price falls, more and more consumers can buy the product. Recent example are DVD players and flat-screen televisions.
Price skimming has four important advantages. First, a high initial price can be a way to find out what buyers are willing to pay. Second, if consumers find the introductory price too high, it can be lowered. Third, a high introductory price can create an image of quality and prestige. Fourth, when the price is lowered later, consumers may think they are getting a bargain. The disadvantage is that high prices attract competition. Price skimming can be used to price virtually any new products, such as high-definition televisions, new cancer drugs, and color computer printers.
Because it is minimally processed, white tea is said to retain the highest level of antioxidants and has a lower caffeine content than black and green teas. The company says the tea is picked only a few days each year, right before the leaf opens, yielding a small harvest.
With this strategy, the company offers new products at low prices in the hope of achieving a large sales volume. Penetration pricing requires more extensive planning than skimming does because the company must gear up for mass production and marketing.
When Texas Instruments entered the digital-watch market, its facilities in Lubbock, Texas, could produce 6 million watches a year, enough to meet the entire world demand for low-priced watches.
If the company had been wrong about demand, its losses would have been huge. Penetration pricing has two advantages. First, the low initial price may induce consumers to switch brands or companies. Using penetration pricing on its jug wines, Gallo has lured customers away from Taylor California Cellars and Inglenook. Second, penetration pricing may discourage competitors from entering the market. Their costs would tend to be higher, so they would need to sell more at the same price to break even.
A product priced below cost is referred to as a loss leader. Retailers hope that this type of pricing will increase their overall sales volume and thus their profit. Items that are leader priced are usually well known and priced low enough to appeal to many customers. They also are items that consumers will buy at a lower price, even if they have to switch brands. Supermarkets often feature coffee and bacon in their leader pricing. Department stores and specialty stores also rely heavily on leader pricing.
Pricing of services tends to be more complex than pricing of products that are goods. Services may be priced as standard services, such as the price a hair stylist might charge for a haircut, or pricing may be based on tailored services designed for a specific buyer, such as the prices charged for the design of a new building by an architect.
Fighter Brands : The Celeron microprocessor is a case study of a successful fighter brand. When the strategy works, a fighter brand not only defeats a low-priced competitor, but also opens up a new market. The Celeron microprocessor, shown here, is a case study of successful fighter brand. Despite the success of its Pentium processors, Intel faced a major threat from less costly processors that were better placed to serve the emerging market for low-cost personal computers, such as the AMD K6.
Intel wanted to protect the brand equity and price premium of its Pentium chips, but it also wanted to avoid AMD gaining a foothold on the lower end of the market. So it created Celeron as a cheaper, less powerful version of its Pentium chips to serve this market.
Everyday low price is a pricing strategy offering consumers a low price without having to wait for sale price events or comparison shopping. Everyday low price EDLP is a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping.
EDLP saves retail stores the effort and expense needed to mark down prices in the store during sale events, as well as to market these events. EDLP is believed to generate shopper loyalty. The company has worked hard to manage this economic image of value for its products that competitors, even giant retail stores, are unable to meet.
It is unique because it does not market itself like other grocery stores do nor does it require its customers to take out a membership to enjoy its low prices. High-low pricing is a strategy where most goods offered are priced higher than competitors, but lower prices are offered on other key items.
High-low pricing is a method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors. However, through promotions, advertisements, and or coupons, lower prices are offered on other key items consumers would want to purchase. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.
High-low pricing is a type of pricing strategy adopted by companies, usually small and medium sized retail firms. They are loyal to a specific brand. High-Low Pricing Strategies : Many big firms are using high-low pricing strategies, especially in the shoe industry ex: Reebok, Nike, and Adidas.
There are many big firms using this type of pricing strategy ex: Reebok, Nike, Adidas. The way competition prevails in the shoe industry is through high-low price. However, in these industries one or two firms will not provide discounts and works on fixed rate of earnings. Those firms will follow everyday low price strategy in order to compete in the market.
One pricing strategy does not fit all, thus adapting various pricing strategies to new scenarios is necessary for a firm to stay viable. Pricing strategies for products or services encompass three main ways to improve profits. The business owner can cut costs, sell more, or find more profit with a better pricing strategy.
When costs are already at their lowest and sales are hard to find, adopting a better pricing strategy is a key option to stay viable. There are many different pricing strategies that can be utilized for different selling scenarios:. 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 simple 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.
A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries.
The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.
A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. The airline industry is often cited as a success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight. Non-price competition means that organizations use strategies other than price to attract customers.
Advertising, credit, delivery, displays, private brands, and convenience are all examples of tools used in non-price competition. Business people prefer to use non-price competition rather than price competition, because it is more difficult to match non-price characteristics. Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and that the marketing mix is used to develop a strategy to enable management to implement the policy successfully.
Pricing above competition generally requires a clear advantage on some non-price element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.
The key is to prove to customers that your product justifies a premium price. While some firms are positioned to price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less. Costs can be reduced by increased efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and advertising.
For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at lower cost. Such reductions often involve some loss in effectiveness, so the trade off must be considered carefully. Privacy Policy. Skip to main content. Search for:. Specific Pricing Strategies. New Product Pricing With a new product, competition does not exist or is minimal, hence the general pricing strategies depend on different factors.
Learning Objectives Compare and contrast penetration pricing and skimming pricing. Key Takeaways Key Points Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers.
The decision of best strategy to use depends on a number of factors. A penetration strategy would generally be supported by the opportunity to keep costs low, and the anticipation of quick market entry by competitors. A skimming strategy is most appropriate when the opposite conditions exist. Key Terms market penetration : having gained part of a market in which similar products already exist Market Share : The percentage of some market held by a company.
Product Line Pricing Line pricing is the use of a limited number of price points for all the product offerings of a vendor. Learning Objectives Describe the characteristics of line pricing. Key Takeaways Key Points Line pricing is beneficial to customers because they want and expect a wide assortment of goods, particularly shopping goods. The product and service mix can then be tailored to select price points. Line pricing suffers during inflationary periods, where such a strategy can be inflexible.
Key Terms price point : Price points are prices at which demand for a given product is supposed to stay relatively high. Consumers compare multiple attributes such as price, style, quality, and features. Psychological Pricing Psychological pricing is a marketing practice based on the theory that certain prices have meaning to many buyers.
Learning Objectives Explain the types of psychological pricing. Key Takeaways Key Points Products and services frequently have customary prices in the minds of consumers. Odd prices appear to represent bargains or savings and therefore encourage buying. Thus, marketers often use odd prices that end in figures such as 5, 7, 8, or 9. Key Terms customary price : A price that customers identify with particular items.
Price Points : Price points are prices at which demand for a given product is supposed to stay relatively high. Pricing During Difficult Economic Times During a recession, companies must consider their unique situation and what value they provide customers when devising a pricing strategy.
Learning Objectives Discuss pricing strategies during difficult economic times. Key Takeaways Key Points Many companies are tempted to slash prices during a recession, but this strategy should be carefully considered. Cutting prices can degrade the value of the brand, lead to a price war, and also lead customers to put off buying when times are good in expectation of price cuts when times are bad. Key Terms recession : A period of reduced economic activity fighter brand : A pricing strategy where a company prices items lower than the competition in order to protect or gain market share.
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