General Pricing Approaches PDF

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General Pricing Approaches A trick to establishing a final price for a product by a marketing manager is to identify a "estimated price level" to be used as a fair starting point. Demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches are four popular approaches to helping determine this approximate price level. While these methods are discussed below separately, several of them intersect, and in looking for an estimated price range, a productive marketing manager will consider many. Demand-Oriented Approaches In choosing a price level, demand-oriented approaches emphasize factors influencing anticipated consumer tastes and desires rather than factors such as expense, benefit, and competitiveness. Skimming Pricing Skimming pricing should be used by a company selling a new product, setting the maximum introductory price that those consumers that want the product are able to pay. These clients are not very price-sensitive because they measure the price, efficiency, and potential of the new commodity to meet their needs against the same replacement characteristics. The business reduces the price to draw a more price-sensitive segment as the demand of these consumers is met. As rates are reduced in a sequence of steps, skimming pricing thus gets its name from skimming successive layers of "cream," or consumer segments. In early 2003, many flat-screen TV vendors were selling them at around $5,000 and used skimming pricing so many potential buyers were able to purchase the device at the high price immediately. Flat-screen TV rates have usually fallen over time, but skimming pricing tends to be used by retailers with TVs with modern hardware or bigger displays. Penetration Pricing Penetration pricing is the establishment up a smaller, more competitive, original price for a new commodity to sell directly to the general market, the exact opposite of skimming pricing. When customers are price-sensitive, this approach makes sense; Nintendo deliberately chose a diffusion strategy when it launched the iconic video game console, the Nintendo Wii. For Nintendo Wii U, the technique continues to be used. In addition to providing the opportunity to create revenues, market share, and earnings, penetration pricing prohibits competition from joining the market because the profit margin is comparatively poor. In addition, as the cost of manufacturing decreases due to the cumulative demand, entrants who enter the market will face higher unit costs at least before the early entrant catches up with their output. When one talks about penetration pricing, Walmart springs to mind. The same is true of the very profitable Dollarama chain, which is constantly growing its number of Canadian outlets.

Penetration pricing may follow skimming pricing in certain cases. In the early phases of the product life cycle, a business could price a high product to attract price-insensitive customers. In the latter stages of the product life cycle, after the business has gained back the money expended on research and development and introductory campaigns, it uses penetration pricing to cater to a larger segment of the population and boost market share. Prestige Pricing While, when the price is lower, buyers prefer to buy more of a good, often the reverse is true. When buyers use pricing as a metric of the quality of an item, whether the price is set below a certain amount, a business runs the risk of appearing to sell a low-quality commodity. Prestige pricing means setting a high price such that the commodity is drawn to and bought by cost- or status-conscious buyers. Rolls-Royce vehicles, Chanel perfume, and Cartier jewelry have a luxury price factor in them and do not sell at cheaper prices than at higher prices as well.? The higher the price of a luxury good, the higher the status associated with it and the greater its exclusivity, since it can be purchased by less individuals. The prices of prestige products remain high over the product life cycle, unlike products such as flat-panel TVs, which have declined in price throughout the product life cycle. The All-Day Heels series of female high-heeled shoes produced by Canadian retailer Ron White is an example of prestige pricing. This trendy women's shoe collection blends both beauty and comfort. At a premium price that suits its outstanding consistency, the All-Day Heels range is ready. The shoes are made of Peron, a durable high-tech elastic polymer developed by NASA, and have arch protection, built-in cushioning fabrics, and thin lightweight insoles. Price Lining Often at a variety of different unique selling points, which is called price lining, a company that sells not only a single product, but a line of goods will price them. For instance, a discount department store manager can cost $59, $79, and $99 for a line of women's dresses. In certain cases, all goods can be bought at the same cost and then, depending on color, type, and anticipated demand, marked up to varying percentages to reach these price points. In other situations, producers design goods at various price points and dealers apply roughly the same mark-up percentages to meet the three price points sold to customers. Odd-Even Pricing If you are in a hardware shop, for $399.99, you can see a miter saw. You could find a Windex glass cleaner for $2.97 in a grocery store. These businesses use odd-even pricing, which means setting rates below even numbers by a few dollars or cents. "The expectation is that the miter seen by customers is valued at "something over $300" rather than "over $400. This tactic has a psychological effect: $399.99 sounds dramatically cheaper than $400, while there is just a gap

of one cent. There is some proof to say that this is working. Research shows, however that overuse of odd-end rates continues to silence its impact on demand. Target Pricing The amount that the final customer will be able to pay for a commodity will often be estimated by producers. Then they act backwards, to decide what price they will charge for the commodity, by markups taken by retailers and wholesalers. The consequence of this practice called target pricing, is that the seller purposefully changes the structure and characteristics of a product to meet the target price for customers. Bundle Pricing Bundle pricing, which is the selling of two or more goods at a single "box" price, is a commonly used demand-oriented pricing strategy. Air Canada, for example, sells travel bundles that contain airfare, car rental, and accommodation. Bundle pricing is focused on the premise that the package is more desired by buyers than the individual items. This is attributed to the advantages obtained by not having to make different transactions and improved pleasure in the appearance of another item from one item. Bundle pricing also provides purchasers with a lower overall cost and vendors with lower marketing costs. Yield Management Pricing Have you ever been on a plane and found that the girl next to you charged a cheaper price than you paid for her ticket? Disturbing, isn't it? But what you noted is yield management pricing, charging various premiums to optimize sales at any given time for a fixed amount of space. 10 Airlines, hotels, and car rental companies indulge in capacity management by adjusting prices depending on day, day, week or season to balance demand and supply. Cost-Oriented Approaches A price is more determined by the cost side of the pricing problem for cost-oriented methods than the demand side. Price is calculated by looking at the expense of purchasing and selling and then adding enough to cover direct expenses, overhead and benefit. Be Sweet Inc.'s chapter-opening vignette illustrates the importance of balancing the cost of production and marketing. Standard Markup Pricing To make a profit, businesses market their goods at a price that exceeds the cost of manufacturing or sourcing the goods and the cost of selling them. The disparity between an item's sale price and its expense is conventionally referred to as the markup, and this is generally calculated as a percentage. Gross margin is most sometimes referred to as a markup.

Markup is commonly expressed by suppliers as a percentage of cost divided by cost, which is the differential between purchase price and cost. This is recognized as a regular markup, too. This technique is used by producers because they are obsessed most of the time about prices. Parties who procure and resell items, such as wholesalers and dealers, almost all struggle with selling rates. As a percentage of price, which is the difference between sale price and cost, separated by the selling price, they also convey markup. Using the same markup percentage would result in a different sale price for each of the methods. This could surprise you to learn that when purchased at a supermarket, a commodity costing $50 to make will end up costing a buyer more than double as much, but this is not uncommon. At each point, it is necessary to note that markup is needed so that the businesses concerned can cover their expense of buying the commodity, pay to sell it in the sales chain to the next stage, and can make some profit. The markups shown are indicative of such goods, such as designer furniture, this percentage markup depends based on the type of retail store (such as furniture, clothes, or grocery) and on the commodity concerned. Typically, high-volume products have lower markups than lowvolume products do. 10 to 25 percent of supermarkets such as Loblaws and Sobeys markup staple goods such as sugar, rice, and dairy products, while 25 to 47 percent markup luxury items such as snack snacks and sweets. These mark ups would offset all the store's costs, pay for overhead expenses, and add something to sales. These markups, which can seem very high for supermarkets, will result in just a 1 percent profit on sales revenue. Cost-Plus Pricing A variant of conventional markup pricing is used by many producers, technical services, and building firms. Cost-plus pricing includes summing up the gross unit cost of delivering a good or service and adding a single amount to the cost of arriving at a price. The most widely used approach to fix prices for business goods is cost-plus pricing. Gradually, however among business-to-business advertisers in the service industry, this method finds popularity. The growing cost of legal fees, for instance, has led several law firms to pursue a cost-plus pricing policy. Instead of paying company customers on an hourly basis, attorneys and their clients settle on a flat rate for the law practise based on projected costs plus a benefit. This method is used by many advertising companies today. The customer here agrees to pay a bill to the agency depending on the cost of his job plus any agreed-on benefit. Profit-Oriented Approaches To set prices using profit-oriented methods, an organisation can prefer to offset both sales and costs. This could entail either setting a target of a particular dollar profit volume or communicating this target profit as a percentage of revenue or expenditure.

Target Profit Pricing A business sets an annual profit target of a particular dollar sum, which is called target profit pricing. For e.g., if you owned a picture frame shop and had to reach a target profit of $7,000 in the coming year, how much would you need to charge for each frame? You will have to calculate your costs and then determine how many frames you will make, because profit relies on revenues and costs. Let's say that you expect 1,000 photographs to be framed next year, based on sales of previous years. The cost of your time and materials for framing an ordinary image is $22, while the labour costs (rent, wages for managers, etc.) are $26,000. Finally, your goal is to gain $7,000 in earnings. How do you per picture measure your price? Clearly, this form of pricing is based on a reliable demand estimation. Because demand is always difficult to forecast, if the prediction is too high, this approach has the potential for catastrophe. A target profit pricing, in general, strategy is best, without a lot of competition, for businesses selling innovative or special goods. What if $40 per framed picture was paid by other frame shops in your area? For your more costly prints, you will have to deliver increased consumer service as a brand manager, lower your expenditures, or compromise for less profit. Target-Return-On-Sale Pricing In order to set prices, businesses such as supermarkets also use target return-on-sales pricing to give them a benefit that is a specified percentage, say, 1 percent of the volume of sales. This pricing approach is also used because of the complexity of setting a revenue or expenditure benchmark to illustrate how much work a business requires to meet the goal. Target Return-On-Investment Pricing Companies such as General Motors and certain public utilities use tar to fix rates to reach a return on investment (ROI) target, such as a percentage required by the board of directors or regulators, for return on investment pricing. A hydro utility, for instance, may decide to pursue a 10 percent ROI. If the plant and infrastructure spending is $50 million, the price of hydro will have to be fixed at a cost for its consumers that results in revenues of $5 million a year. Later in this segment, the value of achieving ROI estimates will be discussed. Competition Oriented Approaches Instead of stressing market, expense, or benefit considerations, the strategy of an organisation may be based on an overview of what rivals are doing. Customary Pricing Customary pricing is used on certain goods where tradition, a standardised sales channel, or other competitive considerations determine the price. There is a customary price of a few dollars for candy bars sold by regular vending machines, and a substantial deviation from this

price will result in a loss in revenue for the seller. In its candy bars, Hershey has traditionally changed the quantity of chocolate based on the price of raw chocolate, rather than changing the regular sale price so that it can afford to market through selling devices. Above, at, or, below Market Pricing "A product's "market price" is what consumers are usually able to pay, not simply the price set by the company. It is impossible to define a particular market price for a product or product class for certain goods. However, marketing managers often have a subjective intuition for the price or market price of the rivals. Using this benchmark, they may then deliberately pick a plan. The Ethics Emphasis package, "Uber Controversial," explores the influence of the below-market price approach of Uber. Rolex is proud to stress among watch makers that it makes one of the costliest watches you can purchase a simple instance of above-market pricing. Global clothing brand producers such as Christian Dior and stores such as Holt Renfrew purposely set higher prices than those seen at The Bay for their goods. At-market pricing is commonly used for major mass merchandise stores such as Hudson's Bay. In the eyes of their opponents, these chains are also seen as defining the current selling price. They also have a benchmark price for rivals using above- and below market pricing. A variety of companies, by contrast, use below-market rates. This way, Walmart puts itself. Manufacturers of generic products and supermarkets that sell their own private labels of products ranging from peanut butter to shampoo purposely set rates for these products between 8 to 10 percent below the prices of nationally marketed competing products such as Skippy peanut butter or Pantene Pro-V shampoo. Loss-Leader Pricing Retailers often purposely market widely used items at relatively cheap costs, such as paper towels, soft drinks, and facial tissues, to lure buyers who the manufacturer expects, may then purchase other goods at normal prices. The downside to loss-leader pricing is that certain customers switch from store to shop, only making transactions on certain loss-leading items. This buying method, dubbed cherry-picking, essentially foils the loss-leader selling technique to lure consumers who would often consume goods with healthy profit margins. Video game machines, for example, can be sold at a loss to build the chance to benefit from high-margin video games....