Managerial Economics: On Pricing Strategy PDF

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Summary

This provides the definition, factors, purposes, and two classifications of Pricing Strategy (ie. Cost-Based Pricing and Market-Based Pricing)....

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PRICING STRATEGY   

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Also called “Pricing Methods” The ways in which the price of goods and services can be determined. Has different factors: 1. product/service 2. competition 3. target audience 4. product’s life cycle 5. firm’s vision of expansion, etc. Has different purposes: 1. to enter a new market 2. to increase market shares in a market 3. to defend an existing market from new competitors A company can employ one or all of these methods, depending on the type of product they offer and the ultimate objective of pricing.

2 CLASSIFICATIONS OF PRICING STRATEGY A. Cost-Based Pricing  Considers the cost of production as the basis of calculating the price for the finished goods.  Has three different ways: 1. Cost-Plus Pricing, 2. Markup Pricing, and 3. Target-Return Pricing  Calculates the cost of production incurred and adds a markup to it. The markup is the percentage of profit calculated on total cost. Selling Price = Cost of Production + (Cost of Production X Markup Percentage/100) Profit = Selling Price – Cost of Production B. Market-Based Pricing  A variation of Cost-Based Pricing.  In this pricing method, the percentage of markup is calculated on the selling price. Markup Price = Unit Cost / (1 – Desired Percent of Return on Sales) Profit = Markup Price – Unit Cost Target Return Price = [Unit Cost + (Desired Percent of Return)(Capital Invested)] / Unit Sales   

Target-Return Pricing: The price is set to yield a required Rate of Return on Investment (ROI) from the sale of goods and services. Market-Based Pricing: Considers the market conditions as the basis of calculating the price for the finished goods. Includes: 1. Perceived-Value Pricing 2. Value Pricing

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Going-Rate Pricing Auction Type Pricing Differential Pricing

Perceived-Value Pricing The price is set on the basis of the customer’s perception of the goods and services, considering all elements that influence customer perception such as advertising, promotional tools, additional benefits, product quality, channel of distribution....