Introduction to Pricing Strategies
What is pricing exactly? Does innovative pricing help a business rake in the bucks and develop a loyal customer-base?
Or are product prices a puppet of the existing conditions? And, do all the different pricing strategies make any difference in reality?
This write-up intends to answer these intriguing questions as lucidly as possible, as we investigate the ideas and motives behind pricing.
It will also attempt to deliver vital information about pricing & its strategies, as simple as possible. Let’s hope it helps build your ideas and confidence in acing your pricing strategy assignment help without external assistance.
So, without further ado, let’s dive right in.
What Is Pricing And What Are Its Influential Factors?
In simple words, we can say that pricing is the process using which a business sells its products or services. Many companies consider pricing to be a part of their marketing strategy and implement pricing strategies in line with their marketing plans.
While setting the price of a product or service, businesses often consider several vital factors: the overall cost of manufacturing, market competition & condition and promotional expenses, consumer behavior, and more.
Here’s a brief overview of the factors that can impact the pricing decisions of a business.
The response of the public is a significant factor that dictates the pricing strategy of a firm. Three things—the buyer’s perception of whether the product offers value, the number of buyers, and their sensitivity to changes in prices—have the potential to affect product pricing.
Price sensitivity or price elasticity is a crucial factor determining whether customers will buy a product given its price.
The demand for a product is liable to change with change in its pricing. Simultaneously, the demand for certain products or services is unlikely to change irrespective of their price changes.
Sensitivity to changes in prices or price elasticity is given as:
Price elasticity = percentage change in quantity demanded / percentage change in price
Electronic appliances such as Television, refrigerators, etc., luxury items are more price elastic in terms of their demand; that is, they sell less if their prices are high & more if the prices are low. Elasticity is heavily dependent on market conditions and the income scale of consumers.
Similarly, price inelastic products are those whose sales are relatively insensitive to changes. Demand for essential products and services such as food and healthcare are not affected much by price fluctuations.
Monopolies and high competitions are significant factors that affect the pricing decisions of a firm. Companies that enjoy a monopoly in a particular market have a lot of freedom while fixing their prices simply because there are no substitutes.
How competitors determine the pricing of their products has a massive impact on a firm’s pricing decisions. It is quite evident since customers will always look to buy a lower-priced product and attractive discounts.
Companies will always look to develop and maintain a loyal customer base; naturally, low prices, fantastic offers, price cuts, and services that help cut down on consumer expenses will attract more footfall.
The availability of a competitive product can make firms rethink their pricing strategies. Merchants must look at substitutes, direct competitors, and potential entrants before deciding upon their pricing strategies.
Economy and Government Laws & Regulations
Global and regional economic conditions have a profound impact on market conditions. Economic conditions do not affect costs but change consumer behavior.
- Under poor economic conditions, interest rates tend to drop, and unemployment rises. Businesses tend to lower their prices in such scenarios.
- Federal and state regulations also affect pricing strategies across sectors. Though rules help protect consumers, promote competition, and encourage ethical behavior, these policies affect pricing decisions.
- Policies and regulations aim to protect consumers against price-fixing, a strategy where different firms collude together to charge high prices for similar products and services.
- Unfair trade laws protect smaller businesses by fixing a minimum price for similar products. These laws prevent larger enterprises from operating as loss leaders and avoid implementing predatory pricing
- Bait & switching pricing strategy is yet another technique that is considered illegal in many markets. Nevertheless, many businesses utilize this technique to lure customers and then make them buy expensive alternatives, citing no or limited stock.
The expenses incurred in the manufacturing and promotion of a product must be taken into account while deciding upon a product’s prices.
Product costs typically include the following:
- Total direct labor,
- Total direct materials,
- Consumable supplies, and
- Total allocated overhead costs
Product costs may also include any expenses due to testing, research, and packaging involved in the manufacturing stage.
Moreover, promotional and distribution expenses play a crucial role in determining costs. When a new product is launched, promotional prices are often relatively high.
A firm needs to break even and then gain some more to turn over a profit. A business breaks even if its total costs are equal to total revenues earned.
Now, the total costs of a company include both its fixed costs and variable costs. The components above of a product’s price-include both the fixed and variable costs of a product:
Overhead costs = Fixed costs, which must be paid irrespective of the quantity of its production or sales;
Costs due to direct supplies, labor, and materials= Variable costs, which tend to vary as per demand.
How should a company price a new product? Is it worthwhile to spend time brainstorming about the perfect pricing strategy? These are the kind of questions which you can come across in your pricing strategy assignments. It will help you big time if you first determine the importance of implementing a proper pricing strategy and look into the decision-making process.
The criticality of an acute pricing strategy can be summed as follows:
If the pricing strategy goes wrong, the demand for the product can fall, or the business will not be able to rake in a profit.
Too high price= losing out on potential customers
Meager price= sacrificing profit
Let us now take a brief look at the decision-making process behind product pricing.
A Look Into Pricing Decision-Making
Poor pricing decisions can quite devastating for a company, given their far-reaching consequences. It is essential to delegate these critical decisions to the right set of people.
From an organizational standpoint, pricing is a cross-functional decision-making challenge and can involve many other departments. Finance, sales, marketing, and operations personnel have a say in determining a particular product’s price.
In all probability, each department’s pricing decisions are bound to be biased due to one factor or the other.
- Finance executives have a high probability of selecting pricing strategies by their accounting knowledge and orientation. They have a firm understanding of the costs involved, a strong grasp of break-even analyses, and an acute knowledge of cost-plus analysis. Naturally, they are one of the most likely candidates for making pricing decisions with their heightened understanding of the profit margins and an ultimate aim to increase shareholder value.
But, they are often not in the best position to understand the mindset of consumers.
- Sales and marketing executives can claim to be the perfect choice for making pricing decisions. They tend to be more customer-oriented and are well informed about their preferences, the actual market conditions, and market share. Marketing personnel has better ideas about steering customers towards buying a product &ascertaining their willingness to pay a specific price.
The incentive bias comes into play, however, as marketing executives often lower prices to meet sales targets and grab more customers. In the process, the company may miss making a viable profit.
- Operations executives are also potential candidates to make pricing decisions. Issues related to economics, scale, and cope are at their fingertips and can influence pricing decisions.
Yet again, incentives and performance measurements act as a biasing factor in the decision-making process.
Because of these reasons, business executives decide to make pricing strategy decision-making processes a cross-functional endeavor. Companies must take advantage of the benefits of each department’s skills, capabilities, and resources to make acute pricing strategy selection.
Many companies make pricing decisions a chief-executive level concern due to the sheer breadth of the responsibilities involved.
The Pricing Professional
To aid then in their decision-making process, many company executives have come up with a new organizational position: The Pricing Professional
Pricing professionals are expected to bring into the mix a perfect blend and volume of insight, knowledge, and skills.
- They possess the mindset and ideas to understand customer perception, behavior, and willingness to pay a specific price.
- Pricing professionals need to have a firm understanding, knowledge of economic and market issues.
- They must be aware of all factors related to costs, including marginal production costs and fixed incremental costs.
- From a marketing standpoint, they need to have strong ideas about competitive actions, market share, and industry dynamics. At the same time, they must know good economics and determine the relationships amongst price & volume changes, and profit requirements.
- Pricing professionals need to possess a mix of quantitative analytical skills with more refined qualitative skills to make better informed and insightful decisions.
- Most pricing professionals come from finance, marketing, economics, or mathematical & sciences background.
Before concluding this article, let us look into the different pricing strategies employed by businesses across different markets and sectors.
Types of Pricing Strategies
Following is a list of some of the most common pricing strategies utilized and adopted across industries.
Cost-plus pricing is a cost-based method for deciding upon the prices of products and services. Under this strategy, the direct labor, materials, and overhead costs of a product are summed together. Then a mark-up percentage or profit margin is added to determine the price of a product.
Incremental Cost Pricing
Incremental costing is all about setting a price based on increment costs. Here, the selling price of a product is obtained using the product’s variable cost, not its overall manufacturing costs. The fixed cost remains the same. The product’s selling price is generated using the variable costs since this strategy involves manufacturing the same product using the same setup and labor.
In this scenario, the sellers allow buyers to bid and compete for a product by asking them to quote the highest price, which they are likely to pay for it. The highest bidder gets the item.
Price skimming is a strategy where a business sets a relatively high selling price for a product and then lowers it over time.
Implementing this particular strategy allows companies to recover hefty expenses incurred in research, development, and manufacturing. Companies that utilize this particular strategy are often sellers of high end and luxury items. The gradual lowering of prices allows companies to target different layers of customers.
Loss Leader Pricing
Companies adopting a loss leader pricing strategy marks its products at substantially low prices to attract customers. Such an approach allows a company to boost sales as customers tend to buy in large amounts and make additional purchases.
Loss leader pricing in a bid to lure customer traffic away from potential competitors. Retail stores that use this particular strategy know that they will not make a profit from these products. They intend to make a profit on large volumes of sales, which these loss leader products generate.
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Demand oriented pricing
As the name suggests, this strategy revolves around the market demand of a product. The business first determines the consumer’s willingness to pay a specific price for a good or service.
The higher the demand, the higher the price, while a low demand results in low prices. Certain services charge higher prices during peak demand. Some examples are cab prices, restaurants, cinemas, airlines, etc.
Prestige pricing or image pricing involves charging a product at a significantly high price to give the appearance of quality and prestige.
Prestige pricing aims to set prices higher than average and works on the perception of a better price, better quality. Jewelry, cars, luxury items are sold following this particular technique.
Dynamic pricing is all the rage on online e-commerce websites. Businesses that utilize this strategy tend to manipulate and change prices based on customer demand, ability, and urgency. Higher
And, with that, we come to the end of this write-up. I hope this article was educative enough for anyone and acts as a reliable pricing strategy assignment help & reference guide in times of need!
Jacob Ryan is a price analyst with a multinational firm in Oregon. A busy man,
he takes time out of his hectic schedule to write and offer first-rate pricing strategy assignment help, only at MyAssignmenthelp.com.