Marketing
Pricing Strategies
Pricing strategies refer to the methods and approaches used by businesses to set the prices of their products or services. These strategies can include penetration pricing, skimming pricing, value-based pricing, and competitive pricing, among others. The goal of pricing strategies is to maximize profits, gain market share, or create a competitive advantage.
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eBook - ePubReturn on Investment Manual
Tools and Applications for Managing Financial Results
- Robert Rachlin(Author)
- 2019(Publication Date)
- Routledge(Publisher)
12Pricing Strategies and their Impact on the Profitability Rate
Establishing the right price for a product or service is a major management function. It is a function that has an impact throughout the organization and is especially noticed when calculating the profitability rate, a major component of the return on investment equation. Pricing Strategies are so vital to a business that they are considered among its most important functions. The ultimate survival of the business depends on effective Pricing Strategies.The ability to maximize both volume and price is unquestioned. Every business, in order to survive in the marketplace, must market its goods and/or services in such a way that revenues exceed costs and that the remainder generates a fair and reasonable ROI.Key Factors Affecting Pricing
Management must understand that pricing is a complex subject and that it responds to many factors. For example, the marketplace in which a company operates will determine at what price and at what volume levels customers will respond. A company’s ability to keep unit costs as low as possible will aid in setting pricing guidelines. You must have the capability of manufacturing and selling the product at different economic levels. You must also be aware of what profits are needed to sustain growth and to move in the direction anticipated for the long term.Outside influences cannot be ignored. They are at times equally or more important in establishing a pricing structure. For example, costs of manufacturing and distribution, governmental regulations, plant capacity, governmental regulations, capital investments, legal implications, financial liquidity, technological changes, competitive conditions, and current economic conditions will play a key role in pricing decisions.In setting prices, several major influences must be considered. Other influences unique to a specific business, however, cannot be ignored.Influences on Pricing Decisions
eBook - ePub- Geoffrey Lancaster, Lester Massingham(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
Pricing decisions are more than just a ‘mechanical’ exercise of adding margins for profit to costs. Price setting must become an integral part of the marketing strategy of the company and must be consistent with corporate and marketing objectives and other elements of the mix. In addition to these inputs to pricing decisions, the marketer must also consider demand, cost and competitors.Although cost-based and competitor-based pricing methods can be used, they suffer from major weaknesses. The most useful approach is a marketing-oriented one that does not neglect costs and competitors but is essentially based on customers and their perceptions of value.A whole set of complex factors affect pricing decisions, making this in fact one of the most complex and difficult areas of strategic market planning. If anything, this complexity is compounded by the dynamic nature of pricing, with so many developments affecting the pricing process.Key terms
Demand schedule 138 Price elasticity of demand 141 Inelastic (demand) 142 Elastic (demand) 142 Switching costs 143 Cross elasticity of demand 143 Fixed costs 145 Variable costs 145 Breakeven point 145 Contribution 147 Cost-plus pricing 148 Marginal or direct-cost pricing 150 Variable mark-up pricing 150 Competition-based pricing 150 Going rate pricing 151 Customer value-based pricing 151 Economic value pricing 152Notes
1 Oxenfeldt, A.R. (1973), ‘A decision-making structure for price decisions’, Journal of Marketing, 37, January: 50.2 Kehagias, J., Skourtis, E. and Vassilikopoulou, A. (2009), ‘Plaiting pricing into product categories and corporate objectives’, Journal of Product & Brand Management, 18(1): 67–76.3 Indounas, K. and Avlonitis, G.J. (2009), ‘Pricing objectives and their antecedents in the services sector’, Journal of Service Management, 20(3): 342–74.4 Hutt, M.D. and Speh, T.W. (2012), Business Marketing Management: B2B, 11th edn, Cincinnati, OH: South Western Educational Publishing.5 Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance
- Ray Donnelly, Colin Linton, Colin Linton(Authors)
- 2010(Publication Date)
- Routledge(Publisher)
CHAPTER 4 Pricing, Pricing Concepts and Price Setting
DOI: 10.4324/9780080961255-5Learning Outcomes
By the end of this chapter you will be able to:- Analyse the role of pricing in influencing customers
- Evaluate and apply a range of pricing approaches and strategies
- Examine the factors that influence the pricing of goods and services, in both domestic and international markets
Introduction
Pricing will now be considered with a view to deepening the understanding of the impact that a variety of Pricing Strategies can have on the product position in the market. We will explore the ways in which pricing can be used to manage the product at various stages in its lifecycle in order to maximise the appeal of the product and profitability.Readers will be appraised of the importance of setting pricing objectives as a benchmark and to guide strategic product development. The role of the customers’ view of different strategies will also be considered particularly in terms of the perception of value for money over which Pricing Strategies have significant influence. The role of pricing in building market share will also be considered as a key elemention the marketing mix.The Role of Pricing in Product Management
Price is ‘the amount of money charged for a product or service’ (Armstrong and Kotler, 2006 ). It is the value that someone is prepared to pay for the product. It is also the one element of the marketing mix that generates revenue, income and profit for the organisation, i.e. it has a direct impact on the bottom line and needs careful management.While organisations do not compete with each other on price alone, it can be an important consideration for the consumer when choosing to make a purchase. Different organisations selling a (very) similar product can charge different prices, which are often brought about by internal calculations of ‘cost’. Different costing approaches will make a difference to the price which can be charged to the consumer if an acceptable profit is to be made by an organisation.
eBook - ePub- Clive Marsh(Author)
- 2012(Publication Date)
- Kogan Page(Publisher)
enetration: Try to win new customers in existing markets and increase/extend existing customer purchases. Differentiation. Price competitively .- C hallenger: Being innovative and selling new ideas. Seize new opportunities and outsell competitors with quality and keen prices . Take on higher-risk business at potentially higher prices .
- L eader: Sell at very keen/ best prices . Increase distribution network. Increased advertising.
Defensive strategies- F ollower: Take lower risks and possibly accept lower prices .
- N iches: Specialize and perhaps obtain better prices .
- C ost reduction: Cut costs. Have the ability to sell at lower prices .
Creaming or skimmingThis is where prices are set with consideration to competitors’ product prices. A product may be totally distinctive, have perishable distinctiveness or have little distinctiveness from the competitors’ products.Clearly if there is little that distinguishes your product from the competitio n, then your price may have to track competitors’ prices more closely.This strategy can be used only for a limited time; to win greater market share a seller would use other pricing tactics. Cost-plus pricingThis strategy is often used to gain high profits from early adopters of new products and technology. It involves selling a product at a high price, maybe sacrificing some volume but obtaining high margins and perhaps setting higher price expectations. It may be used in an attempt to recover research and development costs.We have discussed at some depth various costing methods and the need for accurate cost information to see how selling prices will contribute to profits. Cost-plus pricing, where prices are set from costs, may have some use when there is no market information but generally has the significant disadvantage of not taking into account market intelligence.
eBook - ePubEntrepreneurship Marketing
Principles and Practice of SME Marketing
- Sonny Nwankwo, Ayantunji Gbadamosi, Sonny Nwankwo, Ayantunji Gbadamosi(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
Chapter 8Choosing the right pricing strategy
P. Sergius KokuINTRODUCTIONLEARNING OBJECTIVESAfter reading this chapter, you will be able to:Develop an appreciation for complexities in pricing;Develop pricing objectives;Develop appreciation for the interface between pricing decisions and law;Develop appreciation for the internal and external factors that affect pricing decisions;Be able to discuss pricing variables and the various pricing objectives;Understand the differences in the pricing process in SMEs and large organisations;Choose an appropriate pricing strategy;Be able to do simple calculations involving markup and break-even volume.Regardless of firm size, pricing is one of the most critical activities that take place within the firm. The importance of the pricing process to a firm lies in the fact that pricing is the only means through which a firm can generate revenue. A mistake in the process could be costly to the firm. Pricing mistakes may not only make the firm less profitable but also they can result in a firm’s bankruptcy and its eventual closure.Because of its importance, pricing has attracted a significant research effort in many academic disciplines such as marketing, economics, and law. Because it can be easily mimicked by competition, firms do not rely solely on price for their competitive strategy. However, price’s uniqueness as a strategic tool is reflected in the fact that it is about the only corporate activity that goes by several different names, depending on the context. For example, it is referred to as a ‘fare’ in the transportation industry, a ‘fee’ in education and its related business, ‘cover’ in the entertainment industry, and ‘price’ in many other situations.Regardless of what it is called, the primary objective of price is to cover all the costs incurred in making a product/service and to produce profit while it still appeals to the intended target market. The issue of whether products or services must be priced to maximise profit is a seemingly simple but in fact rather vexing one and will not be discussed in detail here. However, suffice it to say that, while some economists believe that pricing must be used as a tool to maximise profit, behavioural economists take the view that profit maximisation is not the object of the firm. Cyert and March (1963), for example, have argued that because of the interactions that take place within firms, the wide range of personal objectives that are held by the employees, as well as the constraints that exist, firms aim to achieve profits that would be satisfactory to their disparate stakeholders, instead of trying to maximise profits.
eBook - ePubPricing and Profitability Management
A Practical Guide for Business Leaders
- Julie Meehan, Mike Simonetto, Larry Montan, Chris Goodin(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
What Comprises a Successful Pricing Strategy?A consumer durable goods manufacturer had grown significantly over the years, largely through acquisitions. Though it had absorbed different businesses, it had never developed a unified pricing strategy or a centralized pricing organization. Now, however, the company found itself facing fierce competition and considerable external pricing pressures (e.g., declines in the housing market and volatile oil costs). The sales force did not trust the outdated corporate price lists and did its best to set prices under a cost-plus model. However, without a cohesive strategy and policies to enforce it, there were extreme disparities in prices. The abuse of overrides put the majority of the manufacturer's realized prices well under the corporate minimums.The company had been able to overcome these problems while the economy was good, but when it took a turn for the worse in late 2008, the company's margins declined sharply. Management needed to change its approach to pricing—and fast. The company assembled swat teams and conducted grueling workshops with employees from all levels of the organization to discuss the pricing strategy. Within six months, the firm had codified new pricing policies, revised specific practices that had been draining margin, created a sophisticated customer segmentation scheme, and revamped the corporate price list process. The result? In less than a year the manufacturer found it had gained an additional $12 million in profit.An effective strategy should reflect an integrated pricing framework that supports business objectives by capturing the value of an offering relative to its rivals and customer demand. The strategy should guide an organization's internal behavior as well as its external communications to the market for all pricing-related actions. A pricing strategy must be:- grounded in data and fact rather than in anecdote and conjecture;
- aligned with overall corporate objectives as well as other functional strategies (e.g., marketing and sales); and
- flexible, adaptive, responsive, and monitored.
Many organizations believe a pricing improvement initiative should first define the overarching strategy, and then design the processes and analytics, which must conform to the strategy. However, a plan that is based solely on hearsay from the field or theoretical concepts of value is doomed to fail, regardless of how meticulous or accurate the subsequent pricing analytics prove to be. An effective strategy must start with a rigorous analysis of the relevant facts, including data about customers, competitors, market dynamics, and historical transactions. When all the information has been gathered and understood, it can be assembled into an insightful, cohesive, and operationally effective framework that will guide pricing decisions.
eBook - ePubMarket Research in Practice
An Introduction to Gaining Greater Market Insight
- Paul Hague(Author)
- 2021(Publication Date)
- Kogan Page(Publisher)
The starting point for setting prices is to understand the overall objective of the business. Do we want to maximize sales? Do we want to maximize profits? Or do we want to maximize market share? It is almost impossible to achieve all of these objectives at once. Most companies chase profits in the long term; shorter term they may prioritize maximizing sales or market share and be prepared to lower their prices in order to achieve one of these objectives. But lowering price to increase sales or share can result in a decrease in profits – either because distribution, advertising and other costs are incurred in reaching more customers, or simply because the decreased cost does not result in enough extra customers to compensate. It can also set the expectation of further reductions in the future.A company that does not use its business objectives as the starting point for its pricing strategy will invariably get its pricing wrong and cause damage to its business. A summary of how different business objectives inform different Pricing Strategies is provided below.Table 20.4Skip tableBusiness objective Pricing strategy Definition of pricing strategy Maximize market share or revenue Penetration pricing Pricing low to attract as many customers as possible Predictable revenue and profits Cost-plus pricing Adding a fixed amount to the cost of providing the offer Predictable revenue and profits Competitive pricing Basing prices on what the competition is charging Maximize profits Value pricing Pricing based on the customers’ perceived value of the offer Maximize profits and build exclusive brand Premium pricing Pricing high and possibly reducing supply in order to maximize margin per customer Maximize profits and provide customer choice Optional pricing Charge for basic offer and then for additional extras Maximize revenue Bundle pricing Offer discounts for buying more than one product or benefit Maximize profits Skimming pricing Start by charging a high price to those that are willing to pay it. Gradually decrease price to sell to groups with smaller budgets 
eBook - ePubStrategic Product Management according to Open Product Management Workflow
The book on Product Management that explains the Product Managers tasks step by step and provides useful tools as applied in practice
- Frank Lemser(Author)
- 2019(Publication Date)
- Books on Demand(Publisher)
PRICING STRATEGYAs participants in our training courses tell us again and again, there are outright price wars in their company. This is not a price battle in the true sense of the word, but a fight about who in the company has sovereignty over the definition of prices. The discussions usually take place between Sales and Product Management, but Top Management would probably also like a say here more often.First of all, it is a basic thing that everyone works together in a company and should work together on its success.As a Product Manager, you derive the pricing strategy which is then presented in a business proposal, which is generated from the business plan. The prices are also part of this decision document, i.e. as a Product Manager, you propose a price that is determined based on market facts.When we ask the above-mentioned training participants whether they have done all their preliminary work in accordance with the Open Product Management Workflow in order to justify and represent their price proposal with good arguments, then it often goes silent. Because it then becomes clear to our colleagues why Sales with their statement: “We speak to the customers and know our way around the market.” always wins.A well-founded price proposal and a credible pricing strategy will only be delivered if the preliminary work has been completed properly. Using this image, you can see what preparatory work must be completed before the pricing strategy can be derived.The aim of the derivation of the pricing strategy is: To determine the value of the solution for customers. To do so, you need to find out:- How much time and/or money the customer saves
- Whether an expected price exists, based on:
- The self-detected savings potential
- The recognition of the time saving
- Perceived added values (if so, what are they?)
When asking for an expected price, you should also use the product positioning, i.e. the market message that was previously created. At this point, you can use the Technology Benefit Analysis (Document 10) as a tool for the survey.
