Pricing Policy
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- Pricing policy v Price: It is the quantity of payment or compensation given by one party to another in return for goods or services. v The price of a product may be seen as a financial expression of the value of that product. vPricing policy: It is the policy of a company or business that guides the price setting of its good and services that are offered for sale. vIn setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.
- Pricing Objectives • Profit maximization • Satisfactory profits • Target return on investment Profit oriented • Market share • Sales maximization Sales oriented • Maintain existing prices • Meet competition’s price Status-quo oriented.
- Factor influencing Pricing policy Fixed & variable cost Competition Business objective Target group & willingness to pay Positioning.
- Common Pricing policies v One price policy: offers the same price to all customers who purchase products under the same conditions and in the same quantities. Most companies use a one-price policy because it makes pricing easier and customers like it. v Flexible price policy: offers the same product and quantities to different customers at different prices. For example, grocery stores might give frequent-shoppers discount prices. Flexible pricing has become easier because companies now have access to databases that keep track of different price scales.
- Pricing Strategy v Pricing strategy in marketing is the pursuit of identifying the optimum price for a product. vA pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. vIt is targeted at the defined customers and against competitors.
- Types of Pricing strategies Penetration pricing Skimming Pricing Competitive Pricing Economy Pricing Bundle Pricing Discount Pricing Discriminatory Pricing Prestige Pricing Full Cost Pricing
- Penetration Pricing v Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. vThis strategy is most often used businesses wishing to enter a new market or build on a relatively small market share
- Skimming Pricing v The practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or much improved product is launched onto a market. v The objective of skimming is to “skim” off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the “early adopters” falls. v High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the supplier benefits from ‘monopoly profits’, but as profitability increases, competing suppliers are likely to be attracted to the market.
- Competitive pricing v Competitive pricing is setting the price of a product or service based on what the competition is charging. v This pricing method is used more often by businesses selling similar products, since services can vary from business to business, while the attributes of a product remain similar. v In order to grab market share.
- Economy Pricing A valuation technique which assigns a low price to selected products. Economy pricing is widely used in the retail business and production costs have been kept to a minimum.
- Discount Pricing v Businesses use discount pricing to sell low-priced products in high quantities. With this strategy, it is important to cut costs and stay competitive. v Large retailers are able to demand price discounts from suppliers and make a discount pricing strategy effective. v Occasional discounts and discounts that reward loyal customers are effective. v Discounts used too often begin a downward pricing spiral that may eventually damage your ability to sell the product at full price.
- Discriminatory Pricing Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay.
- Prestige Pricing v Marketing strategy where prices are set higher than normal because lower prices will hurt instead of helping sales, such as for high-end perfumes, jewellery, clothing, cars, etc. Also called image pricing. v Prestige pricing has a direct correlation with the brand and the perception of the customers over the image of the company.
- Full Cost Pricing v Full cost-plus pricing is a price-setting method under which you add together the direct material cost, direct labour cost, selling and administrative costs, and overhead costs for a product, and add to it a mark-up percentage (to create a profit margin) in order to derive the price of the product. v This method is most commonly used in situations where products and services are provided based on the specific requirements of the customer; thus, there is reduced competitive pressure and no standardized product being provided. vThe method may also be used to set long-term prices that are sufficiently high to ensure a profit after all costs have been incurred.
