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Post by PickyChicky on Apr 29, 2016 16:47:12 GMT -6
Different Types of Pricing Strategy by Leigh Richards, Demand Media
Pricing is one of the four elements of the marketing mix, along with product, place and promotion. Pricing strategy is important for companies who wish to achieve success by finding the price point where they can maximize sales and profits. Companies may use a variety of pricing strategies, depending on their own unique marketing goals and objectives. Premium PricingPremium pricing strategy establishes a price higher than the competitors. It's a strategy that can be effectively used when there is something unique about the product or when the product is first to market and the business has a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle. Penetration PricingA penetration pricing strategy is designed to capture market share by entering the market with a low price relative to the competition to attract buyers. The idea is that the business will be able to raise awareness and get people to try the product. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of-mouth and create awareness amid a crowded market category. Economy PricingEconomy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whose brand is based on this strategy. Aldi, a food store, is another example of economy pricing strategy. Companies take a very basic, low-cost approach to marketing--nothing fancy, just the bare minimum to keep prices low and attract a specific segment of the market that is very price sensitive. Price SkimmingBusinesses that have a significant competitive advantage can enter the market with a price skimming strategy designed to gain maximum revenue advantage before other competitors begin offering similar products or product alternatives. Psychological PricingPsychological pricing strategy is commonly used by marketers in the prices they establish for their products. For instance, $99 is psychologically "less" in the minds of consumers than $100. It's a minor distinction that can make a big difference. Source: smallbusiness.chron.com/different-types-pricing-strategy-4688.htmlReferences Resources: "Marketing With the End in Mind", Lin Grensing-Pophal, 2005
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Post by PickyChicky on Apr 29, 2016 16:58:08 GMT -6
Four Types of Pricing Objectives by Daria Kelly Uhlig, Demand Media Price is a vital component of a marketing mix, also known as the "four Ps" of marketing. The other components are product, place and promotion, all of which constitute costs. Price, on the other hand, generates a return as it supports the other marketing-mix elements. Although supply and demand drive pricing decisions, they're not the only factors. Any number of pricing objectives may come into play, but four in particular apply to most businesses. SurvivalPrices are flexible. A company can lower them in order to increase sales enough to keep the business going. The company uses a survival-based price objective when it's willing to accept short-term losses for the sake of long-term viability. ProfitPrice has both direct and indirect effects on profit. The direct effect relates to whether the price covers the cost of producing the product. Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale -- the relative benefit of selling more units. The primary profit-based objective of pricing is to maximize price for long-term profitability. SalesSales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods. A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily spur a change in the other. Status QuoA status quo price objective is a tactical goal that encourages competition on factors other than price. It focuses on maintaining market share, for example, but not increasing it, or matching a competitor's price rather than beating it. Status quo pricing can have a stabilizing effect on demand for a company's products. Source: smallbusiness.chron.com/four-types-pricing-objectives-33873.html ReferencesResources: The Times 100: Marketing Mix (Price, Place, Promotion, Product)
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Post by PickyChicky on Apr 29, 2016 17:05:15 GMT -6
Factors Influencing Pricing Strategy by Hannah Wickford, Demand Media
Marketing’s four Ps -- product, price, promotion and placement -- are the basic components of any marketing mix. The decisions you make with regard to all of these elements can mean the difference between success and failure. There are many factors that will have an influence on how you set the price for your product or service, with some of them internal and some external, and most of them will fluctuate over time. CompetitionA competitive pricing strategy, where prices for a product or service are set based primarily on the prices of the competition, is best suited for a price-sensitive and highly competitive market. Whether you use this type of strategy or not, you should always take your competition’s pricing into account when setting your own pricing, unless you hold a monopoly. If consumers perceive your product and your competition’s as having equal value, you could lose out in a big way if your competitor’s price is lower than yours is. Market DemandThe laws of supply and demand should always come into play when setting your pricing. If a product is in high demand, particularly if demand exceeds supply, then the market can bear a higher price. Conversely, if demand dwindles, consumers will not be willing to pay higher prices. Your pricing should remain relatively stable over time, but you can put promotions in place to discount the price when needed. Brand StrategySetting your prices without a thorough grasp of your brand objectives can destroy any brand-building efforts. Your price is a part of your brand image. Think about Walmart, which has built its entire brand around low pricing, or Tiffany & Co., whose consumers expect high-end pricing. If your products’ prices are not in line with your brand image, you will most likely confuse consumers instead of convert them. Cost of Goods SoldIf you want to make a profit on the sale of your products, you must charge a higher price than what it cost you to actually produce and transport them. The cost of goods sold almost always plays an integral role in any pricing strategy. The exception to this is if you are promoting your product as a loss leader. A loss leader is a product that is sold below cost as an incentive for consumers to purchase other products at normal prices. Many mobile carriers, for example, sell cell phones at hugely discounted rates so that consumers will sign on for one of their cell phone service packages. Source: smallbusiness.chron.com/factors-influencing-pricing-strategy-54489.htmlReferencesResourcesAbout the AuthorAfter attending Fairfield University, Hannah Wickford spent more than 15 years in market research and marketing in the consumer packaged goods industry. In 2003 she decided to shift careers and now maintains three successful food-related blogs and writes online articles, website copy and newsletters for multiple clients.
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Post by PickyChicky on Apr 29, 2016 17:22:55 GMT -6
Competitive Pricing Strategy by Catherine Lovering, Demand Media
Effective pricing can make or break a business. Selling a well-established product at a similar price to competitors is an option for small retailers who want to draw customers to their businesses. Keeping customers there, however, often means distinguishing themselves on bases other than price. Relying on a competitive pricing strategy may be risky if volume cannot be maintained or if costs suddenly rise. Pricing Strategy OptionsCompetitive pricing is one of four major pricing strategies. Other options include cost-plus pricing, where a set profit margin is added to the total cost of a product -- including materials, labor and overhead. Markup pricing is where a percentage is added to the wholesale cost of a product. Demand pricing is determined by establishing the optimal relationship between profit and volume; a smaller per-unit profit is acceptable if volume is increased significantly. Competitive pricing is charging a price that is comparable to other vendors selling the same item. Factors to ConsiderProduct prices determine the revenue stream of a business. Prices must be sufficient to cover the costs of product production, company overhead and profit. Before lowering prices it's preferable to lower costs to maintain a stable profit margin and a stable cash flow into the business. Any pricing strategy must be chosen to ensure a maximum of profit. Knowing your market and customer base are key elements to choosing the right pricing strategy. About Competitive PricingVendors use a competitive pricing strategy when several other businesses sell the same product and there is little to distinguish one vendor from another. A market leader will generally set the price for the product and other vendors will usually have no option but to follow suit in order to remain competitive. Vendors will either match the pricing of the market leader or set prices within a comparable range. Establishing Competitive PricingVendors who are not market leaders can use the accepted price as a starting point. From there they can opt to charge slightly more on the basis of factors such as superior customer service or an extended warranty on a product. Retailers must be fully informed of the prices their competitors charge and also know how discerning their customers are on price alone. Once price is established, sales volume must be monitored to see if the strategy is working. Risks of Competitive PricingFor many small businesses in particular, competitive pricing results in a narrowing of profit margins. This makes the business vulnerable to a sudden rise in costs. Therefore, independent retailers competing with high-volume, big box stores may choose an alternative pricing strategy that affords them a larger cushion on their profit margin and justify it on the basis of their niche advantage -- for example, being local and customer-focused. Source: smallbusiness.chron.com/competitive-pricing-strategy-59220.htmlReferences
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Post by PickyChicky on Apr 29, 2016 20:16:58 GMT -6
The Average Purchase Amount for a Pricing Strategy by Murad Abel, D.B.A., Demand Media
Pricing strategies are used to help companies and business owners determine an appropriate price for products and services. When products are initially offered, it can be difficult to determine the best price for competitive advantage and ensure an appropriate return on investment. The average pricing strategy helps ensure the prices are not so high as to reduce sales volume -- or too low to limit profits. When determining the average pricing strategy, consider the market, regional considerations, options and the average strategy. If you're a small-business owner, you may consider the prices of your local competitors. Research the MarketResearching the market and comparable products or services gives company decision-makers an opportunity to understand their competition and set ranges for the pricing strategy. The research should include any product or service that a customer may conceivably consider, instead of the product being offered. For example, if a business was selling jelly, then the research range would include all local jellies sold with similar quality. Regional PricingProducts and services will range in value and price depending on where they're sold. This is influenced by economic considerations, as well local demand. For example, you might pay more for a cup of coffee in a large city than you would in the suburbs. California and Michigan may also have differences in prices that impact sales. Researching pricing indexes and local markets can improve proper pricing of products. Option and Add-On ValueCompare and contrast the products so that a value can be determined based on the options and add-ons the product offers. Each advantage and disadvantage of the product should be understood, compared to similar products with like characteristics. For example, if most mailing-list software offered retails on average for $15, but those with enhanced databases retail for $17, then the market value of this option is $2. The Average PriceThe average pricing strategy means that the average price between the high price and low price is chosen. This option helps ensure value is realized, which encourages purchases at an appropriate price. If the price is too high, then fewer sales occur -- while a lower price will increase sales but decrease potential profits. The average price encourages overall balance in sales and profits to create maximum return on investment. Source: smallbusiness.chron.com/average-purchase-amount-pricing-strategy-15272.htmlReferences- Journal of Personal Selling; Qualitative Methods in International Sales Research; Javalgi et al.; Spring 2011
- Engineering Economist; Evaluating Product Plans Using Real Options; Presenjit Shil and Venkat Allada; 2007
- Journal of Finance; Real Options, Product Market Competition, and Asset Return; Felipe Aguerrevere; April 2009
About the AuthorMurad Abel has more than 15 years of experience in management and consulting. He is a business leader in the casino industry, as well as an academic professor in the subjects of business, management, leadership, human-resource management and communications. Abel earned his M.B.A. at Davenport University and his Doctor of Business Administration from the University of Phoenix.
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Post by PickyChicky on Apr 29, 2016 21:01:01 GMT -6
Product Valuation Strategy by Bert Markgraf, Demand Media
Product valuation fixes the price of a product based on what potential customers are willing to pay. Companies want to set the price high enough to cover their costs, but just below the maximum value the product has for the members of a target market. Valuation is a critical process for small businesses, whose comparatively low sales volumes reduce their ability to absorb pricing mistakes. Strategies to determine the valuation look at various cost and market characteristics to help fix an appropriate price. CostsThe product costs are a key component of product valuation strategy. They provide a price below which the business loses money. Identifying the costs related to the manufacturing of the product is a critical part of the valuation process. Rather than simply adding up the costs of production, it is more relevant to look at costs that the company can avoid if it doesn't manufacture the product. Selling the product at a price higher than those costs results in a net benefit to the company. CompetitionCompetitors' pricing affects product valuation. It doesn't make sense to manufacture a product if competitors price it below your own costs. If the lowest price a competitor charges is higher than your production costs, there is a business case for selling the product. Competitor pricing lets you determine whether there is a market for your product at your price level. Once you have verified that such a market exists, you can focus on external factors for product valuation. DemandOnce the product cost structure is clear, valuation strategy looks at demand. Demand affects the price you can charge for a product because high demand makes economies of scale possible. You can get an idea of demand from competitor sales figures and from market surveys. If there is high demand, you can achieve a high sales volume and spread your fixed costs over more sales. This means you can charge a lower price for the product and still make money. SupplyThe other side of the influence of demand on product valuation is the supply of product. Product valuation strategy looks at whether the potential supply of product is enough to fill the demand once you enter the market. If supply is constrained, shortages make the price rise. You have to decide whether the emphasis of your strategy will be on sales volume or maximizing sales margin. A high price in the presence of supply constraints increases percent profit, but a lower price increases sales and may increase total profit. Added ValueA final aspect of product valuation strategy is the introduction of added value. If you can identify product characteristics that your customers value, and which you can add to your product at low cost, you can increase the price of the product and its profitability. If this added value gives you a unique advantage over your competitors because it is difficult for them to copy, your market position is even stronger. A strong position in the market lets you either charge a higher price for your product and increase profitability or charge a lower price and increase market share. Source: smallbusiness.chron.com/product-valuation-strategy-43015.htmlReferences
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Post by PickyChicky on Apr 29, 2016 21:06:43 GMT -6
Value-Based Pricing Strategy by Lisa Magloff, Demand Media
The two basic ways of pricing goods and services are cost-plus pricing and value-based pricing. Cost-plus sets the price at the cost of production plus a profit. In value-based pricing, the price is based on what customers are willing to pay. The more value your product or service has to your customers, the higher the price you can charge. Value-based pricing strategies therefore are based on the value of the product to individual customers. IdentificationTo arrive at the optimum price, determine how highly your customers value your product or service. Examine factors such as whether your customers will save money or time by using your product or service; whether your product or service is unique; whether your product or service will help customers gain a competitive advantage; and what the competition charges. The answers to these questions will help you determine what customers are willing to pay for your product or service. EffectsWhen you are offering a product or service that is not unique and in a market where prices are well established, you may have to adopt the strategy of setting your price at the same level as your competitors. This may help you to enter the market, but you will need to lower your costs to raise your profit levels above your competitors, to gain a competitive advantage. Expert InsightFor some products and services, it may make sense to set your prices according to how much you will save your customers. Craig Stedman, writing in Computerworld, describes how software vendors set their license fees for individual customers based on the amount of internal savings customers can expect to achieve by using their product. Another company, selling gaskets that prevent chemical leaks and spills, charges customers based on the cleanup costs they will avoid by using the product. ConsiderationsFor certain products or services, it may make sense to charge a higher amount relative to your costs. You can do this if your product is unique, if you are positioning your product as a high-status item or if it will save your customers money. For example, many luxury items, such as designer handbags, are priced at hundreds of times their production cost, but customers are paying for the prestige of owning the brand. Drug companies may price their products high and justify this by arguing their drug can save the patient an even more expensive medical procedure. PotentialAnother type of value-based pricing strategy is to offer some customers a discount. This may be based on the amount they buy or on how often they use your service. Airlines, trains and hotels use a related strategy of pricing seats or rooms differently depending on when customers buy the tickets. When there are seats left to fill very close to the departure date, the airline is willing to sell these at a discount in order to fill the plane. This helps to maintain profitability. Source: smallbusiness.chron.com/value-based-pricing-strategy-2727.htmlReferences
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Post by PickyChicky on Apr 29, 2016 21:12:38 GMT -6
The Differences Between Value-Based & Cost-Based Pricing by E.M. Rawes, Demand Media
Businesses have methods by which to price their products and services. Two common methods are cost-based pricing and value-based pricing. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Cost-Based PricingCost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions are such that the going competitive price is under the price floor, the company may price at the floor or attempt to lower its costs to lower the floor. But ideally, the company should price somewhere in between the floor and the ceiling, according to the McDonough School of Business. Many companies that produce in masses use this pricing strategy, such as companies that produce textiles, food products and building materials. Value-Based PricingA value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. FocusCost-based pricing focuses on the company's situation when determining price. In contrast, value-based pricing focuses on the customers when determining price. A value-based pricing company develops a means by which to calculate the potential value their product or service may bring customers and prices accordingly. Some companies use computer software to determine the value a product or service can offer. PricesWhen a company uses cost-based pricing, it prices between the price floor and the price ceiling. The market conditions dictate where, between the floor and the ceiling, the company sets its pricing. If it uses value-based prices, the company sets its pricing in a range determined by what customers are willing to pay. Generally, the value-based price is higher. BenefitsCost-based pricing generally results in competitive prices. Companies that use this strategy may attract consumers who are looking for inexpensive products and services. Value-based pricing companies often earn high profits on each item sold, but some consumers may not be willing to pay the high price and purchase from a competitor. Source: smallbusiness.chron.com/differences-between-valuebased-pricing-costbased-pricing-23095.htmlReferences About the AuthorE.M. Rawes is a professional writer specializing in business, finance, mathematical and social sciences topics. She completed her studies at the University of Maryland, where she earned her Bachelor of Science. During her time working in workforce management and as a financial analyst, she reinforced her business and financial know-how.
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Post by PickyChicky on Apr 29, 2016 23:11:13 GMT -6
Strategy to Mark Down but Save the Margin by Chirantan Basu, Demand Media
Markdowns are good news for customers, but not necessarily for retailers. If done incorrectly, markdowns can put pressure on profit margins, especially for small businesses. The last thing a small-business owner needs is a price war with a big-box retailer because he cannot win that battle. His markdown strategy must achieve both market share gains and minimum profit margins. BasicsCompanies mark down prices usually to stimulate sales or make room for new products in inventory. The markdown price should be sufficient to cover a company's minimum profit margin requirements, as well as its fixed and variable costs of production. Fixed costs, such as rent and insurance, do not vary with production volume. Variable costs, such as direct labor and raw materials costs, do vary with volume. If the production costs are $20 per unit and the minimum profit margin requirement is $2 per unit, the markdown price should be at least $20 plus $2, or $22 per unit. DemandCustomer demand, store location, availability of substitute products, competitive environment and general economic conditions play a role in pricing strategies and markdowns. For example, a small business may need to mark down aggressively in a weak economy to stimulate demand. It may be able to save some of its margins by negotiating lower prices with suppliers. Similarly, a grocery store may need to mark down bakery items only 10 percent three or four days before their expiration dates but 50 percent or more a day before the expiration dates. In other words, it is easier to save profit margins if companies anticipate demand and plan their markdowns. LocalizationBusinesses can save profit margins by adopting a selective pricing and markdown strategy. For example, a grocery chain may price the same product differently depending on its store locations. In a working class neighborhood, it may use markdowns aggressively to attract customers, but not in its store in a prosperous suburban neighborhood. Product mix also plays an important role in pricing decisions. For example, spices and specialty foods may sell quickly in an immigrant neighborhood or close to religious celebrations. However, the same items in a non-immigrant neighborhood may not sell without significant markdowns. TechnologyCompanies may use price optimization software to assist in pricing and markdown strategies. Software algorithms can analyze past sales data, cost structure and the pricing strategies of competitors to suggest prices and the timing and amount of markdowns. Technology may not matter to a small business selling a few items, but some form of automated pricing is essential for a small or large retailer with hundreds of different items in stores. The software can send price and markdown recommendations directly to stores, which can then update the price labels. ConsiderationsRetailers and suppliers need to agree on who picks up the tab for the markdowns. Small businesses may not have the buying power of big-box retailers, but they have some leverage with suppliers. For example, a supplier may agree to take some unsold merchandise back or offer a partial credit on marked-down items. Source: smallbusiness.chron.com/strategy-mark-down-but-save-margin-37445.htmlReferences Resources About the AuthorBased in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.
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