Pricing Concepts for Establishing Value
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Today, I wanted to give you some additional information on various pricing concepts and strategies.
Pricing Concepts for Establishing Value
The Five Cs of Pricing
The five Cs of pricing are Company Objectives, Customers, Costs, Competition, and Channel Members (Grewal & Levy, 2013).
Four Pricing Orientations.
A profit-oriented pricing strategy focuses on maximizing, or at least reaching a target, profit for the company (Grewal & Levy, 2013). A sales orientation instead sets prices with the goal of increasing sales levels. With a competitor-oriented pricing strategy, a firm sets its prices according to what its competitors do. Finally, a customer-oriented strategy determines consumers’ perceptions of value and prices accordingly.
The relationship between price and quantity sold.
Generally, when prices go up, quantity sold goes down. Sometimes, however—particularly with prestige products and services—demand actually increases with price.
Changes in price generally affect demand; price elasticity measures the extent of this effect. It is based on the percentage change in quantity divided by the percentage change in price. Depending on the resulting value, a market offering can be identified as elastic, such that the market is very price sensitive, or inelastic, in which case the market cares little about the price (Grewal & Levy, 2013).
How to calculate a product’s breakeven point.
Because the break-even point occurs when the units sold generate just enough profit to cover the total costs of producing those units, it requires knowledge of the fixed cost, total cost, and total revenue curves. When these curves intersect, the marketer has found the breakeven point.
The four types of price competitive levels.
In a monopoly setting, either one firm controls the market and sets the price, or many firms compete with differentiated products, rather than on price. Monopolistic competition occurs when there are many firms competing for customers in a given market but their products are differentiated (Grewal & Levy, 2013). In an oligopolistic competitive market, a few firms dominate and tend to set prices according to a competitor-oriented strategy. Finally, pure competition means that consumers likely regard the products offered by different companies as basic substitutes, so the firms must work hard to achieve the lowest price point, limited by the laws of supply and demand (Grewal & Levy, 2013).
The difference between an everyday low price strategy (EDLP) and a high/low strategy.
An everyday low pricing strategy is maintained when a product’s price stays relatively constant at a level that is slightly lower than the regular price from competitors using a high/low strategy, and is less frequently discounted (Levy & Weitz, 2012). Customers enjoy an everyday low pricing strategy because they know that the price will always be the about the same and a better price than the competition. High/low pricing strategy starts out with a product at one (higher) price, and then discounts the product. This strategy first attracts a less price sensitive customer that pays the regular price, and then a very price sensitive customer that pays the low price (Levy & Weitz, 2012).
The difference between a market penetration pricing strategy and a price skimming pricing strategy.
When firms use a price skimming strategy, the product or service must be perceived as breaking new ground or customers will not pay more than what they pay for other products. Firms use price skimming to signal high quality, limit demand, recoup their investment quickly, and/or test people’s price sensitivity (Grewal & Levy, 2013). Moreover, it is easier to price high initially and then lower the price than vice versa. Market penetration, in contrast, helps firms build sales and market share quickly, which may discourage other firms from entering the market. Building demand quickly also typically results in lowered costs as the firm gains experience making the product or delivering the service.
Pricing practices that have the potential to deceive customers.
There are almost as many ways to get into trouble by setting or changing a price as there are pricing strategies and tactics. Some common legal issues pertain to advertising deceptive prices. Specifically, if a firm compares a reduced price with a “regular” or reference price, it must actually have sold that product or service at the regular price. Bait and switch is another form of deceptive price advertising, where sellers advertises items for a very low price without the intent to really sell any at that price. In many states, advertising the sale of products priced below the retailer’s cost also constitutes a form of bait and switch. Collusion among firms to fix prices is always illegal (Levy & Weitz, 2012).
Grewal, D., & Levy, M. (2013).M: Marketing. (3nd ed.). New York, NY: McGraw-Hill/Irwin.
Levy, M., & Weitz, B. A. (2012). Retailing management (8th ed.). New York, NY: McGraw-Hill/Irwin.