Operation Management

Topics: Pricing, Marketing, Variable cost Pages: 10 (2884 words) Published: January 16, 2013
Pricing strategies
From Wikipedia, the free encyclopedia
Pricing strategies for products or services encompass three main ways to improve profits. These are that the business owner can cut costs or sell more, or find more profit with a better pricing strategy. When costs are already at their lowest and sales are hard to find, adopting a better pricing strategy is a key option to stay viable. Merely raising prices is not always the answer, especially in a poor economy. Too many businesses have been lost because they priced themselves out of the marketplace. On the other hand, too many business and sales staff leave "money on the table". One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs and behaviors of customers and clients.[1] Contents  [hide]  * 1 Models of pricing * 1.1 Cost-plus pricing * 1.2 Creaming or skimming * 1.3 Limit pricing * 1.4 Loss leader * 1.5 Market-oriented pricing * 1.6 Penetration pricing * 1.7 Price discrimination * 1.8 Premium pricing * 1.9 Predatory pricing * 1.10 Contribution margin-based pricing * 1.11 Psychological pricing * 1.12 Dynamic pricing * 1.13 Price leadership * 1.14 Target pricing * 1.15 Absorption pricing * 1.16 High-low pricing * 1.17 Premium decoy pricing * 1.18 Marginal-cost pricing * 1.19 Value-based pricing * 1.20 Pay what you want * 1.21 Freemium * 1.22 Odd pricing * 2 Nine laws of price sensitivity and consumer psychology * 3 References| -------------------------------------------------

[edit]Models of pricing
[edit]Cost-plus pricing
Main article: Cost-plus pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. This appears in two forms, full cost pricing which takes into consideration both variable and fixed costs and adds a percentage as markup. The other is direct cost pricing which is variable costs plus a percentage as markup. The latter is only used in periods of high competition as this method usually leads to a loss in the long run. [edit]Creaming or skimming

In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity - this can be attributed to: their need for the product outweighing their need to economise; a greater understanding of the product's value; or simply having a higher disposable income. This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.[2] [edit]Limit pricing

Main article: Limit price
A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make...
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