pricing

Topics: Pricing, Marketing, Suggested retail price Pages: 6 (1917 words) Published: October 18, 2013
136 - Unit 2: Marketing Plan: Pricing Strategies
Pricing Strategies
There is no limit to the number of variations in pricing strategies and tactics. This wide variety of options is exactly what allows small business owners to be so creative. Pricing always plays a critical role in a firm’s overall strategy: pricing policies must be compatible with a company’s total marketing plan.

Introducing a New Product
Most small business owners approach setting the price of a new product with a great deal of apprehension because they have no precedent on which to base their decision. If the new product’s price is excessively high, it is in danger of failing because of low sales volume. However, if it is priced too low, the product’s sales revenue might not cover costs. When pricing any new product, the owner should try to satisfy these objectives: 1. Getting the product accepted. No matter how unusual a product is, its price must be acceptable to the firm’s potential customers.

2. Maintaining market share as competition grows. If a new product is successful, competitors will enter the market, and the small company must work to expand or at least maintain its market share. Continuously reappraising the product’s price in conjunction with special advertising and promotion techniques helps to retain a satisfactory market share. 3. Earning a profit. Obviously, a small firm must establish a price for the new product higher than its cost. Entrepreneurs should not introduce a new product at a price below cost because it is much easier to lower a price than to increase it once the product is on the market. Small business owners have three basic strategies to choose from when establishing a new product’s price: a penetration pricing strategy, a skimming pricing strategy, and a sliding –down the demand curve strategy.

Market penetration. If a business introduces a product into a highly competitive market in which a large number of similar products are competing for acceptance, the product must penetrate the market to be successful. To gain quick acceptance and extensive distribution in the mass market, the firm should introduce the product with a low price. In other words, it should set the price just above total unit cost to develop a wedge in the market and quickly achieve a high volume of sales. The resulting low profit margins may discourage other competitors from entering the market with similar products.

In most cases, a penetration strategy is used to introduce relatively low-priced goods into a market with no elite segment and little opportunity for differentiation exists. The introduction is usually accompanied by heavy advertising and promotional techniques, special sales, and discounts. Entrepreneurs must recognize that penetration pricing is a long range strategy; until consumers accept the product, profits are likely to be small. If the strategy works and the product achieves mass market penetration, sales volume will increase, and the company will earn adequate profits. The objectives of the penetration strategy are to beak into the market quickly,

136 - Unit 2: Marketing Plan: Pricing Strategies
to generate high sales volume as soon as possible, and to build market share. Many consumer products, such as soap, shampoo, and lightbulbs, are introduced through penetration pricing strategies.
Skimming. A skimming pricing strategy often is used when a company introduces a new product into market with little or no competition. Sometimes the firm employs this tactic when introducing a product into a competitive market that contains an elite group that is able to pay a higher price. Here a firm uses a higher than normal price in an effort to quickly recover the initial developmental and promotional costs of the product. Start up costs usually are substantial due to intensive promotional expenses and high initial production costs. The idea is to set a price well above the total unit cost and to promote the product heavily in...
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