Pricing Strategy ...

Only available on StudyMode
  • Download(s) : 1801
  • Published : March 15, 2009
Open Document
Text Preview
There are many ways in which the price of a product can be determined. The following are the foremost strategies that businesses are likely to use.

1 Competition-based pricing
2 Cost-plus pricing
3 Creaming or skimming
4 Limit pricing
5 Loss leader
6 Market-oriented pricing
7 Penetration pricing
8 Price discrimination
9 Premium pricing
10 Predatory pricing
11 Contribution margin-based pricing
12 Psychological pricing
13 Dynamic pricing
14 Price leadership
15 Target pricing
16 Absorption pricing
17 Marginal-cost pricing
18 References

[edit] Competition-based pricing
Setting the price based upon prices of the similar competitor products.

Competitive pricing is based on three types of competitive product:

Products have long distinctiveness from competitor's product. Here we can assume The product has low price elasticity.
The product has low cross elasticity.
The demand of the product will rise.
Products have perishable distinctiveness from competitor's product, assuming the product features are medium distinctiveness. Products have little distinctiveness from competitor's product. assuming that: The product has high price elasticity.

The product has some cross elasticity.
No expectation that demand of the product will rise.
The pricing is done based on these three factors.

[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.

Price = Cost of Production + Margin of Profit.

[edit] Creaming or skimming
Selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. 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/service. These early adopters are relatively less price sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration.[1]

[edit] Limit pricing
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 entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as strategic behavior is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time.

[edit] Loss leader
Main article: loss leader
Loss Leader:

In the majority of cases, this pricing...
tracking img