Session III: Pricing Policy
Question I: Why is pricing policy so important in the marketing mix of a product ?
What is pricing? Pricing is the process of determining what a compagny will receive in Exchange for its products. Pricing strategy is important for several aspects in the compagny wich are: Survival : short-term objectives are set in order to survive Profit :the objective is to maximise profits
Return on investment : prices are set to attain a specified return on the compagny’s investment. Cash flow : prices may be reduced to generate cash and cover a temporary crisis Status quo : if the competitive threat is weak there may be the no incentive to adjust set prices. Product Quality : may be reflected in the prices charged.
Source: Oxford Lerning Lab
Question II: Explain the different way to fix a price.
There are several methods to set the price of a product wich are: Psychological pricing method: adjusting pricing by considering the customer’s perception of your price figuring like positioning or popular price points … Break-even pricing method: the firm tries to determine the price at which break-even point will be or making the target profit it is seeking. Cost plus margin pricing method: the firm determines the price by calculating the costs for any given product (fixed plus variable) then adds a margin to it. Price of the market minus costs method: the firm determines the price of its product by substracting the costs of said product to its market price, to calculate its margin.
Question III: Explain the breakeven point and its utility.
The break-even point is the amount of sales for a given price wich generate as much revenue as costs (profit=0). Its utility is simply to know how high the sales must be to cover costs.
The break-even analysis is a financial tool that allows a manager to estimate how many units of a product a company needs to sell in order to break even, assuming a given price and cost structure for the product. Once breakeven has been reached, the manager can be assured that enough sales have been generated to cover associated fixed costs, and every incremental sales euro will generate profit. Sources: http://hbsp.harvard.edu
Question IV: Explain what is skimming policy and penetration policy. Price skimming involves a business initially selling a product at a high price, when demand is at its strongest to achieve the maximum profit margin and slowly lowering the price as demand reduces. It is called skimming because the business is trying to achieve the highest possible price at all times relative to demand. This is actually a really clever pricing strategy, as when a new product is released then demand tends to be at its highest, and so it makes financial sense to try and make the most of this high demand. Equally price skimming allows for the business to lower the price so should not cause a massive drop in sales once demand drops as the lower price will compensate for this by pulling in more customers. Price skimming works particularly well with unique products, and I will use an example of the gaming industry to best highlight how it works. Let us imagine a company producing a new games console that is the best product in gaming at the present moment. At its product launch, there is massive demand for the product and so the company would use price skimming to set the price as high as possible- let us say $499. However once a fair few units have been sold, the marketing hype reduces and the competition has released a console of similar capabilities then the demand for the console has dropped pretty considerably. So instead the company might drop its price to $399 to reflect this drop in demand at the $499 price. After a few more months it might then drop its price to $299 and then maybe even $199. The strength of this strategy is that it gives the business a massive profit margin near the start of the products life cycle, which helps...
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