METHODS OF PRICING/DETERMINING PRICE LEVELS
- Mark-up pricing-this involves adding a standard markup to the product cost .markups are higher on seasonal items, slower moving items and items with high sewerage and handling costs a high mark up however may be disadvantageous if competitors prices are low.ie hotels peak mostly in holidays.
- It is adavantagious in that sellers can determine their costs more easily and hence by basing their prices on cost, they simplify the pricing task.
- Where all firms use this pricing method, prices tend to be similar hence price competition is minimized.
- Most people feel that pricing method is fair to both buyers and sellers.
- Target return pricing-the firms determines a price that will yield its target rate of return on investments if the firm doesn’t reach expected unit sales, the marketer can prepare a break even chart to learn what would happen at other sales levels based on different prices the manufacturer will then use different prices and estimate the probable impact on sales volume and profits.
- Perceived value pricing-companies based their price on customer perceived value they see the buyers perception of value and not the sellers cost as the key to pricing e.g. a car manufacturer may price his car at a million while his competitor charges 90,000.he may explain the difference due to longer warranty of the car, superior services, superior durability etc the customer will be convinced that such a car operating costs will be lower and hence buy the more expensive car.
- Value pricing-companies charge a low price for low quality goods and a high price for high quality goods the price must reflect a high value offer to customers.
v. Going rate pricing-the firms basis its price largerly on competitors prices smaller firms follow the leader changing their prices only when the market leaders change theirs rather than when their own demand or costs change some firms may charge a slight premium or a slight discount but they preserve the amount of difference to minimum.
Vi sealed bid pricing-this is where a company submits sealed bid for jobs the firm bases its price on expectations of how competitors will price and for a firm to win a contract, it has to submit the lowest price bid, however it can not price below costs and neither can it compromise on quality, hence a firm will bid a price that will maximize the expected profits in the long –run.
This are defined as long plans and they are not limited, compared to ways of establishing prices.
Use a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries such as Conrad Cruises, Savoy Hotel rooms, airplanes etc
The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.
Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.
This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example ‘price point perspective’ 99 cents not one dollar
6.Product Line Pricing
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.
7.Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to buy. Optional ‘extras’ increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
8.Captive Product Pricing
Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.
9.Product Bundle Pricing
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).
Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.
This approach is used where external factors such as recession or increased competition force companies to provide ‘value’ products and services to retain sales e.g. value meals at McDonalds.
Price cut may have many meanings ie,
- product about to be replaced by newer models
- fault in the product
- the sellers are abandoning the segment ,so they want to do away with the stock as fast as possible.
- reduction in quality.
Price increase on the other hand may have many meanings ie
- the product is so hot ie has become unobtainable, so better buy it soon,
- Improved value etc.