PRICING DECISION AND
STRATEGIES
- Safiyah bt Mohd Saad (D20181081850)
- Nor Amira bt Md Jani (D20181081838)
- Nuratiqah Binti Zaid (D20181081835)
- Nur Athirah bt Abd Razak (D20181081814)
PRICING DECISION AND STRATEGY
INTRODUCTION
- Pricing strategy refers to method companies use to price their products or services.
- Almost all companies, large or small, base the price of their products and services on production, labor and advertising expenses and
- then add on a certain percentage so they can make a profit
- choice business make when setting price for their product or services.
- companies make simple pricing decisions often try to increase sales by making small, competitive adjustment such as purchase discount, volume discount and purchase allowance.
FACTORS THAT INFLUENCE PRICING DECISION
COMPETITOR
- Influence price through their technologies, plant capacities and operating strategies which affect their costs.
- Competitive conditions affect the pricing decisions.
- Competition is a crucial factor in price determination.
- A firm can fix the price equal to or lower than that of the competitors, provided the quality of product, in no case, be lower than that of the competitors.
CUSTOMER
- Influence price through their effect on the demand for a product or service, based on factors such as product features and quality.
- The market demand for a product or service obviously has a big impact on pricing.
- Since demand is affected by factors like, number and size of competitors, the prospective buyers, their capacity and willingness to pay, their preference etc. are taken into account while fixing the price.
LIFE OF THE PRODUCT
- The price of the product also depends upon the characteristics of the product.
- In order to attract the customers, different characteristics are added to the product, such as quality, size, colour, attractive package, alternative uses etc.
- Generally, customers pay more prices for the product which is of the new style, fashion, better package etc.
REQUIRED RATE OF RETURN
- considered the markup rate to earn the required return.
- eg. Markup must be higher than selling price.
- atleast 20% of original price.
COST
- Cost and price of a product are closely related.
- The most important factor is the cost of production.
- In deciding to market a product, a firm may try to decide what prices are realistic, considering current demand and competition in the market.
- The product ultimately goes to the public and their capacity to pay will fix the cost, otherwise product would be flapped in the market.
- first consideration when making price decision most important factor when cost excess sale “we gain loss”
- eg. identify the price of competitors product for each item
HOW COMPANY MAKE LONG RUN PRICING DECISION
- Long run decisions involve a time horizon of a year or longer:
i) Pricing product in major market where price setting has some leeway.
ii) Profit margin in long runs pricing decision are often set to earn some reasonable return on investment.
Latisha computer Corporation manufactures two brands of computers : simple computers (SC) and Complex Computer (CC)
Latisha uses a long run time horizon to price Complex Computer (CC)
- Direct materials costs vary with the number of units produced.
- Direct manufacturing labor costs vary with direct manufacturing labor-hours
- Ordering and receiving, testing and inspection, and rework costs vary with their chosen cost drivers.
Penetration Pricing Strategy
PENETRATION PRICING STRATEGY
- Typically sets a low price for its product or service in hopes of building market share, which is the percentage of sales a company has in the market versus total sales.
- The primary objective of penetration pricing is to garner lots of customers with low prices and then use various marketing strategies to retain them.
- For example, a small Internet software distributor may set a low price for its products and subsequently email customers with additional software product offers every month.
- A small company will work hard to serve these customers to build brand loyalty among them.
PRICE SKIMMING STRATEGY
- Company sets its prices high to quickly recover expenditures for product production and advertising.
- The key objective of a price skimming strategy is to achieve a profit quickly.
- Companies often use price skimming when they lack financial resources to produce products in volume,
Product Life Cycle Pricing
PRODUCT LIFE CYCLE PRICING
- All products have a life span, called product life cycle.
- A product gradually progresses through different stages in the cycle: introduction, growth, maturity and decline stages.
- During the growth stage, when sales are booming, a small company usually will keep prices higher.
- For example, if the company's product is unique or of higher quality than competitive products, customers will likely pay the higher price.
- A company that prices its products high in the growth stage also may have a new technology that is in high demand.
COMPETITIVE-BASED PRICING
- There are times when a small company may have to lower its price to meet the prices of competitors.
- A competitive-based pricing strategy may be employed when there is little difference between products in an industry.
- For example, when people purchase paper plates or foam cups or a picnic, they often shop for the lowest price when there is minimal product differentiation.
- Consequently, a small paper company may need to price its products lower or lose potential sales..
Temporary Discount Pricing
TEMPORARY DISCOUNT PRICING
- Small companies also may use temporary discounts to increase sales.
- Temporary discount pricing strategies include coupons, cents-off sales, seasonal price reductions and even volume purchases.
- For example, a small clothing manufacturer may offer seasonal price reductions after the holidays to reduce product inventory.
- A volume discount may include a buy-two-get-one-free promotion