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Pricing approaches

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Descriptive pricing appraoches

Published in: Business

Pricing approaches

  1. 1. Descriptive Pricing Approaches
  2. 2. Full cost pricingFull cost pricing is a practice where the price of a product iscalculated by a firm on the basis of its direct costs per unit ofoutput plus a markup to cover overhead costs and profits. Theoverhead costs are generally calculated assuming less than fullcapacity operation of a plant in order to allow for fluctuatinglevels of production and costs.Full cost pricing = Cost + Fair Profit 2
  3. 3. Full-Cost Pricing markup pricing : fixed amount added to the total cost of the product break-even pricing : per-unit fixed costs + per-unit variable costs rate-of-return pricing : set to obtain a desired ROI 3
  4. 4. Pricing Strategies  full-cost price strategies – consider both variable and fixed costs  variable-cost price strategies – consider only variable costs, not total costs 4
  5. 5. Product-Line Pricing  Product-Line Pricing involves determining: 1) the lowest-priced product and price 2) the highest-priced product and price, and 3) price differentials for all other products in the line 5
  6. 6. Product life cycle pricing 6
  7. 7. Use Skimming Pricing Strategy when: demand likely to be price inelastic different price-market segments, appealing to buyers with a higher acceptable price offering is unique enough to be protected from competition production or marketing costs are unknown capacity constraint exists organization wants to generate funds quickly realistic perceived value of the product exists 7
  8. 8. Use Penetration Pricing Strategy when:  demand likely to be price elastic  offering is not unique enough to be protected from competition  competitors expected to enter market quickly  no distinct price-market segments  possibility of cost savings with large volume of sales  organization’s major objective is to obtain a large market share 8
  9. 9. Loss leader pricing strategy A product priced below cost, or at a loss, in order to attract new customers is called a loss leader. Loss-leader pricing the sale of certain products at, or close to, a loss while pricing related products or services high to increase profits. One popular example of this is a razor with disposable blades. Often, a store will price the razor very low, but armed with the knowledge that the consumers with need to purchase new blades, refill sets are over-priced to increase profits. Loss leaders make up for the losses they incur by enticing consumers to make further purchases of profitable goods while they are in the shop. Since many customers browse and end up purchasing more than they had initially planned, this is a smart strategy. Customers also feel good about getting a bargain, and will often buy other items with the money they just saved. 9
  10. 10. Peak load pricing strategy Peak-load pricing strategy involves charging different prices during peak hours versus off peak hours. When the demand during peak times is so high that the capacity of the firm cannot serve all customers at the same price, the profitable thing for the firm to do is engage in peak-load pricing Thus, higher prices can be charged during high peak demand hours, and lower prices charged during off peak demand hours. If a firm were to charge a high price at all times, no one would purchase during low peak hours. By lowering the price during these low peak demand times, and charging a higher price during high peak demand times, the firm increases profits by selling to some consumers during the low peak times than none at all. In turn, if a firm charged a low price during all times of the day, it would lose profit during high peak demand times when consumers are willing to pay extra for the services. 10

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