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Pricing Strategies Essay

Competition based pricing

Setting the price based upon prices of the similar competitor products. Competitive pricing is based on three types of competitive products:

* Products having lasting distinctiveness from competitor’s product. Here we can assume
* The product has low price elasticity.
* The product has low cross elasticity.
* The demand for 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 products.

Assuming that:

* The product has high price elasticity of demand.
* The product has some cross elasticity of demand.
* No expectation that the demand of the product will rise.

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 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. AC + Profit markup

It is lower than profit maximizing level of pricing
Price = Cost of production + Margin of profit

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 or 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. This method can come with some setbacks as it could leave the product at a high price to competitors.

Limit pricing

To set a price low enough to ensure that new entrants are discouraged to enter the market. 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 the 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 labour for a long period of time.

Loss leader

Loss leader: Basic concept in the majority of cases, this pricing strategy is illegal under EU and US Competition rules. No market leader would wish to sell below cost unless this is part of its overall strategy. The idea of selling at a loss may appear to be in the public interest and therefore often not challenged. Only when the leader pushes up prices, it then becomes suspicious. Loss leadership can be similar to predatory pricing or cross subsidization; both seen as anti-competitive practices.

Market-orientated pricing

Setting a price based upon analysis and research compiled from the targeted market. Also with the cost price.

Penetration pricing
This price is deliberately set at a low level to gain customer’s interest and establishing a foot-hold in the market.

Price discrimination
Setting a different price for the same product in different segments of the market. For example, this can be for different ages or for different opening times, such as cinema tickets. Such as market orientated pricing is also a very simple form of pricing used by very new businesses. What is involves is, setting a price of product/service according to research conducted on your target market. It holds good in case of: price sensitive consumers existence of large mass market intence competition in the market.


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