Pricing policies & Strategies | UGC NET Commerce Preparation Course PDF Download

Pricing Policy and Strategy Overview

Managers should begin setting prices during the development stage as part of strategic pricing to avoid launching products or services that cannot sustain profitable prices in the market. This approach enables companies to either align costs with prices or discard products or services that cannot be produced cost-effectively. By implementing systematic pricing policies and strategies, companies can enhance profitability and strengthen or protect their market shares. Setting prices is a critical task for marketing and finance managers, as the price of a product or service significantly influences its success and the company's overall profitability.

Defining Pricing Policy and Strategy

• Pricing policy refers to how a company determines the prices of its products and services.
• Pricing is based on factors like costs, value, demand, and competition.
• Pricing strategy involves how a company uses pricing to achieve its strategic goals.
• Strategies may include setting lower prices to boost sales volume.
• Alternatively, higher prices can be set to reduce backlog.
• Although pricing policy and strategy have distinct elements, they often overlap.
• The different policies and strategies are not mutually exclusive.

Developing Pricing Strategies

• Managers can begin crafting pricing strategies after establishing the basis for their prices.
• Identify company pricing goals, such as:
  • Increasing short-term and long-term profits
  • Stabilizing prices
  • Improving cash flow
  • Deterring competition
• Consider current market conditions to ensure chosen prices align with the market.
• Effective pricing strategy involves considering:
  • Customers
  • Costs
  • Competition
  • Various market segments
• Pricing strategy goes beyond merely reacting to market conditions.
• Requires thorough planning and consideration of:
  • Customers
  • Competitors
  • Company objectives
• Pricing strategies can vary depending on:
  • New entrants or established firms
• New entrants may offer products at lower prices to capture market share.
• Incumbents might respond by:
  • Matching prices
  • Lowering them further
  • Enhancing customer loyalty through increased advertising

Cost-Based Pricing

• Traditional pricing policy, summarized by cost-based pricing, involves determining all fixed and variable costs associated with a product or service.
• After calculating the total costs, managers add a desired profit margin, such as a 5% or 10% markup, to each unit.
• The goal of this approach is to cover all costs and achieve a targeted level of profit.
• This method is straightforward, relying on financial and accounting records to set prices.
• It does not require market analysis or consideration of competition.
• Cost-oriented pricing is popular because it uses easily accessible internal information, allowing a company to defend its prices based on costs and a profit markup.
• However, critics argue that cost-oriented pricing is ineffective in modern markets.
• One issue is that determining a unit's cost before setting its price can be challenging, as unit costs may vary with volume.
• This method can result in high prices in weak markets and low prices in strong markets, which hinders profitability.
• While costs are a factor in developing a pricing policy, they should not solely determine prices.
• Managers should consider what costs they can afford to pay, given the market-allowed prices, and still make a profit.
• Additionally, pricing generally involves determining what prices customers can afford before deciding on production volumes.
• Managers should evaluate whether their costs allow them to compete in low-cost markets, where customers prioritize price.
• Alternatively, they may target premium-price markets, where customers value quality and features.

Value-Based Pricing

Value-based pricing is based on the idea that the optimal selling price reflects a product's or service's perceived value by customers, rather than just the company's production costs. This approach requires managers to research customer needs, preferences, expectations, and financial resources, as well as compare their products or services with competitors to identify value advantages and disadvantages.

Value-based pricing is not merely about creating customer satisfaction or increasing sales; it focuses on setting prices to enhance profitability by tapping into the value attributes of a product or service. This approach relies heavily on effective advertising, especially for new products or services, to communicate value to customers and justify higher prices if necessary.

Demand-Based Pricing

Demand-based pricing, like value-based pricing, does not primarily focus on costs. Instead, it centers on customer behavior, product quality, and characteristics. This approach sets prices based on the level of demand for a product or service, rather than on production costs.

Managers adopting this policy must determine how many products or services they can sell at different prices. Demand schedules help identify the most profitable production and sales levels by considering cost estimates at various sales volumes and the expected revenues from these levels.

The success of demand-based pricing depends on the accuracy of demand estimates, which requires extensive knowledge of market factors. Managers often rely on sales representatives or market experts to provide accurate estimates of demand based on price changes.

Competition-Based Pricing

• In competition-based pricing, a business sets its prices by looking at what its rivals charge.
• The company first finds out who its competitors are and examines its own product or service.
• After this evaluation, the company decides if it should set its prices higher, lower, or the same as its competitors.
• This decision depends on the advantages and disadvantages of its product compared to others, as well as how competitors might react.
• This pricing strategy allows companies to quickly set prices with less effort, as it does not require extensive market research like demand pricing does.
• Using competitive pricing can make distributors more willing to work with a company since the prices are in a familiar range.
• Furthermore, this pricing method helps businesses shape how customers see their products by choosing prices in relation to their competitors.

Strategies for New and Established Products

• Pricing strategies often depend on a product's life cycle stage, with new products requiring different strategies than established or mature products.
• For new products, entrants typically use pricing strategies to quickly capture market share.
• In markets with multiple competitors, entrants often lower prices to change consumer habits and gain market share.
• Simple pricing structures are effective for new products, allowing customers to easily compare prices and recognize lower costs.
• However, low-pricing strategies for new products should be carefully designed to create the right market impression.
• Managers can use low introductory prices on a promotional basis and adjust them once the product gains market share.
• Market skimming, which involves setting high initial prices and gradually lowering them as market share increases, is suitable for high-tech products.
• For established products, companies may not need to adjust prices in response to new entrants, as customers may prefer to pay more for the familiarity and reliability of established brands.
• However, if established companies lack this advantage, they may need to implement complex pricing strategies.
• Complex strategies may include embedding prices in plans to make it difficult for customers to compare with lower-priced entrants.
• Alternatively, they can use tactics like two-part pricing, which charges both fixed and variable fees, to maintain market share.

Market Segmentation

• Managers can enhance their pricing strategies by segmenting markets based on customer needs, expectations, and financial resources.
• Successful segmentation involves identifying what motivates different market segments and tailoring pricing schemes to meet the needs of each segment.
• Targeting specific segments that align with the company's products or services is crucial.
• By setting prices differently for various segments based on factors like location, time of sale, quantity, and product design, companies can achieve their strategic goals.
• Strategic goals may include increasing profits, market share, or cash flow.