Advantages And Disadvantages Of Cost Oriented Pricing

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Avoid Pricing Mistakes
• Pricing is too cost oriented. Companies do not take enough account of the overall market demand and consumer psychology.
• Prices are not revised often enough to take advantage of changed conditions in the marketplace. • Prices are set independently of the rest of the marketing plan.
• Prices are not varied enough for different product items and market segments.
• Prices are set to match or better a competitor without justification or analysis. Types Of Pricing Strategies
The best strategy for you will depend on your firm, your product and your market. Remember that you do not have to use just one of the strategies outlined above. Many firms, in fact, use more than one approach and arrive at a price that represents a reasonable compromise between each of these strategies. 1. Cost oriented pricing: Many firms set product prices largely on the basis of
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Demand oriented pricing: One obvious disadvantage of at least the target-pricing component of cost-based pricing is that sales volume is affected by price. What is missing is a demand function showing how many units the firm could expect to sell at different prices. It is very difficult to quantify how much a price increase or decrease will affect demand. This relationship is called the price elasticity of demand and differs between products. Another approach to pricing is to work backwards from the products perceived value to the buyer, rather than forward from costs. A company develops a product for a particular target market with price, quality and service to match the competition for that segment of the market. Having determined this demand oriented price, the manufacturer then works out whether, allowing for costs, there is sufficient profit on the item to make it worthwhile. There is no formula for working out sales volume at the demand price. This figure has to be arrived at on the basis of experience and a conservative estimate of the market share the product will
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