Choosing the Wrong Pricing Strategy

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Choosing the Wrong Pricing Strategy Can Be a Costly Mistake: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?articleid=792)

Choosing the Wrong Pricing Strategy Can Be a Costly Mistake
Published : June 04, 2003 in Knowledge@Wharton

Prices have been at the center of human interaction ever since traders in ancient Mesopotamia -- our modern-day Iraq -- began keeping records. Who doesn’t love to guess what something costs – or argue about what something ought to cost?

So it should come as no surprise that companies spend a lot of time figuring out how to price their products and services. But two professors in Wharton’s marketing department, Jagmohan S. Raju and Z. John Zhang, say firms do not always go about pricing
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“You have to lay out the scenarios: If I do this, the competition will react a certain way. If the competition doesn’t react that way, then you have to have another plan ready. You cannot afford to fall behind your competition.” Pricing can be thought of in any number of ways. One approach is a simple “cost-plus” strategy: You figure out what it costs to produce an item and tack on a nice profit margin. Another approach is to conduct research to determine what customers are willing to pay for your product ($200 for a tiny bottle of perfume, for example) and set the price accordingly. Another method is competition-based pricing, whereby a company figures out what its competitors are charging, then adjusts its prices up or down. “All of these approaches make some sense, but none alone is sufficient,” says Zhang. “With pricing strategies, the whole really is greater than the sum of its parts.” A classic example of how developing the right pricing strategy can spell the difference between profit mediocrity and profit stardom occurred at Ford Motor in the 1990s. For years, Ford, like other auto makers, tried to hold prices as low as possible on entry-level cars, such as Escorts. Low prices represented an attempt to attract young buyers, with the hope that as they grew older and needed bigger vehicles they would remain loyal to

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