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
Price is the amount of money given in exchange for the ownership or use of a good or service. Firms, like Glitzz need to consider the amount of money that consumers are willing to give up in exchange for their products.
Designing an appropriate pricing strategy is always a challenging task for most corporations, because price is a determinative factor of operating profits. Meanwhile, price can affect customer perceptions and product development. According to the basic economic theory, pricing policy should reflect the product’s costs and the relationship between supply and demand. In addition to the fundamental framework, price settle mechanism should take into consideration the underlying industry environment. For example, pricing in manufacturing is heavily cost-based with the certainty that the costs are fully covered. And conversely, in some particular sectors, there are downsides when price setting relies solely on the variable costs because of the high fixed cost. Based on this judgment, product providers should carry different pricing mechanism under different market conditions. Accordingly, pricing evolves from a purely academic topic related to the economic theories to a profits-maximising instrument involved with marketing practices. All these issues make the price setting problem more
The principal microeconomic issue at work is supply and demand. The author invokes a number of economic theorists (both liberal and conservative) who endorse price gouging out of a belief that it is simply the natural manifestation of a capitalist society that relies on supply and demand. There is a belief that preventing price gouging allows consumers to act with little consequence for their actions. According to this line of thinking, a business is well within its rights to raise prices because they should respond to public demand; at other times, there is little demand, so they are wise to take advantage when there is significant demand. Moreover, economic theorists have argued that price-gouging is positive because it makes people question whether the item they are considering purchasing
A Pricing strategy refers to method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labour and advertising expenses and then add on a certain percentage so they can make a profit. Pricing strategy in marketing is the pursuit of identifying the optimum price for a product. This strategy is combined with the other marketing principles known as the four P 's (product, place, price, and promotion), market demand, product characteristics, competition, and economic patterns. The pricing strategy tends to be one of the more critical components of the marketing mix and is focused on generating revenue and ultimately profit for the company. The
Pricing is a relevant issue in procurement at all levels. Individuals purchasing the commodities of an organization should receive clarity on pricing. There is confusion in this
Swing Manufacturing and Steady Manufacturing both operate in the widget industry, but with radically different cost structures. Swing is a capital-intensive, automated manufacturer, while Steady is a labor-intensive "job-shop." Monthly operating data are as follows:
Pricing your products is actually one of the hardest decisions for a new business owner to make. Make the prices too high and no one will want to buy. Make the prices too low and you can't make a profit. Not knowing how to price products properly is a common challenge for new business owner. And it is one that can make or break a company.
The setting of ‘fair’ prices to consumers: the company should bear in mind that customers nowadays will shop around to compare the intended products and services. However for the business survival and growth purposes, the company should also maintain its profit margins to ensure its business growth and expansion. The company needs to consider its cost factors and business operation areas to reduce or minimise the costing areas.
Prices reflect the unique value of the brand to a certain extent. Brand positioning builds the unique brand image in the minds of consumers, so price setting and adjustments must adapt brand positioning, and brand positioning shows the brand’s unique value through price (Kotler, 2013, p. 215). For Qantas, the pricing strategy utilises a cost plus margin method of product pricing, offering lower pricing in accordance to the market demand. The number of travellers requiring Qantas services, prompt the airline to adjust pricing rates accordingly.
By far, when completing the marketing segment of the Small Business Paper Three Essay, the concept of pricing product(s) and/or service(s) for consumers is the most challenging task that needs to be address for my soon-to-be commercial and residential cleaning service in Rockford, Illinois. For the most part, Katz and Green (2014) sum up that price setting is one of the toughest decisions entrepreneurs have to face, regarding his or her goods and/or services (p. 283). Considerably, as a prospective cleaning business owner, setting a price for my cleaning services is difficult for me, because I do not want my prices to be too high or too low for potential consumers. As you stated, price competing is valuable part of how businesses
something else. A business can use a variety of pricing strategies. The price can be set to maximize profitability Businesses may benefit from lowering or raising prices. Pricing depends on the needs and behavior of customers. Business need to find what pricing will make them successful business.
The way companies price their goods and services depends heavily on many different factors. Throughout human history, goods and services have always had intrinsic value to people, and in our day and age this is no different. Shopping, however, has changed quite a bit due to many different reasons. Prices of goods and services are now changed by companies based on psychology, supply and demand, and government influences to adapt themselves to the modern world.
As we all think at times and ask ourselves, how did Wal-Mart become the world’s largest retail chain? Or why is Apple the most valuable technology company even with high priced products? First companies have to understand their market and strategies according to its demand and income level, regardless of whether they intend to offer their products at a low-price or high price. What do you think of when you hear the words “Pricing Strategy”? One of the four major elements of the marketing mix is pricing. A pricing strategy refers to the method companies used to price their products or services. Pricing strategy being with a market analysis of what the ideal product price for a given product of service should be. Either if the business is small or large, they base their products or services on production, labor worked, and advertising expenses. Once these prices and totals are established they then add on a certain percentage to generate a profit. When dealing with pricing strategies it tends to be one of the most critical components of the marketing mix. It cost to produce and design a certain product, and it cost to distribute a product and cost to produce it. When a company chooses a pricing strategy they dramatically impacts the profit margin of their business, and it also determines the pace at which the business can grow.
Quite often, consumers purchase goods and services based on their perceived need. Upon making the decision that a need is present and a solution is available consumers are more equipped to react to that need. Although previously perceived that consumers will normally accept prices as presented by suppliers that remains to not be the case. Consumers assess and process prices based on past purchases and other psychological process they went through previously such as persuasive marketing strategies, accessibility of the goods or services and possibly information gathered from prior purchasers of a product. There are countless options that are available to consumers. Consumers are then faced with the choice of choosing the product that best fulfills their need at that given point. Consumers who are knowledgeable regarding prices will be aware of the approximated price for products (Zhao, Zhao & Deng, 2015).
Price, which is one of the most important elements of the marketing mix, can be difficult to get right. Pricing too high, or low, can negatively impact on customer satisfaction and revenue. Adopting a pricing strategy is necessary to achieve desired sales objectives (Chan & Wong 2005).