Chapter 6 pricing price: In economics and business, the price
PRICING POLICES AND STRATEGIES
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| PRICING POLICES AND STRATEGIES
Pricing policies represents the general framework within which pricing decisions are changed. It provides guidelines to carry out pricing strategy. There are five stages in developing the pricing strategy. Like any other activity strategy formulation starts pricing with the clear statements of objectives. It is essential that pricing decision be integrated with the firms over all marketing program. Formulation of marketing strategy is not a onetime phenomenon. It should be flexible that is it can be molded according to the need of the hour because pricing strategy is the plan of action to face the challenges of a particular market situation. Major dynamic pricing strategies available to management are: New-Product Pricing Strategies Pricing strategies usually change as the product passes through its life cycle. In preparing to enter the market with a new product, management must decide whether to adopt a skimming or a penetration pricing strategy. Market - Skimming Pricing Setting a relatively high initial price for a new product is referred to as market-skimming pricing. A firms introducing a new or innovative price that customers really desiring the product are willing to pay. These customers are not very price sensitive because they weigh the new products price, quality, and ability to satisfy their needs against the same characteristics of substitutes. As the demand of these customers is satisfied, the firm lowers the price to attract another, more price sensitive segment. Thus, skimming pricing gets its name from skimming successive layers of "Cream", or customer segments, as prices are lowered in series of steps. The initial pricing of VCRs at more than $1500 and the Trivial Pursuit game $39.95 are examples of skimming pricing within 3 years after their introductions, both products were often priced at less than half their initial prices. Some times minor modifications are made in the product when it is offered at a lower price to a new segment; publishing hardback best selling novels in paper back is an example. Skimming pricing is an effective strategy when (i) enough prospective customers are willing to buy the products immediately at the high initial price to make these sales profitable (ii) the high initial price will not attract competitors. (iii) Lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and (iv) Customers interpret the high price as signifying high quality. These four conditions are most likely to exist when the new product is protected by patents or copyrights or its uniqueness is understood and appreciated by customers. Market - Penetration Pricing In market-penetration pricing, a relatively low initial price is established for a new product. The price is low in relation to the target market's range of expected prices. The primary aim of this strategy is to penetrate the mass market immediately and, in so doing, generate substantial sales volume and a large market share. At the same time, it s intended to discourage other firms from introducing competing products. Texas Instruments (TI) consciously chose a penetration strategy when it introduced its hand-held calculators and digital watches. As demand for these products increased, unit product costs fell, which permitted TI to lower its prices further. The conditions favoring penetration pricing are the reverse of those supporting skimming pricing. Many segments of the market are price sensitive. a low initial price discourages competitors from entering the market, and Unit production and marketing costs fall dramatically as production volume increase. Thus, the firm using penetration pricing may (i) maintain the initial price for a time to gain profit loss from its low introductory level or (ii) lower the price further, counting on the new volume to generate the necessary profit. In some situations penetration pricing may follow skimming pricing. A company might initially price a product high to attract price-sensitive consumers and recoup initial research and development costs and introductory promotional expenditures. Once this is done, penetration pricing is used to appeal a broader segment of the population. Download 46.43 Kb. Share with your friends:
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