Pricing Strategies

price

 

 

Focused Pricing Strategy is when we outline a strategy that drives pricing decisions towards completion of a goal. To start you need to take four steps…

  1. Estimate Demand, Costs, and Profits
  2. Establish Pricing Goals
  3. Develop a Strategy
  4. Further Develop According to Pricing Principles

Estimate Demand, Costs, and Profits with research.  How much has this item sold with this seller, what is the current price, what is my combined cost to sell each product, and how much does that leave in profit?

Establish Pricing Goals – So here, think about what is your focus or what goal you want to acheive with a whole line of products or a product individually.

Are you focused on Profit?  In that case how much do you estimate or need to sell, at certain parts of the Product’s life cycle, fiscal quarter, etc.

Or, are you going to be focused on Sales/Market Share?  How many units do you estimate to sell in what period?  What Margins are you comfortable with?

Lastly you could be focused on keeping the peace or Status Quo.  How are you seeing your competitors and when do you change focus?

Developing A Price Strategy means to determine your starting price and the focus that will drive the changes of price throughout Product’s life cycle, fiscal quarter or other dependency.

Pricing Strategies are generally oriented around Sales, Profits, or the Status Quo.  Each Pricing strategy has different tasks, focus and ideal times to use them.

Profit (Revenue) Oriented – Start with high price in beginning and follow with promotion along life of product.  The Life of Product can be centered around fiscal quarters following product’s release, or phases of Product Life Cycle.

Sales (Market Share) Oriented – Sell at a low price compared to competitors to gain market share, this will bring down price and may lead to competitors matching you.

Status (Risk Tolerance, Security) Oriented – Match competitors for uniform results.

Profit Oriented or Price Skimming is better when most of these situations are present…

  • Blocked Entry to competitors, or high barriers to entry
  • Inelastic demand
  • Legal Protection
  • Technological Advancements
  • Unique Advantages or Highest Quality
Profit Orientation Graph
A general idea of Profit Oriented Strategy with Promotion

Sales Orientation or Penetration Pricing can …

  1. boosts sales
  2. increase barriers to entry
  3. lower cost per unit

A successful Sales Orientation strategy needs mass production, large volume at low prices, and even then it can still be matched by competitors.  Not enough market share could be obtained for efforts as well.

Sales Focus Strategy
A general idea of a sales focused strategy

Status Quo Strategy aims to not incite competition, or risk, and is a better chance of survival for small organizations, yet it may ignore demand changes and costs.

Limits to Price Strategies

BE CAREFUL, There are Limits to Price Strategies, some obvious strategies can be illegal! Such As…

  • Predatory Pricing – Charging such a low price that it pushes competitors out of business or the market.
  • Price Discrimination – This is the idea that a seller discriminated by price between two or more purchasers, with significant competitive difference, among other conditions outlined by the Robinson-Patman Act of 1936
  • Price Fixing – Establishing a strategy with another firm on how each will price their product.
  • Unfair Trade Practices – Their are Laws and Clauses now in Contracts with Distributors, Manufacturers, or Suppliers; barring retailers from selling below costs or other agreed upon benchmarks.  Please ask legal professional for more information.

Additional Legal Pricing Strategies

Discounts of quantity, cash, or seasonal periods.

Geographic pricing – includes many strategies and is important in shipping, placement of products and logistics

  • Basing Point – seller charges freight from a base point, no matter destination
  • FOB Origin Pricing – Buyer pays freight costs from shipping point
  • Freight Absorption – Seller pays freight charges, buyer is not charged
  • Uniform Delivered Pricing – Seller pays freight costs and bills buyer a fixed flat charge
  • Zone Pricing – Divide an area into zones, each having their own freight costs

Others such as, single Price rebates, 0% financing, flexible pricing (different prices for different conditions of return, trade-ins (turn in an item for credit towards purchase) , leader (nearest to or most below costs), bait (Misleading but not false Advertising), Bundling (combine Products into Package).

Things To Remember!

A high Volume of sales on an item with a low profit margin can still bring in large profit.

Eliminating a product or SKU will lose any savings one obtained by producing large amounts, in this way dropping a product will reduce benefits gained from economies of scale

Eliminating a product or SKU from a whole line may affect quality image of whole line, and other related SKUS.

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