Pricing strategy is a component of a firm’s product/market development strategy for that product and/or the business as a whole to achieve a competitive advantage.
A firm’s product/market strategy (inclusive of pricing strategy) must be developed in the context of the firm’s chosen generic strategy to maximize its competitive advantages (cost leadership, product differentiation and niche marketing/focus) and how the firm plans to develop the product over time (product-life cycle development)
1. Cost leadership
• Aim to produce the lowest cost and good quality product in the industry.
• Adopts a cost-conscious approach
• Competences - strong technical advantage and low-cost distribution system.
• A low-cost leader will have the ability to lower prices in time of severe competition and enjoy higher profit margins.
• A low-cost leader can defend itself in price wars, attack competitors on price to gain market share.
• Penetration pricing
2. Product differentiation
• Aim to produce products with special and unique attributes that are valued by customer and who is willing to pay for it.
• Strong marketing and promotion to develop customer/brand loyalty.
• Corporate reputation for quality or technological leadership.
• Adopts premium pricing or market skimming pricing
3. Focus/Niche Marketing
• Concentrates on a strategically identified target market segment (e.g. isolated geographical areas, small or medium-sized customers with unique demands)
• The target market segment will determine the choice between a low-cost base or a differentiation-base.
4. Product Life-cycle Development and Pricing
The price at which a product should be sold is not a one-time, once and for all decision. For example the price will need to be modified over time as the product passes through the various stages of its life-cycle:
• Introduction – high price skimming or penetration pricing
• Growth – gradual price reductions or gradual price increases
• Maturity / saturation – savage price cutting / price wars
• Decline – price decreases.
************
Showing posts with label Pricing Strategies. Show all posts
Showing posts with label Pricing Strategies. Show all posts
Friday, July 1, 2011
PRICING POLICY FOR NEW PRODUCTS
A new product pricing strategy will depend largely on whether a company's product or service is the first of its kind on the market.
Totally new products create problems with pricing as there is no information on which to base the price.
If the product is the first of its kind, there will be no competition yet, and the company, for a time at least, will be a monopolist. Monopolists have more influence over price and are able to set a price at which they think they can maximise their profits. A monopolist's price is likely to be higher, and his profits bigger, than a company operating in a competitive market.
There are two basic strategies:
1. Penetration pricing.
2. Market skimming.
************
If the new product being launched by a company is following a competitor's product on to the market, the pricing strategy will be constrained by what the competitor is already doing.
The strategies available here are:
1. Penetration pricing.
2. Average or going rate pricing.
3. Discount pricing.
4. Premium pricing.
(1) Penetration Pricing
Market penetration – a policy of low prices when a product is initially launched in order to obtain a high penetration into the market i.e. to gain rapid acceptance of the product.
The circumstances that favour a penetration policy are as follows:
• If the firm wishes to discourage competitors from entering into the market.
• If the firm wishes to shorten the initial period of the product's life cycle in order to enter the growth and maturity stages as quickly as possible.
• If there are significant economies of scale to be achieved from high-volume output, and so a quick penetration into the market is desirable in order to gain those unit cost reductions.
• If demand is highly elastic and so would respond well to low prices.
•
For penetration pricing to be effective, the total market in which the firm is operating must be substantial, and the anticipated market share significant.
(2) Market Skimming
Market skimming involves high prices and high promotion costs when the product is launched to obtain sales.
Market skimming is an attempt to exploit those sections of the market that are relatively insensitive to price changes. Initially high prices may be charged to take advantage of the novelty appeal of a new product when demand is initially inelastic.
Conditions suitable for a market skimming policy are:
• Where the product is new and different, so that customers are prepared to pay high prices so as to be ‘one-up’ on other people who do not own one.
• Where the strength of demand and the sensitivity of demand to price are unknown. It is much easier to lower prices than to increase them. From a psychological point of view it is far better to begin with a high price, which can then be lowered if the demand for the product appears to be more price sensitive than at first thought.
• Where high prices in the early stages of a product's life might generate high initial cash flows. A firm with a liquidity problem may prefer market skimming for this reason.
• Where products have a short life cycle, and so need to recover their development costs and make a profit quickly.
With high prices being charged potential competitors will be tempted to enter the market. For skimming to be sustained, one or more significant barriers to entry must be present to deter these potential competitors. Examples include patent protection, prohibitively high capital investment, or unusually strong brand loyalty.
A skimming policy offers a safeguard against unexpected future increases in costs, or a large fall in demand after the novelty appeal has declined. Once the market becomes saturated the price can be reduced to attract that part of the market that has not been exploited.
(3) Average or Going-rate Pricing
In a competitive market, where there are many suppliers of homogeneous products, and the new product does not differ (and cannot be differentiated sufficiently by marketing means), in terms of quality or design, from existing products, then the firm has little choice but to charge the 'going-rate'. Departure from this price will lead to losses.
(4) Discount Pricing
Discount pricing is where products are priced lower than the market norm, but are put forward as being of comparable quality.
The aim is that the product will procure a larger share of the market than it might otherwise do, thereby counteracting the reduction in selling price.
However, care must be taken to ensure that potential customers' perceptions of the product are not prejudiced by the lower price. The consumer will often view with suspicion a branded product that is priced at even a small discount to the prevailing market rate.
(5) Premium Pricing
In most situations, the new product will either differ, or be made to appear different, in a way that will justify a premium over competing products thereby covering the additional production or marketing costs.
(6) Differential pricing – exists where it is possible to charge different prices for the same product to different customers. The bases on which price discrimination can operate are as follows:
• by product version
• by time
• by place (geographical location)
• by market segment (type of customer)
• by order size
• by age
***********
Totally new products create problems with pricing as there is no information on which to base the price.
If the product is the first of its kind, there will be no competition yet, and the company, for a time at least, will be a monopolist. Monopolists have more influence over price and are able to set a price at which they think they can maximise their profits. A monopolist's price is likely to be higher, and his profits bigger, than a company operating in a competitive market.
There are two basic strategies:
1. Penetration pricing.
2. Market skimming.
************
If the new product being launched by a company is following a competitor's product on to the market, the pricing strategy will be constrained by what the competitor is already doing.
The strategies available here are:
1. Penetration pricing.
2. Average or going rate pricing.
3. Discount pricing.
4. Premium pricing.
(1) Penetration Pricing
Market penetration – a policy of low prices when a product is initially launched in order to obtain a high penetration into the market i.e. to gain rapid acceptance of the product.
The circumstances that favour a penetration policy are as follows:
• If the firm wishes to discourage competitors from entering into the market.
• If the firm wishes to shorten the initial period of the product's life cycle in order to enter the growth and maturity stages as quickly as possible.
• If there are significant economies of scale to be achieved from high-volume output, and so a quick penetration into the market is desirable in order to gain those unit cost reductions.
• If demand is highly elastic and so would respond well to low prices.
•
For penetration pricing to be effective, the total market in which the firm is operating must be substantial, and the anticipated market share significant.
(2) Market Skimming
Market skimming involves high prices and high promotion costs when the product is launched to obtain sales.
Market skimming is an attempt to exploit those sections of the market that are relatively insensitive to price changes. Initially high prices may be charged to take advantage of the novelty appeal of a new product when demand is initially inelastic.
Conditions suitable for a market skimming policy are:
• Where the product is new and different, so that customers are prepared to pay high prices so as to be ‘one-up’ on other people who do not own one.
• Where the strength of demand and the sensitivity of demand to price are unknown. It is much easier to lower prices than to increase them. From a psychological point of view it is far better to begin with a high price, which can then be lowered if the demand for the product appears to be more price sensitive than at first thought.
• Where high prices in the early stages of a product's life might generate high initial cash flows. A firm with a liquidity problem may prefer market skimming for this reason.
• Where products have a short life cycle, and so need to recover their development costs and make a profit quickly.
With high prices being charged potential competitors will be tempted to enter the market. For skimming to be sustained, one or more significant barriers to entry must be present to deter these potential competitors. Examples include patent protection, prohibitively high capital investment, or unusually strong brand loyalty.
A skimming policy offers a safeguard against unexpected future increases in costs, or a large fall in demand after the novelty appeal has declined. Once the market becomes saturated the price can be reduced to attract that part of the market that has not been exploited.
(3) Average or Going-rate Pricing
In a competitive market, where there are many suppliers of homogeneous products, and the new product does not differ (and cannot be differentiated sufficiently by marketing means), in terms of quality or design, from existing products, then the firm has little choice but to charge the 'going-rate'. Departure from this price will lead to losses.
(4) Discount Pricing
Discount pricing is where products are priced lower than the market norm, but are put forward as being of comparable quality.
The aim is that the product will procure a larger share of the market than it might otherwise do, thereby counteracting the reduction in selling price.
However, care must be taken to ensure that potential customers' perceptions of the product are not prejudiced by the lower price. The consumer will often view with suspicion a branded product that is priced at even a small discount to the prevailing market rate.
(5) Premium Pricing
In most situations, the new product will either differ, or be made to appear different, in a way that will justify a premium over competing products thereby covering the additional production or marketing costs.
(6) Differential pricing – exists where it is possible to charge different prices for the same product to different customers. The bases on which price discrimination can operate are as follows:
• by product version
• by time
• by place (geographical location)
• by market segment (type of customer)
• by order size
• by age
***********
Subscribe to:
Posts (Atom)