| Pricing Decisions |
If a company wants to sell a product it has to set a selling price. The price depends on internal & external factors.
Internal factors: There are two main internal factors, which determine the price. First there are the cost pf
production. E.g. Labour, raw material, energy, second, there is a profit mark-up, which is added to these costs. For
example, the unit cost are $100 and the profit mark-up is 25% the company will sell the product for $125.
External factors: are the influence of the market, especially the prices of competing products, E.g. If there is a
product very similar to ours on the market, our price should not be much higher, otherwise we won't be able to sell
our product. So the situation on the market limits our price range.
You will have to deal with these internal & external factors and the corresponding decisions when you play the
strategic game at the end of these lessons.
Pricing Strategies:
Skimming and maximising strategy are both high-price strategies.
The price a company fixes is the list price but there are different ways to reduce this price e.g. Discounts &
Credits.
Discounts:
The company can give different discounts to their customers. A customer who orders a large quantity on an item
may receive a quantity discount. A distributor who gives marketing information to the company or takes on other
tasks of the company, for example, the transport, may receive a trade discount. The company can give a
patronage discount for a customer who buys at this company for a long time or it offers a bonus if the customer
buy a large amount during one year. Customer who pay cash may be given a cash discount. And the company
can also give an employee discount for its own employees.
Part of the price policy of a company is to decide who receives a discount. This makes it difficult for customers to
compare prices of different companies.
Credit:
Normally, a customer has to pay at the moment that he takes the goods, but for industrial goods or if the customer is
a businessman, he often pays later. He has to pay after a period of time or he can save money if he pays cash. The
conditions to pay also influence the price. If the customer has to borrow money from the bank to pay his own invoice
it is more expensive than if he has time to earn the money by selling the goods and paying later. So the credit rules
of the vendor are important for the customer.
Internal factors: There are two main internal factors, which determine the price. First there are the cost pf
production. E.g. Labour, raw material, energy, second, there is a profit mark-up, which is added to these costs. For
example, the unit cost are $100 and the profit mark-up is 25% the company will sell the product for $125.
External factors: are the influence of the market, especially the prices of competing products, E.g. If there is a
product very similar to ours on the market, our price should not be much higher, otherwise we won't be able to sell
our product. So the situation on the market limits our price range.
You will have to deal with these internal & external factors and the corresponding decisions when you play the
strategic game at the end of these lessons.
Pricing Strategies:
- Skimming strategy: if the company has a new & unique product it often starts with a high price. For customers,
who buy the product first, it is a status symbol & these customers are willing to pay a very high price. So the
company can "skim" the market. Later the company has to make a price reduction to get more customers. - Maximising strategy: The company wants to maximise profits, so it tries to set high prices. This is possible if
there is a great demand for a product. - Penetration strategy: If a company wants to penetrate a market, it starts with a low price. The company
wants to win a lot of customers and it often wants to beat the competitors with the low price. This is a low-
price strategy. Later the company tries to raise the prices to make more profit. - Capturing strategy: If a company offers products which are linked in some way it can use different prices
strategies for the different products. If the company offers for example, items of equipment and also the
"software" it may sell the equipments at low prices but charge high prices for the software. - Market price strategy: The company chooses the same price for its products as the competitors set. In this
way price wars are avoided. - Psychological price strategy: the vendor gives the customer the feeling the product is cheaper than it is. If you
buy a product for $99 it is cheaper than for $100. - Discrimination pricing strategy: The company demands different prices for the same product in different
market segments. If you use the facilities of a club, you will pay less if you are a member than a non-member.
Skimming and maximising strategy are both high-price strategies.
The price a company fixes is the list price but there are different ways to reduce this price e.g. Discounts &
Credits.
Discounts:
The company can give different discounts to their customers. A customer who orders a large quantity on an item
may receive a quantity discount. A distributor who gives marketing information to the company or takes on other
tasks of the company, for example, the transport, may receive a trade discount. The company can give a
patronage discount for a customer who buys at this company for a long time or it offers a bonus if the customer
buy a large amount during one year. Customer who pay cash may be given a cash discount. And the company
can also give an employee discount for its own employees.
Part of the price policy of a company is to decide who receives a discount. This makes it difficult for customers to
compare prices of different companies.
Credit:
Normally, a customer has to pay at the moment that he takes the goods, but for industrial goods or if the customer is
a businessman, he often pays later. He has to pay after a period of time or he can save money if he pays cash. The
conditions to pay also influence the price. If the customer has to borrow money from the bank to pay his own invoice
it is more expensive than if he has time to earn the money by selling the goods and paying later. So the credit rules
of the vendor are important for the customer.
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