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Pricing Methods

by | Jul 19, 2017 | Uncategorized | 0 comments

This blog is a follow up from my previous blog “Pricing Strategies”.  A copy can be found at www.jlabbott.net

The price objective for new product should be either to maximize profit margins or to maximize quantity to gain market share.  Skim pricing and penetration pricing strategies are taken into consideration.

Skim pricing attempts to “skim the cream” off the top of the market.  This strategy is appropriate when demand is high and inelastic and the customers are not highly price sensitive.  Skim pricing does not expect high volumes.  Another reason for this method is avoid large startup costs associated with creating a large volume of orders.

Penetration pricing uses the objective of quantity maximization by pricing the product low. This method assumes the demand is going to be highly elastic; prospects are price sensitive and quantity demand will increase significantly as prices decline.

The product is something that can gain appeal quickly, and there is a threat of impending competition.

As your product lifecycle moves forward, there will be a change in the demand curve and costs.  Pricing should be evaluated over time.

The pricing objective depends on many factors such as, production costs, existence of economies of scale, barriers to entry, product differentiation, and the company’s resources.
 

Pricing methods

 
Cost plus pricing:             set the price at the production cost plus current profit margin.

Target return pricing:     set the price to achieve a target ROI.

Value based pricing:    base the price on the effective value to the customer relative to alternative products.

In addition to setting a pricing level, business owners can design innovated pricing that better meet the needs of both the company and its customers. As an example, many software companies have changed their pricing to a subscription model.
 

Pricing discounts

 
Quantity discount:                         Offered to a customer who purchases in large quantities

Cumulative quantity discount:  This discount increases as the cumulative quantity increases.

Seasonal discount:                         This discount is based on holidays or other events where the product has a higher demand.

Cash discount:                                  This discount is for cash upon delivery of goods or services.

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