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Pricing




Pricing is the process of setting a price for a product. Pricing takes account of the value of a product, its quality, the ability of the customer to pay, the volume of sales required, the level of market saturation and the prices charged by the competition. Too low a price can reduce the number of sales as significantly as too high a price. A low price may increase sales but not as profitably as fixing a high, yet still popular, price.

Pricing involves setting the pricing objectives and selecting a pricing method to achieve these objectives. When determining a pricing objective a firm may choose among maximizing profits, maintaining or increasing its share of the market, creating a specific demand for its product, differentiating its product from similar products provided by the competitors.

Once a firm has determined its pricing objectives, it must select a relevant pricing method and strategy. The pricing method offers a ‘basic’ price for each product. Pricing strategies are then used to modify the basic price according to pricing objectives and the market situation.

The three kinds of pricing methods are cost-based pricing, demand-based pricing and competition-based pricing. The essence of cost-based pricing is determining the total cost of producing one unit of the product and then adding the markup that is the amount that covers additional costs such as insurance or interest and profit. The resulting sum will be the selling price of the product. In demand-based pricing the breakeven analysis is applied. In this case the total revenue from all units sold must equal the total cost of all units sold. The total revenue is the total amount received from the sales of a certain number of units. The total cost of producing a certain number of units is the sum of the fixed costs and variable costs attributed to those units. In competition-based pricing the firm simply sets the same price that its competitors charge for similar products.

After setting the basic price for a product according to the chosen pricing method, the firm adjusts the price according to the chosen strategy. Pricing strategies depend on the firm’s pricing objectives, the markets for its pro­duct, the degree of product differentiation, the life-cycle stage of the product, and other factors.

When introducing a new product or innovation the firm sets either the highest possible price to recover more quickly the high costs of production (the strategy of price skimming) or a low price in order to capture a large market share (the strategy of penetration pricing).

Psychological pricing strategies are based on consumers’ subjective perceptions. Firms that apply odd-pricing, multiple-unit pricing, prestige pri­cing or price lining aim at attracting consumers for different reasons: to pay less as with odd or multiple-unit pricing, to purchase high quality presti­gious items as with prestige pricing or to have a wider choice of different brands sold at the same price as with price lining. Whatever the reason the firm increases sales and profits.

Another pricing strategy widely used nowadays is discounting or price reduction. Producers and sellers offer a wide variety of discounts to their customers. Trade discounts are offered to middlemen, quantity discounts are given to customers who buy in large quantities and seasonal discounts promote the purchase of goods or services out of season.

Assignment 3. Answer the following questions.

1. What do we call ‘pricing’?

2. What factors does pricing account for?

3. In what way does an incorrect price influence sales?

4. What activities does pricing involve?

5. What pricing objectives do you know?

6. What pricing methods do you know?

7. What do pricing strategies depend on?

8. What strategies are used in the introductory stage?

9. What are the psychological pricing strategies based on?

10. How are different discounts applied?

 

Assignment 4. Study the following definitions. Make sure you understand them and can reproduce them from memory.

Pricing The process of determining the price at which goods or services will be sold.
Trade discount A discount given by one business to another which is making a purchase for resale to an ultimate customer.
Sales maximization Pricing strategy under which management sets an acceptable minimum level of profitability and then tries to maximize sales.
Markup The amount that a seller adds to the cost of a product to determine its basic price.
Breakeven analysis Method of determining the minimum sales volume needed at a certain price level to cover all costs.
Variable costs Costs that change with the production level such as labour and raw materials.
Fixed costs Costs that remain stable regardless of the production level achieved.
Total cost Composed of total variable costs (TVC) and total fixed costs (TFC).
Total revenue The total amount received from sales of a product.
Market share Percentage of a market controlled by a certain company or product.

 

Assignment 5. Put questions to the italicized words or phrases.

1. Pricing takes account of the value of a product, its quality, the ability of the customer to pay, etc. 2. When determining a pricing objective a firm may choose among maximizing profits, maintaining or increasing its share of the market, creating a specific demand for its product, etc. 3. If a firm has determined its pricing objectives, it must select a relevant pricing method and strategy. 4. In demand-based pricing the breakeven analysis is applied. 5. Pricing strategies depend on the firm’s pricing objectives, the markets for its pro­duct, etc. 6. Psychological pricing strategies are based on consumers’ subjective perceptions.

Assignment 6. Indicate by circling the appropriate response whether each of the following statements is true (T) or false (F). If it is false, say why.

T F 1. Too low a price can increase the number of sales as significantly as too high a price.

T F 2. Pricing strategies are used to modify the basic price according to pricing objectives and the market situation.

T F 3. In cost-based pricing the breakeven analysis is applied.

T F 4. Psychological pricing strategies are based on consumers’ subjective perceptions.

T F 5. In competition-based pricing the firm simply sets the same price that its competitors charge for similar products.

T F 6. When introducing a new product or innovation the firm may set the highest possible price to recover more quickly the high costs of production. This strategy is called cost-based pricing.

T F 7. Firms apply different pricing strategies and methods to attract consumers.

 

Assignment 7. Translate the following phrases into Ukrainian.

Prices charged by the competition; a high, yet still popular price; profitably; to maintain or increase the share of the market; to cover additional costs; the chosen strategy; to recover the cost of production; to capture a large market share; to purchase goods or services out of season; to increase the number of sales significantly; to modify the basic price according to pricing objectives.

 

Assignment 8. Translate into English.

Занадто висока/низька ціна; вартість товару: платоспроможність покупця; відрізняти/виокремлювати товар від аналогічних товарів; суть: одиниця продукції; страхування; кінцева сума; застосовувати аналіз беззбитковості; ступінь диференціації продукції; приваблювати споживачів; за будь-якої причини, загальний прибуток повинен дорівнювати загальній вартості регулювати відповідно до обраної стратегії.

 

Assignment 9. Match the pairs of synonyms. Use any 5 words in the sentences of your own.

A: to set, to suggest, to apply, price reduction, additional, significantly.

B: to use; considerably; to charge; extra; discounting; to offer.

Assignment 10. Paraphrase the underlined words using the synonymous wordsfrom as.9 in proper form. Translate the sentences.

1. The pricing method suggests a ‘basic’ price for each product. 2. When setting a price for a particular product the firm must state the pricing objective and select a pricing method. 3. Too low a price can significantly reduce the number of sales. 4. Price reduction is a widely used pricing strategy. 5. What method have you applied to set the basic price? 6. Cost-based pricing adds the amount that covers additional costs such as insurance or interest and profit.

 

Assignment 11. Match the pairs of opposites.

A: fixed; similar; subjective; to maximize; to reduce; discount.

B: to increase; objective; different; markup; variable; to minimize.

 

Assignment 12. Substitute the underlined words for their opposites (see as.11) so that the sentences make sense. Translate the sentences.

1. Correctly chosen pricing strategy allows the firms to reduce sales profits. 2. As we deal with a different product our price must beat the prices of our competitors’. 3. Various markups serve to encourage consumers to buy. 4. Variable prices help the customers to make the best choice. 5. Every consumer has his own objective perception of a product. 6. Sales maximization is a pricing strategy under which management sets an acceptable minimum level of profitability and then tries to minimize sales.

 

Assignment 13. Fill in the blanks with an appropriate word or phrase. Translate the sentences.




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