Three Pricing Strategies

There are three basic pricing strategies: cost-plus pricing, competitive pricing, and value pricing.

In cost-plus pricing, you look at the cost of what you sell-that is, the total marginal cost–then add on the profit you need to make. That’s your price. Cost-plus means “cost plus profit.”

This method of pricing is straightforward and ensures that you will make money on what you sell. Unfortunately, it does not ensure that you will sell it. The success of this pricing strategy depends on targeting a “reasonable” profit and controlling your costs. It also depends on not being under-priced by a competitor.

A competitive pricing strategy aims to price the product at the lowest price among all recognized competitors. Low prices are one way to compete effectively, and sometimes competitive pricing is essential. For instance, in an industry selling a commodity, the outfit with the lowest price will usually succeed. That’s because when the products themselves are not differentiated, price becomes the differentiating factor.

Competitive pricing is not just for commodities. In retail, for example, portable CD players are not a commodity, but once a customer has decided she wants to buy one, price will play a big role in which type she buys. So competitive pricing is common in retailing. In fact, some retailers offer to beat any other advertised price.

In general, the success of a competitive pricing strategy depends on achieving high volume and low cost – preferably the lowest in the industry – so you can maintain the lowest price and still make a profit. Success also depends on avoiding a destructive price war.

A value pricing strategy is the alternative to basing your prices on your costs or your competitors’ prices. Instead, you base your prices on the value you deliver to customers. In this strategy, you deliver as much value as possible to your customers – and charge them for it. With this strategy, you charge a high price and justify it by delivering high value.

Value pricing is common in high technology and luxury items, such as clothing, restaurants, and automobiles.

In practice, a business considers all three pricing strategies. You have to consider you costs, or your profits will suffer. You have to consider your competitor’s prices, even if you’re not competing on price. You must consider the value you deliver because no matter what you sell, customers want value for their money.

Ex. 1. According to the text

1. A cost plus profit pricing is

a. a straightforward method;

b. a method that ensures that you will make money on what you sell;

c. a method that includes total marginal cost and profit you need to make;

d. all of the above.

2. A competitive pricing strategy aims

a. to beat any other advertised price;

b. to price the product at the lowest price among all recognized competitors;

c. to compete effectively;

d. all of the above.

3. A value pricing stratage suggests that you should base your prices on

a. your costs and expenses;

b. your competitor’s prices;

c. the value you deliver to customers.

Ex. 2. Speak on the following issues:

1. Advantages and disadvantages of cost-plus, competitive and value pricing.

2. You own a business. What type of pricing would you prefer? Why?

Дата добавления: 2014-11-16