How to Set Price

What is Pricing? A method adopted by a firm to set is selling price

Pricing strategies vary from firm to firm

Vary factors can include, competition, type of product and market, and the aims of the firm

The main pricing strategies are as follows:

Market-Orientated Pricing Setting price based upon existing market conditions

Depending on the product features, the price might be set higher or lower than competitors

Price sensitivity

Price sensitive – match competitors price, or set below

Price insensitive – above competitors price

Cost-Plus Pricing Taking into account the cost of the product

Add together:

Direct material cost

Direct labour cost

Overhead cost

Derive a price with a mark up percentage on this figure

More effective in less competitive market

Freemium Practice of offering a basic set of services for free, and enhanced content for a fee

Results in a large proportion of customer using the services for free, and a smaller proportion paying for additional services

Convincing customers

Key functionality must be paid for

Notable success internet based/gaming

Loss-Leader Pricing Aggressive pricing strategy

Sell selected goods below cost in order to attract customers to buy, usually complementary goods, which make up for the losses

More effective on elastic products than inelastic

Penetration Pricing Usually used for new entrants to the market

Setting a low price to attract mass market

Used in competitive market where demand is sensitive

Also used where economies of scale can be gained by mass production

Price Skimming Initial price is high

Product must appeal to a market segment where price is not an important consideration

Price will offset high development costs

Once reputation has been established and competition develops, price might be lowered to keep market share

Questions With a market-orientated pricing strategy, if demand is inelastic how should a firm set their price?

A) Matching competitors price

B) Below competitors price

C) Above competitors price

D) However they feel like it

Questions What does cost-plus pricing not take into account?

A) Materials

B) Advertising

C) Labour wages

D) Transportation costs

Questions What pricing strategy would be used if barriers to entry were high?

A) Price Skimming

B) Loss Leader Pricing

C) Cost-Plus Pricing

D) Penetration Pricing

Bibliography http://www.accountingtools.com/cost-plus-pricing

http://www.accountingtools.com/freemium-pricing

http://www.businessdictionary.com/definition/pricing.html

http://www.businessdictionary.com/definition/market-based-pricing.html

David Needle, Business In Context, Cengage Learning EMEA, 2010

http://www.inc.com/encyclopedia/loss-leader-pricing.html

http://smallbusiness.chron.com/market-based-pricing-strategy-5121.html