The pricing decision of a firm
- Four major factors affecting the difficult decision of choosing a price for a product or service
- The level and strength of consumer demand
- The amount of competition from rival producers to supply a market
- The costs of production and the levels of profit required
- Government taxes and subsidies
- Possible situations in the market for a product/ service:
- Too high
- Consumer unwilling to buy the product
- Too low
- Not covering costs of production
- Competition
- High competition
- Low enough to compete
- Low competition ( No or very few substitutes)
- Consumers may be willing to pay a higher price
- Demand-based pricing strategies
- Price skimming
- Environment with little competition
- High price to recover development cost and get an initial high profit--> Lower price as competitors join the market
- Penetration pricing
- Low price to encourage consumers to try a new product and increase loyalty
- Easy entry to the market
- Later increase output to increase revenue
- Only affordable by large firms in most cases
- Competitive pricing strategies
- Destruction pricing ( or predatory pricing)
- Deep cuts in prices
- Fully remove the competitor from the market
- If done successfully, the firm will be able to recover losses
- Price wars
- Price cuts carried out by various competitors
- Firms continue to try to undercut others
- Very negative consequences for all
- Price leadership
- Equal prices by various firms
- Adjustments to do with the price are done simultaneously
- The price leader will be the firm with largest market share
- Avoid price wars
- Cost-based pricing strategies
- Price = (total cost/ total output) + mark-up for profit
- The price is adjusted depending on the cost per unit and a small amount of profit is added.
Comments
Post a Comment