Is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price.
Market Skimming
- High price, Low volumes;
- Skim the profit from the market;
- Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out).
Value Pricing
Is the practice of setting prices based on the value of a product to the customer, in contrast with other approaches such as pricing based on cost.
Loss Leader
Is a type of pricing strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of sales promotion.
Psychological Pricing
Is a markwting practice based on the theory that certain prices have a psychological impact.
Going Rate (Price Leadership)
In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market.
Tender Pricing
Many contracts awarded on a tender basis, firm (or firms) submit their price for carrying out the work, purchaser then chooses which represents best value, mostly done in secret.
Price Discrimination
Charging a different price for the same good/service in different markets, requires different price elasticity of demand in each market.
Destroyer Pricing/Predatory Pricing
Is the practice of a firm selling a product at very low price with the intent of driving competitors out of the market, or create a barrier to entry into the market for potential new competitors.
Absorption/Full Cost Pricing
Full Cost Pricing – attempting to set price to cover both fixed and variable costs.
Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production.
Marginal Cost Pricing
Marginal cost – the cost of producing ONE extra or ONE fewer item of production. Marginal Cost Pricing – allows flexibility.
Contribution Pricing
Contribution = Selling Price – Variable (direct costs). Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs. Similar in principle to marginal cost pricing.
Target Pricing
Setting price to ‘target’ a specified profit level. Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up.
Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up.
Influence of Elasticity
Any pricing decision must be mindful of the impact of price elasticity. The degree of price elasticity impacts on the level of sales and hence revenue. Elasticity focuses on proportionate (percentage) changes. PED = % Change in Quantity demanded/% Change in Price.
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