Pricing (Part 2)

What Pricing Strategies do I have?

1.       Full Cost Plus Pricing

2.       Marginal Cost Plus Pricing

3.       Market Skimming Pricing

4.       Market Penetration Pricing

5.       Complementary Product Pricing

6.       Product Line Pricing

7.       Volume Discounting

8.       Price Discrimination

9.       Relevant cost Pricing

10.   Minimum Pricing

Full Cost Plus Pricing:

              Full cost plus pricing is a method where by a certain percentage of profit mark up is added to the total cost, remember total cost includes all variable costs plus the FIXED COSTS as well. This method is a popular method used because of its easiness. But there are some disadvantages of using this method.

 If you would have read the pricing part 1 article than you would have come across many factors influencing the price, sadly this method does not take into account most of those factors and therefore this type of pricing method is mostly suitable for contract works or jobbing works.

Nevertheless this method is a quick and simple method to use.

Marginal Cost plus Pricing:

              Marginal cost plus pricing is the same as the full cost plus pricing method, the only difference is regarding the fixed cost. As the name suggests ‘MARGINAL’, which only includes variable costs therefore fixed cost is not taken into consideration when setting the price.

For your knowledge, deciding on contribution is fairly better than to base a decision on profit, because contributions are flexible and are more helpful in decision making. As this method uses contribution instead of profit therefore it can be more better than the full cost plus pricing.

Market Skimming Pricing:

                Market skimming is used when a new product is launched. But it cannot be used for every new product launched. Market skimming means setting high profit margins in the initial stages of the product launch, this can only be done when you are absolutely sure that you product is one of a kind and there is no other product like it. Price Skimming helps maximize the short term profitability of the product but requires extensive advertising and promotion as well. It is equally important in the market skimming to being able to identify the market segments, as this will enable the management to decide which market segments reap higher profits.

 Market Penetration Pricing:

                Penetration pricing can be said to be a total reverse of the market skimming. Here the company enters the market by charging relatively low prices, so as to gain early market share. This policy may also be adopted to discourage new entrants or selling higher volumes early to gain economies of scale.

One advantage of using this pricing is, if the company has spare production capacity, selling higher units means having to produce more, which results in a fall in the unit cost in turn raising the profits earned.

Pricing (Part 1)

 Lets assume you manufacture electronic components like i pods, and now you are planning to develop and market a new kind of i pod, you have worked on all the cost items and marketing expenses and all the other relevant things that you need to take into account.

But the only thing you did not yet consider is the 'Pricing'

What influences the price of my product?

You should be aware that in the modern world your pricing decision should not be solely based on the cost, there are many other factors that affects the pricing of a product, for instance

1. Price Sensitivity
2. Price perception
3. Quality (An important factor)
4. Competitors
   
5. Supplier
6. Inflation
7. Incomes
8. Price of other goods
9. Taste or Fashion
   

This is not an exhaustive list, there are many other factors as well which should be taken into account when determining the price of a product.

Should I consider the market which I will operate in?

Of course, studying the market in which you operate is an important factor as well. Basically there are four categories of market,

1. Perfect Competition
2. Monopoly
   
3. Monopolistic Competition
   
4. Oligopoly
   

Each market has a different characteristic and the price set in it should be according to the overlying conditions. (Keep in mind that perfect competition do not apply in real life scenario)

What else should I consider?

Elasticity of demand is an important factor to be considered as well. When setting the price, the price elasticity of the product should be measured and considered, not taking it into account can result in serious consequences, .e.g. if the price elasticity is very elastic and you increase the price a little bit, this can result in a drastic fall in your sales in turn reducing revenues and profits, (in a worst case scenario you might be pushed out of the market, scary isn't it?)

In the next pricing article, i will highlight a few pricing methods and plus how to set a profit maximizing price.