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Pricing refers to decision on the price to be charged for selling products to customers. There are four main considerations in the pricing decision. These are:
- Pricing objective
- Customers' willingness and capacity to pay
- Costs of manufacturing and selling the product
Pricing objective refers to how the pricing needs to contribute to the total approach to marketing that product. pricing objectives are often associated with two distinct pricing strategies - penetration price and skimming price. penetration price aims at penetrating market to establish a long-term dominance in the market. For this purpose, it is better to keep the product price low to prevent competitors to erode your position. In skimming price the focus is on short term gains rather than long-term market dominance. So skimming price, like skimming cream from top of milk, aims at making maximum profit in initial stages when there is no competition, and leaving the market open to the competition at later stages.
Customers willingness and capacity to pay has major impact quantity of sales possible at different prices. A company must take this into account and decide what combination of price and sales volume result in maximum profit for the company.
Cost of manufacturing and selling the product is another important factor in pricing. In fact some companies may may base their prices solely on the cost. However as cost per unit manufactured tends to vary with the volume of production and sale, it is better to try and fix a Price that gives maximum profit taking into consideration both demand and cost behavior.
The most tricky factor in pricing decision is the nature of competition existing and the likely response of competitors. Some companies fix their price solely in relation to the competitors price, but this again is not likely to be very good approach except for commodity products with many competitors.
The product is new to your company but not to the market.
Therefore, a market penetration approach should be adopted where the new product is set at a low price to attract a large market share.
At this point of time, the product should also be cost plus priced where the fixed, variable cost of manufacturing the product is determined and the price is set after putting in the intended profit margin.
This price approach is effective due to the fact the market that you are penetrating is highly competitive, therefore inducing a highly price sensitive mindset. Your product is the most cheapest!
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