INTERNATIONAL ISLAMIC UNIVERSITY Economic assignment Name: Rimsha hanif Class: Subject: BBAIT(36) economics Submitted to: mam Faiza JULY 10, 2020 Which pricing strategy is best in your opinion what are the reason of choosing that strategy Pricing Strategies A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand. The first step to pinpointing ideal pricing strategy is to establish pricing objectives. The strategy you choose can make or break business, as the price of your product or service directly affects the revenue of your company. Therefore, it is critical to consider which one will best help you achieve your business goals. Some things to take into account when figuring out pricing objectives are : • • • whether you want to maximize short or long term profits achieve market stabilization increase market share, etc. To price products appropriately, we need to know the following: • • • Costs and profit objectives G648, Break-even Pricing, Revenue and Units, explains the process used to determine break-even prices for products. Customers(demand) What value and benefits do customers perceive in the product and how willing are they to pay for it? Competition How many competitors and similar products are in the market and in what price structure? When embarking on a new business venture, there is no shortage of items on the strategizing agenda that need attending to. One crucial step to constituting a successful business plan, and ultimately a successful business, is determining pricing for your products and services. While there are myriad pricing strategies to choose from, certain options are more effective for one type of business than for another. In this post, we will provide pricing strategy examples and help you identify which choice is best for your business. Pricing Strategy 1. Price Maximization 2. Market Penetration 3. Price Skimming 4. Economy Pricing 5. Psychological Pricing 1. Price Maximization A price maximization strategy aims to make pricing decisions that generate the greatest revenue for the company. Calculating the fixed and variable costs a business will incur, and then figuring out how to minimize these costs, aids in arriving at a profit-maximizing output. According to Madhavan Ramanujam, pricing expert and author of Monetizing Innovation, maximization is one of the best strategies for startups who are looking to prioritize revenue growth. 2. Market Penetration Pricing for market penetration is a method used to attract a high volume of buyers by marketing products or services at a lower price than competitors. While this strategy can be extremely useful in increasing market share, it is worth keeping in mind that many new businesses who elect this strategy experience an initial income drop that can be difficult to come back from. The idea is that once a business successfully penetrates the market, they will be able to grow and expand their brand to attain higher profitability to make up for this early setback. 3. Price Skimming This strategy tends to work best during the introductory phase of products and services. It involves introducing a product to the market at a premium price, then methodically lowering the price over time to attract a larger customer base. This method allows a company to generate considerable profits in the introductory phase of a product, and works best for products that can be marketed to consumers willing to pay top price for the latest and greatest. Apple executes the price skimming strategy every year, pricing each new iPhone steeply during the introductory phase, then lowering that price as time goes by. 4. Economy Pricing Economy pricing markets toward price-conscious buyers. This strategy intends to minimize business costs for the sake of selling products and services at a price lower than the market average. While this approach is effective in some cases, it can be risky for smaller businesses, as their profitability relies almost entirely on volume of sales and thus can jeopardize profitability. 5. Psychological Pricing Have you ever wondered why items are often priced at $9.99 instead of the near equivalent of $10? Well, the answer is psychological. As humans, we tend to yield to emotion rather than logic. This is why utilizing “9”s in your pricing creates the illusion of a less expensive product without significantly affecting profitability. Another way to capitalize on this facet of human behavior is by offering something “free” with your product, an example being when a beauty product company offers a complimentary travel-size version of a product for customers who choose their brand over a less expensive competitor. Which Pricing Strategy Is best For Business? Determining the right pricing strategy is an especially challenging aspect of launching a new product or service. You have to set prices for the first time, and this price reveals a lot about your product. A high price creates a sense of premium or exclusivity around the product, whereas a low price might aim at luring customers from potential competitors. As Determining which of these pricing strategies will help you reach your pricing objectives requires serious consideration. A crucial aspect to examine is aligning price with value. You can't sell a valuable product for a ridiculously low price and expect to make a profit. Similarly, no one will buy an overpriced product that they feel is not worth their money. Figuring out how valuable your product is in the eyes of consumers helps you find the “sweet spot” between price and value in order to optimize success. Another deciding factor in concluding which pricing strategy is best for your business is your profitability goals. At the end of the day, you still need to make money. Calculating your gross profit (the revenue left over after subtracting the price of producing a good/service from the total profit) is a major determinant in how you should price your product. It is beneficial to come up with a range of prices that all achieve profitability by accounting for any discounts or price hikes your business may need to make in the future. It is important to acknowledge that there is no perfect pricing strategy for any company. Changes in the market and competition require flexibility and adaptability. While one pricing strategy may be perfect for your product during its introductory phase, that strategy may become ineffective later down the line. A prosperous company is prepared to adjust its strategy over time in pursuance of maintaining profitability and competitive advantage. Still, having a well thought out pricing strategy from the get-go is vital to making sure your business will thrive. skimming pricing strategy: In my opinion Price Skimming strategy tends to work best during the introductory phase of products and services. It involves introducing a product to the market at a premium price, then methodically lowering the price over time to attract a larger customer base. This method allows a company to generate considerable profits in the introductory phase of a product, and works best for products that can be marketed to consumers willing to pay top price for the latest and greatest. Customer segments: Just one or many? Some customers do not want to wait for a new product to become mainstream. They want to show off their newest tech gadgets to their peers. Likewise, B2B companies want to use state-ofthe-art technology to gain a competitive advantage. In both cases, early adopters might be willing to pay more than late followers. The more the willingness to pay differs between segments, the more appropriate a skimming strategy becomes. The same is true if deeply entrenched competitors entail a risk of triggering a price war with your new product Skimming means to gradually skim the layers of “cream” from the market. Apple is a prime example of a company following this strategy. With skimming, your prices are set high to maximize profits in the short term by targeting the customers most interested in your product. In the beginning, you make less but more profitable sales because only early and eager buyers are willing to pay more. Then, the price is steadily reduced over time to attract customers on a budget, who are happy to buy your highly esteemed product for a “bargain”. In contrast, penetration pricing means you offer a low price to attract many customers. Amazon, Facebook, and Uber are well-known examples here, where network effects dominate the market. They rapidly penetrate the market, bring down unit costs, build up a loyal customer base, and create barriers to entry. The high volume compensates for thin unit margins. If you gain many customers early on in such markets, you are better positioned to maximize customer lifetime value from future sales and upsells. EXAMPLE: Apple executes the price skimming strategy every year, pricing each new iPhone steeply during the introductory phase, then lowering that price as time goes by. How Price Skimming Works Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market. Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market. Skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product, they will quickly enter. This approach contrasts with the penetration pricing model, which focuses on releasing a lowerpriced product to grab as much market share as possible. Generally, this technique is better- suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers' production selections. Reasons: Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the following contexts: • • • • There are enough prospective customers willing to buy the product at a high price. The high price does not attract competitors. Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs. The high price is interpreted as a sign of high quality. When a new product enters the market, such as a new form of home technology, the price can affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity. This may help attract early adopters who are willing to spend more for a product and can also provide useful word-of-mouth marketing campaigns. Price Skimming Limits Generally, the price skimming model is best used for a short period of time, allowing the early adopter market to become saturated, but not alienating price-conscious buyers over the long term. Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late, leading to lost sales and most likely lost revenue. Price skimming may also not be as effective for any competitor follow-up products. Since the initial market of early adopters has been tapped, other buyers may not purchase a competing product at a higher price without significant product improvements over the original.
