Every business main goal is to make profits and grow by expanding and offer more products to potential customers. Therefore, businesses require having strategies to gain customers and make good sales in any market. The strategies need to be unique from what the competitors in a market offer for any business to interest customers to purchasing its products. The owner of a business or a manager needs to do surveys in the market to discover the best pricing strategies that he or she should implement in the business and have a competitive advantage over the other market players offering the same products. The major pricing strategies used in businesses are cost-based pricing, competitor based pricing, and customer based pricing.
Customer based pricing is a strategy where a customers need for a product or the demands of a customer is used to set the price. For an innovative or unique product, a customer based price can assist in creating the need for the good. The price should be set to support the image of the product, to increase the sales of the product in target and should entice a lot of customer groups. The set price of the product also focuses on pricing a group of goods to excite customers or reduce inventory levels.
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Many businesses owners usually are interested to know what prices customers would think to offer the best value on the product. When an organization knows the customer, it ensures that it takes a market focus with the business. An organization, in this case, needs to find out how the customer feels about the various products on offer and their reactions if the prices of the products changed (Ke 2012). It is true that customers do not pay more money than the true value of the product. Johnsons claim is, therefore, true. This is because the customers have to feel the value of the product purchase it. Customers change their buying habits according to the prices of products.
Customer based pricing uses penetration pricing where a business set a relatively low entry price at the entry point in the market. The prices mostly are lower than most market prices to attract new customers and encourage consumers to switch to the products of the business due to the low prices. The strategy could make low profits at first, but the result, in the end, is more customers and high sales hence more profits. Price skimming is also a strategy used in customer based pricing where a business sets a high price before other competitors come into the market (Yan 2007). Customers, in this case, are expected to pay a higher price to have the best or latest product in the market. It supports Johnsons claim because customers are ready to pay higher prices for products that are unique in the market and are new. Psychological pricing which is under customer based pricing occurs when a business quotes a price that the makes the customer perceive is cheaper than it is. It is done by quoting prices such as $ 5.99 instead $6. The customers feel the price is lower and goes for it due to the pricing strategy used.
Competitor based pricing is where one prices a product as per the competition trends in the market. Organizations set the prices of their products when considering overhead costs, costs of production as well as the suitable profits the company wants to achieve. It is, however, the responsibility of the companies to ensure their costs are low to ensure that when they set their prices, the profit margins are enough even when there is high competition in the market.
There are different ways people can price their products using a competitive strategy in the market. A business can price its product at prices that are above the competitors and bring new product features and progress that could enable consumers to understand why there is a rise in price. One can also price products at prices below the competitors prices when the business can maintain and increase the volumes without increasing costs. When pricing competitively, a company can also price its products equivalent to those of competitors. A customer will tend to purchase a product he or she feels has more value than that of a competitor, and its price is similar or lower. The dominant companies in the market can also dictate the prices that the smaller and new companies will place on their products through umbrella pricing.
Consumers in a market have various products that are substitutes for each other and it offers the customers a variety of goods to purchase (Chen et al. 2009). It is the responsibility of each company to ensure that its products have fairly competitive prices in the market or are equal to those of the competitors to ensure consumers do not switch to other brands in the market. Companies also need to ensure they review their prices as time goes on to ensure their products have competitive prices. The companies could also improve the quality of their products if they need to keep their prices constant and above the prices of their competitors because the customers will feel that the products are of high value, and therefore a consumer deserves to pay the stipulated price to acquire the product. The consumers who buy products based on comparison of the prices of various brands go for products whose benefits are better against those of their substitutes. Customers purchasing a product have to ensure it is of the right value hence Johnsons statement is true on competitive based pricing.
Cost-based pricing is the strategy that determines prices using information from cost accounting. The price of a product in this strategy is determined by adding the cost of production of a good and the estimated profit the company intends to achieve (Mohan & Rasad 2012). Consumers do not have a hand in the prices, and it would be important for a business to produce in bulk and achieve economies of scale to reduce the costs of production and set appropriate prices in the market that consumers will be willing to pay and which will bring profit to the company.
Cost plus pricing is one of the ways an organization implements cost based pricing. When a retailer wants to know some certainty and the gross profit margin each sale should have, cost plus is the best method to use to determine the price. The purchaser and vendor decide on the proceeds margin the business aims to make on grounds that there is no pre-determined cost of manufacture of the product to be sold. It reduces the risk of working with order custom products because the seller does not have to identify the costs of inputs of the product but just set a certain profit he or she wants to achieve from the business.
Mark up pricing is another form of cost-based pricing where there is production cost, and a profit percentage is added onto it to determine the cost of a product. It has a predetermined production cost and therefore makes it easy to calculate the best cost for a consumer. Businesses can determine all costs the products they sell contain, and they can easily make account of the profits they get against the costs of the products. When people place a constant profit margin on their products, the business can predict their target profits even before making sales based on the quantities they target to sell.
Target return pricing also is known as profit pricing, on the other hand, focuses on the total returns for the organization unlike the markup and cost plus pricing strategies. Manufacturing industries are the best businesses to use target return pricing because they have the capability to surge or decrease their production rates depending on the demand of products or the profits available (Johansson et al. 2012). Consumers tend to purchase the products they feel are of high quality with the raw materials that make up the product. Consumers, therefore, have a high probability of purchasing goods whose companies have indicated their costs of production as a result of the value they have for the product. It also reveals transparency of the companies activities which is a means of winning customers to their business.
In conclusion, cost-based pricing, competitor based pricing and customer based pricing are the major pricing strategies any business would use to win its customers and offer quality prices to the consumers. Cost based pricing involves adding up the production costs to the profit margins a company wants. It creates transparency and makes the consumers know the value of their goods which can increase the sales of a company because the customer understands how much value the products they buy are worth. Competitor based pricing involves a company setting its products prices in line with those of its competitors. Consumers go for products that have a competitive advantage over their substitutes and more so if they have better prices and have other benefits over the substitutes. Customer based pricing involves focusing on what the customers want and setting prices of products according to how the customers feel the product should cost. Consumers are ready to purchase products of high value at a sophisticated price than other goods because they feel the products are worth the price. A business needs to strategize and choose the best pricing strategy that will enable it to gain more customers and profits.
Chen, H., Wu, O. and Yao, D. (2009) On the Benefit of Inventory-Based Dynamic Pricing Strategies.Production and Operations Management, 19(3), pp.249-260.
Johansson, M., Hallberg, N., Hinterhuber, A., Zbaracki, M. and Liozu, S. (2012) Pricing strategies and pricing capabilities. Journal of Revenue and Pricing Management, 11(1), pp.4-11.
Ke, D., Ba, S., Stallaert, J. and Zhang, Z. (2012) An Empirical Analysis of Virtual Goods Permission Rights and Pricing Strategies. Decision Sciences, 43(6), pp.1039-1061.
Mohan, M. and Rasad, C. (2012) Pricing Strategies In Retail Sector. IJSR, 1(7), pp.127-128.
Yan, R. (2007) Market information strategies for online retailers. Journal of Revenue and Pricing Management, 6(3), pp.200-211.