Benefits of Pricing Strategies - Assignment Example

Question No Outline FIVE different Pricing Strategies. Describe the benefits of each, and the markets in which companies might choose to utiliseeach of the strategies. Provide real-life examples of companies and/or products to support your definitions of each of the pricing strategies. The Five Different Pricing Strategy with the benefits of each are the following; 1. Skimming Price- Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. This was used by computer products when the note book computer was introduced as compared to the desktop. 2. Penetration pricing- Penetration Pricing: The strategy of setting a products price relatively low in order to generate a high sales volume. The strategy is commonly associated with pricing new products that do not have identifiable price-market segments. It is used to secure rapid penetration of a market. < http://en.mimi.hu/marketingweb/penetration_pricing.html>. This is the strategy use by many Chinese companies. It priced its products very much than its Western counterparts and it is making a head way for a quite number of computer products. 3. Profit Maximization - In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit.< http://en.wikipedia.org/wiki/Profit_maximization >. Hence, based on the above concept. The strategy requires the price combinations that would yield the highest profit. Hence, a company can use this to have higher profits. Directly or indirectly this is used my many food business like Jollibee food chains. If one enters an outlet one would observe packaging their meals into different combinations of food items. Such strategy is profit maximization. 4. Competitor indexing. It is a price setting technique used by marketers. Generally, it involves using the price of competitors products in determining the price of your own products. Its main advantage is ease of use. Extensive marketing research and statistical analysis are not required This is normally used by some Asian companies in pricing their cell-phone products as compared with those manufactured in Finland. 5. Target rate of return pricing- It is a pricing method used almost exclusively by market leaders or monopolists. You start with a rate of return objective, like 5% of invested capital, or 10% of sales revenue. Then you arrange your price structure so as to achieve these target rates of return.< http://en.wikipedia.org/wiki/Rate_of_return_pricing > This would help the company to meet its corporate profit targets. This is used by utility companies since government allows them a maximum return on investment base. Question No. 2: A theatre has 1500 seats, usually divisible into three price bands. The weekly cost of a particular production is broken down as follows: Artists’ Fees £20,000 Production Costs £7,500 Marketing £2,500 Administration Costs £1,500 Total weekly outgoings are £31,500. Prepare a budget showing the number of seats you propose to sell at each price for each performance. Identify your total maximum possible revenue. (Please see Tables I and II below and excel file for details.) Then, using your proposed pricing, report on the percentage of seats which need to be sold for the production to break even each week, how many performances will you stage? The answer to the question depends on assumption made. Since the problem is silent, it is assumed that only one performance will be made in a week. Based also on the 1500 seats, it is assumed that 10*% of the seats is allotted to front seats, 30% to middle seats and 60% to back seats. Please see Tables I and Table II below and excel file for details. Consider, would you sell tickets for each performance at the same price? Justify any use of differential pricing by market research. Based on the computations made, I will not sell tickets for each of the performance at the same price because it is more logical to have different prices for different seats since customers would prefer to use front seats and they are willing to pay more as against back seats. Differential pricing does much to consider the reactions of the market based on the economic theory of supply and demand. Please see Tables I and II below. Show how pricing would differ if you had a profit target of 25% of costs & 40%. Identify any variable costs in your budget which might change depending on your profit target. Pricing would of course differ in the use of cost-based pricing with profit targets of 25% or 40% of costs as compared to differential pricing, The fact however that profit-level could be estimated in pricing strategy based on cost, its failure to consider the demand or reaction of the market, did not maximize profit as compared to demand-based. As a result, the front seat are not occupied in the case of 40% profit on cost and front seats and middle seats are e not occupied in case of 25% profit on cost. Please see Tables I and Table II for summary below excel file for details. Table I SP/Seat SP/Seat SP/Seat SP/Seat cost-based cost-based Demand equalprice 25% 40%     Front Seat 25.10 28.10 31.00 31.00 Middle Seat 25.30 28.30 28.00 31.00 Back Seat 25.60 28.60 27.00 31.00 Table II Total Sales Total Sales Total Sales Total Sales cost-based cost-based demand equal 40% Profit 25% Profit pricing pricing Front Seat 4,650 4,650.00 Middle Seat 12,735.00 12,600 7,750.00 Back Seat 17,160.00 20,480.00   16,200 9,300.00 29,895.00 20,480.00 33,450.00 21,700.00 Please see attached excel file for details. Base on the above table the best kind of pricing strategy is the demand-based pricing because it considers the market. Question No. 3: Using the data from question two of the assignment, describe how your budget planning might differ if you were asked to use “Demand – Based Pricing” as opposed to the “Cost – Based” method you have utilised. What other pricing methods might be relevant to this industry? My profit planning using demand-based pricing as opposed to cost-based pricing would be very much different. It would be more forward looking. To use the demand-based pricing would require a vigilant study and monitoring of the prices in the market so that profits could be maximized. This kind of planning would also require flexibility in budget preparation. Hence if volume could be increased because of higher demand and to take advantage of higher profits the corporation may be willing to lower prices to attain profits objectives. This kind of strategy will also require the necessity of the application of the principle of price-elasticity in economics. The target rate of return pricing may be used in this kind of industry since it, more or less, relates to cost based-pricing. But this will only be best if the company is market leader or monopolist..< http://en.wikipedia.org/wiki/Rate_of_return_pricing > Question No 4: When analysing a company’s product portfolio, what methods might be used? In conducting analysis of company’s product portfolio, a company could use some techniques. Two of them are given and discussed below by Wikipedia 1. Contribution margin analysis is a technique used in brand marketing and product management to help a company decide what product(s) to add to its product portfolio. The manager asks what will happen to profits if a new product is added or an existing product is discontinued. Calculations take into account additional revenues, additional costs, effects on other products in the portfolio (referred to as cannibalization), and competitors reactions.< http://en.wikipedia.org/wiki/Contribution_margin_analysis> 2. B.C.G. analysis is a technique used in brand marketing, product management, and strategic management to help a company decide what products to add to its product portfolio. It involves rating products according to their relative market share and market growth rate. The products are then plotted on a two dimensional map. Products with high market share but low growth are referred to as "cash cows". Products with high market share and high growth are referred to as "stars". Products with low market share in a low growth market are referred to as "dogs" and should usually be managed for value; that is as much money should be harvested from those products with low or no investments. Products with low market share but high market growth are referred to as "question marks" or "problem children". It is crucial for those products or brands to improve their market share before the market growth is consumed by the competition. The technique can also be applied to a portfolio of companies. Describe the steps in a Product Life Cycle. Use real-life examples of consumer products which you can identify as being at each stage in the Product Life Cycle. Give reasons for your selection. According to , The stages of A Typical Product Life Cycle Products tend to go through five stages: 1. New product development stage. This stage is characterized with very expensive prices, no sales revenue and losses of firms introducing the product in the industry. Certain products have different stages for different locations in the world. The use of wireless internet connections may have been long introduced in developed nations but in some developing nations, it may just be under this stage. 2. Market introduction stage - During this stage, the costs of the product are high, sales volume is low, losses are experienced and prices are high as well. This is not very much different from the first stage; hence we can use still the wireless internet connections in some developing nations. 3. Growth stage - During this stage, cost are reduced due to economies of scale, sales volume increases significantly, there is profitability and prices are used to maximize market share of the firms in the industry. Companies engage in the manufacture of cell phones and those engage in communication industry are still in this stage. 4. Mature stage – During this stage, cost are very low, sales volume peaks, prices tend to drop due to the proliferation of competing products and firms are very profitable. Products like Coca Cola and Pepsi Cola who have been there for many years may just be under this stage. Owners of said products continue to rake profits despite heavy advertisements. 5. Decline stage – During this stage, sales decline, prices drop (lower prices may lead to lower value perception), and profits normally decline. The best examples to use here is the case of printed encyclopaedias. People no longer buy as much as new encyclopaedias because of development in IT where you can have the internet as big collection of books if not libraries. What are the differences between Quantitative and Qualitative decision – making techniques? Identify examples of each and describe a real – life scenario where both methods have been used. The State of Queensland (Department of Education and the Arts) 2002 < http://education.qld.gov.au/strategic/policy/guidelines/risk/qualitative.html> helps us in this situation by discussing the concepts of qualitative and quantitative decision- making techniques as follows: First, it advices us to use a qualitative analysis where the level of risk does not justify the time and resources needed for a numerical analysis, where the data is inadequate, or to perform an initial screening of risks. Its samples of qualitative analysis techniques include analysis based on records of the operation, checklists and questionnaires, event trees, flowcharts, physical inspections and SWOT analysis. It also reminds us that sharing this task among a range of people produces better results. The questionnaires are used in management audit of corporations where the board of directors for example want to have a feel of how its managers are performing. Flowcharts are used by auditors to illustrate the flow of their work. The same are used by programmers to document their programs in the work places. On the other hand, The State of Queensland (Department of Education and the Arts) 2002 mentioned that to calculate the level of risk using a quantitative method in situations where the likelihood of occurrence and the consequences makes this method appropriate. It gave as an example the use of fraud risk assessments which tend to be quantitative. It said that this method is particularly valuable in providing a ranking of residual risks, to identify a prioritised list of action areas. Sample of the techniques include computer modelling, fault tree analysis, hazard and operability studies (HAZOP), hazard indices, statistical analysis. The statistical analysis is widely used in market research of many companies. Companies use the regression analysis to forecast sales hence the same is also used in budgeting require of not a few corporations specially the big one which even have research departments. It admitted also that relatively straightforward methods of quantitative analysis can often be used effectively and that some case studies indicate the use of more refined techniques. It was quick to point out, however, that even sophisticated quantitative techniques may have their weaknesses and these need to be kept in mind. (See AS/NZS 3931:1998 {IEC 60300-3-9}) < http://education.qld.gov.au/strategic/policy/guidelines/risk/qualitative.html> It finally advises: “If using a semi-quantitative approach, it is important not to interpret the results to a finer level of precision than is actually contained in the initial word rankings. Do not use the numbers to give an appearance of precision where it does not exist.” The State of Queensland (Department of Education and the Arts) 2002 < http://education.qld.gov.au/strategic/policy/guidelines/risk/qualitative.html> xxxxxxxxxxxxx Bibliography: 1. < http://en.wikipedia.org/wiki/Contribution_margin_analysis> 2. < http://en.wikipedia.org/wiki/Rate_of_return_pricing > 3. . 4. 5. , 6. 7. The State of Queensland (Department of Education and the Arts) 2002.< http://education.qld.gov.au/strategic/policy/guidelines/risk/qualitative.html> Read More