Value-Based and Cost-Based Pricing Strategies - Essay Example

a). Cost based pricing is a technique of pricing that takes into account the cost of producing a product. To make profit, a business needs to cover the cost of producing a unit of production. Therefore, a certain amount is added on the cost of production and becomes the price of the product. Usually, the amount is a certain percentage of the total cost. In this pricing strategy, maximum and minimum values are set for the price. Technically the maximum price is called the price ceiling while the minimum is called the price floor. The actual price may range between these two values for the price depending on several factors. Value based pricing focuses on the usability and value a product adds to the life of the consumer. Rather than fixing prices with the intention of covering the cost incurred in production of a product, a company fixes the price depending on the value it adds to the consumer’s life. Value can be measured in terms of increased efficiency in conducting business activities, improvement in general standards of living and other qualitative measures. Examples of businesses that use this strategy include software companies and producers of medical products. 1. b). Being a computer and electronics company that seeks to solve the computing needs of our clients, we use the value that the product adds to the lives of our clients to determine how much it is worth. The company also produces a number of personalized software products for its clients. This is a good strategy because rather than concentrating on the metrics in terms of cost of coming up with a product, the company is more concerned with the utility that a client derives from it. It makes no sense for a customer to pay for a product just to cover the cost of producing it while it adds no value to his/her life. i). Traditional approaches of penetrating the market favor charging a low price for a product when a business enterprise is initially entering into a market niche. Chances are high that there were previously existing businesses on the market before it came in and therefore, charging lower prices may capture the attention of the target market. Once it has established a reliable customer base and gained ground in the market, it should take advantage of strategies such as increasing prices or large-scale production to boost profits. This is effective in countering competition especially because of the seemingly low profits. ii). Skimming on the other hand favors charging high prices for products as they are being introduced into the market. The main aim here is to recover the amount invested in production of a product fast. The producer has to bear the risk that the product may face competition from sellers of cheaper products. Therefore, when using this strategy, the seller needs to consider competition on the market. The best approach that our company adopts is that of penetrating the market. Once it has established customer loyalty to its products, it can vary the prices as needed to cover its costs. 2). a). Once the business has established a niche market and gained trust and confidence from its customers, it can now be said to have a vertical market. A vertical market is said to be industry-specific because the vendors and consumers playing part in that market exist in the same industry. On the other hand, if the vendor and customers are from different industries, then the market is called a horizontal market. A business dealing in computer products can sell these products to clients working in the banking industry, transport and communication and many others. The world today has become a ubiquitous computing environment and therefore people from different fields invest in computer equipment and software to run them. This therefore means that an electronics and computer producer exists in a horizontal market. The business has to conduct campaigns to reach all its potential customers in their respective industries in which they operate. However, the computing industry is a heavy consumer of software products. When users purchase personal computers, they are useless hardware without appropriate applications to carry out various specific tasks. Therefore, the business also has to engage in vertical marketing so that it markets its products to producers of general-purpose computing equipment. Otherwise, if it concentrated on horizontal marketing alone, it would miss a huge chunk of its market share existing in the computing industry. 2). b). To reach all potential clients, the company has a number of avenues that it could exploit. Technically, advertisement media are classified into own, paid and earned types. The internet is one of the most important channels that offer access to a worldwide clientele. Nowadays, the internet is widely accessible. Most people have reliable connections to the worldwide web. Hundreds of thousands of websites can be used for promotion of various products online. A business could also create or buy a website through which to advertise and promote its products. A business website is classified among the owned media category. Building websites can be quite an expense. Therefore, businesses could use numerous resources online such as banners and ads displayed on popular websites such social networking sites. Social media marketing is an increasingly popular strategy used to promote products today. Enriched web content could also be posted on other sites with links redirecting traffic to the business website. Techniques such as search engine optimization can also be used to increase a website’s visibility and ranking in results for search engines. This increases chances of prospective clients landing on the business’ website. i). The main strengths of this marketing channel is that the internet is accessible worldwide therefore expanding the market share of the business. Generating international sales is easy when a business has a website through which it promotes its products. The main challenge facing this channel is that numerous competitors also make use of it to promote their products. This increases the odds that a client will land on the business’ website or even desire to make a purchase through it. Other channels include paid media where the business pays for adverts in conventional media such as television, billboards and others. These are quite effective especially in promoting products locally. Social networks and the internet result in a hybrid form of marketing called earned media. This accrues over time in terms of the reputation of the business among its clients. High quality services result in generation of positive attention from clients. 3). a) a&b).). There are different techniques of promoting products that companies could use to promote their products. These techniques make up the promotional mix. These techniques are outlined below: Personal selling This technique involves finding out through research the habits, preferences and needs of a client and then using these factors to generate leads on prospective clients. Once he/she has solid leads, the sales rep then calls on the prospective client to make a sale. The sales rep presents the product to the client using printed brochures or presentation slides to convince him/her of the need for the product. Clients may present the sales representatives with various obstacles trying to resist the purchase of the product. It is the job of the sales representative to overcome these challenges. Usually the sales representative visits the customer’s premises or residence. Direct mail This technique involves sending letters and brochures to the personal mail box of the client. With current trends in technology, this has improved to sending emails and text messages. This is a very effective promotion technique since it establishes a personal relationship between the client and the seller. To acquire customer details, the customer must have previously purchased similar products from the business. Sales promotion These include an incentive for the customers to purchase the products of a business. Examples include competitions where clients are informed that purchasing an item enters them into a draw where they stand to win prizes of various kinds. For a company dealing in computer hardware and software products, there could be prices such as computer hardware or related services at discounted rates. This technique also includes offering products on trial basis. Computer software could be offered free for clients to try for a period. After this, they have to pay for the product. This is a very effective strategy so that the clients ensure the products meet their requirements before committing their money to purchase them. Advertising This involves the use various kind of media to create awareness of existence of a business and the products it deals in. The media charges a certain price for them to put a business’ advertisements on its publications of in its broadcasts. The main channels of advertisement that a business could use include television and radio broadcasts, newspapers and magazine publications and recently the internet (Evans 542). Various websites offer online classified ads on which businesses promote their products. Finding such websites is easy when using search engines. Ads on such sites are colorfully decorated so that they capture the attention of viewers and visitors to websites on which they are posted. Public relations Advertising can also be blended with paid provision of information about a business to come up with public relations as a promotional strategy. This is especially useful when launching new businesses because it suggests to the clients that the business wants to disclose its intent rather than just generate sales. For a hardware and software company, public relations help establish a favorable relationship with the client and therefore create loyalty for its products. 4). a). The information age has transformed the world into a global village. Companies can now participate in markets far outside their local environment. Multinational companies have branches in different countries worldwide (Evans 562). They come up with policies regarding their products depending on several factors including the prevailing business environment in a specific country that they are operating in. The adjustment of policies depending on these factors results in high costs of changing policies. The company therefore loses some part of what would otherwise be profits because of these costs. A global company on the other hand does not make differentiations of the country in which a branch is located. Policies are formulated and applied consistently across all branches irrespective of the conditions of the business environment the branch operates in. This argument is relevant today because most large companies want to expand their market share to include international markets. Conditions in various countries have little impact on the policies that companies adopt for branches in these countries. Communication media, most notably the internet has a great impact on the conduct of international business (Evans 562). 4). b). However, though globalization presents a business with numerous benefits, it also has associated challenges that a business has to overcome. Among these challenges is the effect of culture and practices of people residing in various countries. Though information and the use of computers has spread widely in the world, some people are yet to embrace them. They view these gadgets and especially information provided online as a threat to their way of life. Conservative people want to maintain their traditions and practices to avoid influence from the west. Another key challenge to globalization in this industry is the political policies and influences of political leaders. In most countries, politicians are responsible for formulation of polices governing the activities of foreign companies. Some of these policies may be protectionist in nature, trying to protect local companies from unfavorable competition from foreign businesses. Such policies are harmful to the company in the long run (Evans 346). Other policies that may impede globalization strategies include the taxation and tariffs applied on the products of companies. In some places, these tariffs may be so high that they push the company out of business because of extremely high costs of operations. The laws governing a country especially on matters of trade could also be a hindrance to globalization. Some countries restrict importation of certain products because of various reasons. They set figures such as quota that cannot be exceeded thus making it uneconomical for a company dealing in software products to access their markets. Labor organizations in some countries also view adoption of IT infrastructure as a threat to the jobs of their members. They are therefore resistant to any attempts to use IT products such as computer software in the work environment of these countries. Woks cited Evans, Joel R, and Barry Berman. Marketing. New York: Macmillan, 1982. Print. Read More