Question

Competition to increase one's market share is natural in the pursuit of businesses. Explain whether any of the discussed pricing practices seem, at first glance, like a reasonable strategy for an ambitious company. In your opinion, which is the least defensible?  

Answer 1

Price- Price is the amount or payment paid in exchange, when a seller sells its goods or services to buyer. Price is influenced or determined by the company depending upon the production cost and demand of the product.   

Pricing Strategy- The process of setting the best price for any product/service is known as pricing strategy. Pricing strategy is being used by any business to set the price of their product/service which is influenced by production cost and demand of the product in the market. For carefully setting the price a business need deep understanding of product, market and customer.

Types of Pricing Strategy:

To set price every company needs to look on different aspects of the market and for that there are different pricing strategies-

1. Cost Plus Pricing
2. Competitive pricing
3. Value based Pricing
4. Price Skimming
5. Penetration Pricing

1.Cost Plus Pricing- Cost plus pricing strategy is influenced by cost of producing your own goods or services(COGS). They are also known as mark up pricing strategy. Cost Plus method is applied by adding a fixed percentage to products's production cost.

Price= Cost x (1+ profit margin percentage)

Example: A sandwich on producing cost Rs.100 you will add Rs. 50 as margin and sell it at Rs.150.

2.Competitive Pricing- Competition based pricing technciques centre around the current market rate of an organization;s product or service, it doesn't consider the expense of their product or customers demand. Here, the company consider the competitor's price as a benchmark for setting its price, there may be only a slight difference in price of product of your comapny compared to those of competitors.

Example: Pricing strategy used by Pepsi and Coca Cola

3.Value Based Pricing- The pricing strategy where a company prices its product/services based on how much a customer is willing to pay is known as value based pricing. Thsi strategy is set by a company base on cutomer's willingness to pa and their data.This helps to boost a customer's sentiment and loyalty towards a particular brand.

Example: Art is priced base on its perceived value.

4.Price Skimming- Price skimming is the process in which a company sets price of a product as much as high it can when the product is new and lowers the price when the product becomes old or less popular. A company charges high price because it has substantial competitive advantage. This method even attracts new competitors in the market.

Example: Apple launches its iphone with higher price while it lowers the price of the iphone model when it becomes less popular.

5.Penetration Pricing- Penetration pricing is used to set the products price very low or inorder to gain market share. When this market share is achieved price is set high. This process attracts huge customer in beginning due to low price.

Example: Thsi was used by France Telecom and Sky TV.

For any ambitious company the based strategy used is Competitive based pricing and Cost Plus pricing. Among this pricing strategy least defensible pricing strategy is cost plus pricing where company will set is price based on the cost of production, where company will not compare price with any other company.