Pricing strategies usually change by the business managements as the product passes through its life cycle. There is a fact that, the initial or introductory stage is especially challenging. Business managements bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies: i) Market skimming pricing. ii) Market-penetration pricing.
Market-Skimming Pricing:
Many business managements of the companies that invent new products set high initial prices to "skim" revenues layer by layer from the market. Sony's business management frequently uses this strategy, called Market-skimming pricing. When Sony introduced the world's first high-definition television ( HDTV ) to the Japanese market in 1990, the high-tech sets cost $43,000. These televisions were purchased only by the customers who could afford to pay a high price for the new technology. Sony rapidly reduced the price over the next several years to attract new buyers. By 1993 a 28-inch HDTV cost a Japanese buyer just over $6,000. In 2001, a Japanese consumer could buy a 40-inch HDTV for about $2,000, a price that many more customers could afford. An entry level HDTV set now sells for less than $1,000 in the United States, and prices continue to fall. In this way, Sony's business management skimmed the maximum amount of revenue from the various segments of the market. Market skimming makes sense only under certain conditions. First, the product's quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, Competitors should not be able to enter the market easily and undercut the high price.
Market-Penetration Pricing:
In this context, Rather than setting a high initial price to skim off small but profitable market segments, some Business managements of the companies utilized Market-penetration pricing. They set a low initial price in order to penetrate the market quickly and deeply__to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the company to cut its price even further. For Example, Wal-Mart and other discount retailers use penetration pricing. And Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower-cost direct channels. It sales soared when IBM, Apple, and other competitors selling through retail stores could not match its prices. Several conditions must be met for this low-price strategy to work. First, The market must be highly price sensitive so that a low price produces more market growth. Second, Production and distribution costs must fall as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position__otherwise, the price advantage may be only temporary. For Example, Dell faced difficult times when IBM and other competitors established their own direct distribution channels. However, through its dedication to low production and distribution costs, Dell has retained its price advantage and established itself as the industry's number one personal computer maker.
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Wednesday, October 21, 2009
PRODUCT MIX PRICING STRATEGIES BY A BUSINESS MANAGEMENT
The strategy for setting a product's price often has to be changed when the product is part of a product mix. In this case, the business managements looks for a set of price that maximizes the profits on the total product mix. Pricing is difficult because the various products have related demand and casts and face different degrees of the competition. We now take a closer look at the five product mix pricing situations summarized.
i) Product line pricing.
ii) Optional-product pricing
iii) Captive-product pricing
Pricing of the Product Line:
Business Management usually develops product lines rather than single products. For example, Snapper makes many different lawn mowers, ranging from simple walk-behind versions priced at $259.95, $299.95, and $399.95 to eleborate "Yard Cruisers" and lawn tractors priced at $1,000 or more. Each successive lawn mower in the line offers more features. Sony offers not just one type of television, but several lines of televisions, each containing many models. It offers everything from watchman portable color TVs starting at $99.99, to flat-screen Trinitrons ranging from $200 to $1,500, to its top-of-the-line plasma WEGA flat-panel sets running more than $5,000. In product line pricing, Business management must decide on the price steps to set between the various products in a line. The price steps should take into account cost differences between the products in the line, customer evaluations of their different features, and competitors' prices.
Optional-Product Pricing:
Many Business managements use optional-product pricing__offering to sell optional or accessory products along with their main product. For example, a car buyer may choose to order power windows and a CD changer. Refrigerators come with optional ice marks. Pricing these options is a sticky problem. Automobile's Business managements have to decide which items to include in the base price and which to offer as options. Until recent years, General Motors' normal pricing strategy was to advertise a stripped-down model at a base price to pull people into showrooms and then to devote most of the showrooms space to showing option loaded cars at higher prices. The economy model was stripped of so many comforts and conveniences that most buyers rejected it. Then, GM and other U.S. car makers followed the example of the Japanese and German automakers and included in the sticker price many useful items previously sold only as options. Most advertised prices today represent a well-equipped car. However, during the recent economic downturn, the auto Business managements began to move some features back into the "option" category in order to reduce the prices of standard models.
Captive-Product Pricing:
Business managements of the companies that make products that must be used along with a main product are using Captive-product pricing. Examples of captive products are razor blades, video games, and printers cartridges. Business managements of the main products (razors, video game consoles, and printers) often price them low and set high markups on the supplies.
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i) Product line pricing.
ii) Optional-product pricing
iii) Captive-product pricing
Pricing of the Product Line:
Business Management usually develops product lines rather than single products. For example, Snapper makes many different lawn mowers, ranging from simple walk-behind versions priced at $259.95, $299.95, and $399.95 to eleborate "Yard Cruisers" and lawn tractors priced at $1,000 or more. Each successive lawn mower in the line offers more features. Sony offers not just one type of television, but several lines of televisions, each containing many models. It offers everything from watchman portable color TVs starting at $99.99, to flat-screen Trinitrons ranging from $200 to $1,500, to its top-of-the-line plasma WEGA flat-panel sets running more than $5,000. In product line pricing, Business management must decide on the price steps to set between the various products in a line. The price steps should take into account cost differences between the products in the line, customer evaluations of their different features, and competitors' prices.
Optional-Product Pricing:
Many Business managements use optional-product pricing__offering to sell optional or accessory products along with their main product. For example, a car buyer may choose to order power windows and a CD changer. Refrigerators come with optional ice marks. Pricing these options is a sticky problem. Automobile's Business managements have to decide which items to include in the base price and which to offer as options. Until recent years, General Motors' normal pricing strategy was to advertise a stripped-down model at a base price to pull people into showrooms and then to devote most of the showrooms space to showing option loaded cars at higher prices. The economy model was stripped of so many comforts and conveniences that most buyers rejected it. Then, GM and other U.S. car makers followed the example of the Japanese and German automakers and included in the sticker price many useful items previously sold only as options. Most advertised prices today represent a well-equipped car. However, during the recent economic downturn, the auto Business managements began to move some features back into the "option" category in order to reduce the prices of standard models.
Captive-Product Pricing:
Business managements of the companies that make products that must be used along with a main product are using Captive-product pricing. Examples of captive products are razor blades, video games, and printers cartridges. Business managements of the main products (razors, video game consoles, and printers) often price them low and set high markups on the supplies.
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