CMA USA Part-2 section C
new product pricing strategy:
1. market penetration pricing
2. market skimming pricing
> market penetration pricing:
It may set a low initial price, with the expectation of high sales volume.
Example; jio.
The goal is to win market share and stimulate market growth. And discourage competition.
Ø Market skimming pricing:
It may set a high initial price. Then the company charges a low price to attract the next group of companies.
Example: iPhone
Ø Qualitative factors in decision analysis:
Social impact and public relation
Improving worker safety in the plant
Importance of branding
Positive impact community
Potential improvement in customer service
Ø Price adjustment strategy:
1. Cash discount( sales discount)
A discount is offered to the buyer who pays their invoices within a certain period.
Eg: 2/10 net 30
$100000 10 days 20% discount = 98000
2. Volume discount pricing:
Customers who purchase in large volumes are rewarded with a discounted price.
3. Seasonal discount:
Prices are reduced for products or services purchased out of season.
Eg: in rainy season a/c manufacturing provide a discount to the customer to maintain their sales.
4. Trade discount or functional discount :
The manufacturer offers their discount to members of their distribution channel who performs specific work, such as storing or record keeping.
5. Allowance:’
It is a price reduction based on a particular action taken by the purchaser.
Eg: the company provides allowances if the customer terms in an old item when purchasing a new one.
Ø Other considerations in price setting:
1. Price discrimination :
It is a practice of charging different prices for the same product or service to different customers based on customer flexibility.
2. Peak load pricing:
It is a practice of charging different prices for the same product or service depending on the demand.
Ø Product mix pricing strategy:
1. Product bundle pricing:
Eg: soap, brush
It occurs when the seller bundles the product.
It is discrete whereby process the seller combines or bundle product or service and offer them at a lower price than an item purchased individually.
It includes 2 types,
1. Pre bundling:
If a customer has only one option, either to purchase the ender bundle or purchase nothing.
2. Mix bundling:
If the customer has a choice between buying a bundle and buying one or more of the items individually.
Eg: newsprint.
Ø 2). Product line pricing:
Companies often create product lines rather than single products.
Eg: a jewelry store might sell at four price level
1. Very low quality
2. Low quality
3. Average quality
4. High quality
Ø 3). Captive -product pricing:
In captive pricing, a product required an additional or captive product to function properly.
Eg: printer
Computer printers required ink, and the printer is often price Is low but the ink is expensive.
Ø 4)optional product(featured pricing):
Optional products, features, and services can be offered along with the main product.
Eg: a computer seller might offer a computer with a mouse and processor at a lower price. But include optional upgrades for an additional price.
Ø 5.) by-product pricing:
By product has low value.
Eg: oil cake, tar, etc.
Manufacturers should accept any price that is higher than the cost of delivery of by-products.
Ø Short-run pricing:
in the short-run pricing decision, fixed costs are not relevant, because the fixed costs do not change.
We considered only variable costs.
Ø Long-run pricing decision:
Under this decision, we considered all costs [ variable and fixed costs]
It includes 2 approaches,
1. Market-based pricing approach
2. Cost-based pricing approach.
Ø Market based pricing approach:
In this method, the company set the price according to the demand and competitors' actions.
It includes target pricing and target costing.
Target cost = target price – target profit.
Ø Value engineering:
It is an evaluation of all business functions to reduce costs while still satisfying customer needs.
Ø Cost-based pricing approach:
These approaches focus on the cost to manufacture the project.
It includes,
1. Cost+ target rate of return.
Ø Illegal pricing:
1. Predator price:
A company set a price below its cost of production to drive out competition.
Then recover lost profit through high price.
2. Anti-competitive price:
It is illegal for manufacturers to sell their products to customers at different prices when the goods cross a state line which is known as interstate commerce.
3. Collusive price:
Two or more companies act together to either restrict output or to set prices at an artificially high level.
4. Dumping:
A company in one country set the price of a product artificially low for export to and sales in another country to underprice a domestic industry that may have a higher price due to supply issues.
Ø Cartel:
It is a group of suppliers that creates a formal written agreement that governs how much each member will produce and charge.
Ø Customer life cycle product cost:
It focuses on the total cost to be paid by the customer during the period the customers own the product, including purchase cost + maintenance cost to use, repair, etc.
It calculates from the customer's standpoint.
Ø Product lifecycle pricing and costing:
It is also called cradle-to-grave costing or womb-to-comb.
Ø Product lifecycle strategies:
It includes 5 stages,
1. Product development:
It includes research and development cost
No sales no revenue.
2. Introduction stage:
When a product is first launched, the introduction types times and sales growth will most likely be slow.
The marketing objective at this stage is to generate sales through awareness of and interest in the product.
High promotional cost and expenses increases.
3. Growth stage:
If the new product is successful in the introduction stage, it will enter to growth stage,.
Sales increases
And promotional cost also increases.
The result will be low or negative net cash flow.
In the growth stage, the marketing objective is to maximize market share.
Ø Maturity stage:
During the maturity stage, sales peak but sales growth slows.
The marketing objective is the maximum profit while defending market share.
Here competition increases and promotion costs also increase.
Ø Decline stage:
In the decline stage, sales or product begins to slow and price competition increases due to the increased availability of the alternative product.
Profit decreases.
Ø Impact of market structure on pricing:
1. Perfect competition;
There are many buyers and sellers.
Customers are indifferent.
Perfect information exists in the market.
There are no barriers to entering and exiting the market.
Products are standardized products.
2. Monopoly:
A single firm.
A single supplier.
Unique product.
Example: municipal water company.
High barrier to entry
High capital investment
Monopolist has control over the price it charges.
3. Monopolistic competition:
In monopolistic competition, multiple firms are operating the market and do not collude to set prices.
Eg: car, mobile market.
Products are generally similar but they differ from one seller to the next.
There is nonprice competition.
The demand curve of monopolistic is highly elastic.
Monopolistic sold maximize.
4. Oligopoly:
In an oligopoly, only a few firms operate in the market and each is affected by the action of the others
The market can be either for standardized or differentiated products.
In an oligopoly price decrease by one company will be followed by another company.
Oligopolists face a demand curve that has an elastic section
the curve is elastic when the price is increased by one firm because other firms do not follow.
The curve is elastic when a firm decreases its price because when a firm decreases its price it is followed by other firms.
The graph is kinked.