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BA 101_Lesson 4-Consumer Behavior
Lesson 6-Pricing Strategies
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Pricing strategies
The various techniques that firms use to set the
prices
of their products or services
Pricing strategies
Designed to help firms
maximize
their
profits
while taking into account the market conditions and the behavior of their customers
Common pricing strategies in economics
Cost-plus
pricing
Value-based pricing
Penetration
pricing
Price skimming
Dynamic
pricing
Bundle
pricing
Psychological
pricing
Cost-plus pricing
A pricing strategy that involves adding a
markup
to the cost of producing a product to determine its
selling price
Calculating selling price using cost-plus pricing
1. Determine
total
production cost
2. Add
markup
to production cost
Advantages of cost-plus pricing
Relatively
simple
to calculate
Ensures firm is making a
profit
on each unit sold
Disadvantages of cost-plus pricing
Does not take into account market demand or competition's pricing strategy
May result in pricing too high or too low
Value-based pricing
A
pricing strategy
that involves setting the price of a product based on the
perceived value
that it provides to customers
Value-based pricing
Focuses on how much the
product
is worth to the customer rather than
cost
of production or competition
Allows firms to charge
higher
prices for products perceived as
higher
quality or providing greater benefits
Perceived
value
Determined by a combination of factors such as quality,
performance
, features, and
benefits
Advantages of
value-based pricing
Allows firms to capture more of the value they create for customers
Can result in higher profit margins and a more sustainable business model
Can lead to increased customer
satisfaction
Challenges of value-based pricing
Requires deep understanding of customer
needs
and
preferences
Requires
continuous
monitoring and
adjustment
of pricing strategy
Penetration pricing
A pricing strategy used when introducing a new product, involving setting a
low
price to penetrate the
market
and gain market share
Objectives of penetration pricing
Gain market share
quickly
Establish
the firm as a
viable
competitor
Advantages of penetration pricing
Generates a lot of
interest
in the product
quickly
Helps establish the firm as a
viable
competitor
Builds a
customer base
for future sales
Generates
revenue
quickly
Disadvantages of penetration pricing
Difficult to increase price once product becomes popular
Low
price may give impression of
lower
quality
Price skimming
A pricing strategy used when introducing a new product, involving setting a
high
price initially to maximize profits in the
short
term
Objectives of price skimming
Generate as much
profit
as possible from early adopters and customers willing to pay a
premium
Gradually
reduce
price as demand
stabilizes
Advantages of price skimming
Generates significant
revenue
quickly
Helps establish the product as a
premium
brand
Helps
recoup
R&D costs
Deters
competitors from entering the market
Disadvantages of price skimming
Limits
potential market by deterring
price-sensitive
customers
High
price may lead to perception of
higher
quality than actual
Dynamic pricing
A pricing strategy that involves
adjusting
the price of a product in
real-time
based on changes in supply and demand
Objectives of dynamic pricing
Maximize
revenue
by charging customers the
highest
price they are willing to pay at any given time
Advantages of dynamic pricing
Allows firms to maximize
revenue
Allows quick response to changes in
supply
and
demand
Can help
balance
supply and demand
Disadvantages of dynamic pricing
Can lead to price
discrimination
and be seen as
unfair
by customers
Bundle pricing
A pricing strategy that involves offering a group of products or services together for a
single
price
Objectives of bundle pricing
Increase the value proposition for customers
Increase the
average order value
for the firm
Advantages of bundle pricing
Increases perceived value for customers
Increases
average order
value for the firm
Can help clear out
inventory
Disadvantages of bundle pricing
Difficulty determining
optimal
bundle price
Customers may not want
all
items in the bundle
Psychological pricing
A pricing strategy that involves setting
prices
to take advantage of customers' perceptions or
emotions
Examples of
psychological
pricing
Prices ending in
.99
instead of
.00
Prices with
repeating
digits or patterns like $4.44 or $
99.99
Limited-time
sales or
low introductory
prices
Psychological
pricing
Aims to influence customer behavior by appealing to
psychological
tendencies or
biases
Should be used
ethically
and responsibly to avoid damaging
reputation
or reducing perceived value