By Alla Gul (MBA) – Our Contributor
Pricing analysis is an important part of marketing.
In marketing Price Analysis refers to the analysis of consumer response to theoretical prices in survey research.
In general business, Price Analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit/fee.
Price analysis may also refer to the breakdown of a price to a unit figure. Usually per square metre or square foot of accommodation or per hectare or even square metre of land. The price with suitable adjustment for various differences, is then applied to the valuation problem.The following are the foremost strategies that businesses are likely to use:
- Competition-based pricing
- Cost-plus pricing
- Creaming or skimming
- Limit pricing
- Loss leader
- Market-oriented pricing
- Penetration pricing
- Price discrimination
- Premium pricing
- Predatory pricing
- Contribution margin-based pricing
- Psychological pricing
- Dynamic pricing
- Price leadership
- Target pricing
- Absorption pricing
- Marginal-cost pricing
First, strategic goals greatly influence pricing.
For example, if the business really wants to get into a new market, then it might charge lower than usual prices in order to generate more customers who buy the service.
Penetration pricing is one of the methods to be used in this case. Next, the business might consider changing pricing if the demand for its products is very high or low. Promotional pricing is going to be appropriate in this situation. The lose leader strategy may be implemented as a kind of a promotional pricing. Finally, competitor pricing also has a great effect. If competitors are charging much less, then the business might do well to lower prices. Similarly, if the competitor is charging much more, then the business might consider increasing its own prices. Market pricing method may be used here.
Below are examples of companies that use different pricing methods appropriate to their particular circumstances.
- Penetration pricing: Price way low to enter the market.
This practice generally involves pricing below the competition to gain market entry. Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. For example, penetration pricing was implemented by Vietnamese manicure and pedicure salons to gain market entry and to increase its market share. About twenty years ago, only wealthy women routinely had manicures and pedicures. Then, Vietnamese manicure/pedicure salons were introduced. While the old shops charged about $25 for a manicure and $45 for a pedicure, at a Vietnamese shop the price was as low as about $25 for both plus additional free services. As a result, many traditional salons lost their loyal customers to new Vietnamese places. In addition, many new customers for these services appeared since prices became more affordable. Today millions of ‘regular’ women make the weekly or biweekly trek to have a manicure and a pedicure in these salons regardless of slightly increased prices.
- Personalized pricing: Firms charge different prices to different consumers.
Many companies use personalized pricing to sustain competition, to remain in business, and to grow their business. For example, the United States Postal Services has been offering Negotiated Service Agreement (NSA). It’s a contractual agreement between the Postal Service and a customer to provide pricing incentives to the customer in exchange for a shift in their business mailing practices. According to Stephen M. Kearney, Vice President of Pricing and Classification,
Negotiated Service Agreement, or “NSA,” simply means negotiating pricing with our customers. In many cases, the customer’s behavior change may result in a substantial increase in their mail volume that benefits both the customer and the Postal Service… Today more than ever, the marketplace is very competitive. Businesses need to negotiate pricing to retain customers, to reflect customer needs (such as volume or ease of service), to encourage customer reliance for long-term growth, and to encourage customers to try new products or services. There are many alternatives to mail, and most of them claim to offer better economics, either in cost or return on investment (ROI). Many Postal Service competitors negotiate pricing to win business. The Postal Service needs to negotiate pricing in order to retain and grow its business.
Note: Please read complete interview at the USPS web site at http://www.usps.com/mailerscompanion/mayjune2004/mc0604art1.htm
3. Market pricing:Pricing at the same level as the competition.
A firm has to assess how its product relates to a competitive product and set its price at a comparable level to stay competitive. For example, most agricultural commodities are sold in markets where price has been established by broad market forces. For example, livestock, milk and dairy products, meats, grain, poultry, eggs, etc. are sold at this pricing. While producers in such markets can’t set price, they usually have a ready market for their entire production. Sellers in commodity markets are basically price takers and have to accept the market price. The Upstate Dairy Farms (NY), our local dairy company, is using a market pricing technique for its products. In fact, prices for their milk, butter, and other dairy are very close to similar products of other producers. Another example of companies that use market pricing is fast food restaurants. Their prices are based on market prices that is, what the market will bear. For instance, the market has a set price for a cheeseburger, and restaurants must follow that price. If McDonalds or Burger King will offer a $15 cheeseburger, a vast majority of their current customers (if not all) will not buy it. In other words, the market simply wouldn’t bear it.
- 4. Cost-plus pricing:The cost of production plus a designated percentage is cost-plus pricing.
This method is useful in situations where costs are not known in advance. An example would be custom orders in the initial stages of developing a new product. For example, a group of friends of mine opened a company named InfoTech some time ago. They provide different IT services. As they explained to me, often it is very difficult to set a price at the beginning of the project, since projects sometimes are very different and additional details are reviled only in the middle or at the end of the project. So, first they calculate approximately what the price should/could be in order to cover all expenses and add money on top of it. The price quoted to the buyer is “cost plus” rather than a specific price, and the final price will be established after completion of the project, when all costs are known. The company uses this methodbecause it is relatively easy to implement. However, the cost-based pricing ignores the competition and doesn’t consider what the product is worth to the buyer. A pricing procedure that is not responsive to changes in the market may work initially, but can be a significant obstacle to long-run success.
5. Loss leaders: A company loses money on one service but earns on a related product.
This strategy is often implemented as a part of a promotion campaign. The intent of this practice is not only to have the customer buy the (loss leader) sale item, but other products that are not discounted. These bargains will attract customers who may then purchase other products/services even if they don’t buy the product which price had been initially reduced. This is where a company will make up for the loss as it will be selling other items that generate high profits. One example is HP inkjet printers that are often sold to retail customers below their true value, at a price which seems to be affordable to most consumers.
Moreover, these printers are sometimes offered for free – free after rebate, free with a purchase of an HP computer, etc. However, consumers have to pay the regular price for ink cartridges. It is ink cartridges, not the printers that generate high profits for the HP.
Another example is Gillette’s safety razor handles that are sold at a loss, but sales of disposable razor blades are very profitable.
Major forces influencing pricing are company’s strategic goals, demand for its products or services, and/or competition. Management should pay particular attention when deciding on pricing methods since the success of the entire business depends on it.