10 Sep Hearl Tackett YesterdayAug 27 Instructions

Hearl Tackett

YesterdayAug 27 Instructions

at 3:43pm

Manage Discussion Entry

There are three price setting strategies, cost based pricing, customer based pricing, and competition based pricing (Finch, 2012).  Based on an organizations policies and goals, one may work better than the others.  Obviously, the idea behind pricing strategy is to create profit so selling a product for less than what it costs to manufacture it doesn’t make sense and can’t be sustained in the long term.  If a price is set higher than what your customer is willing to pay, no sales will be made and if the product doesn’t have any competitive value, it will fail in competitive markets (Finch, 2012).

Cost Based Pricing

Cost based pricing is exactly what is sounds like.  The fixed and variable costs associated with what it takes to manufacture the product is considered the price floor or the minimum price acceptable for the product (Finch, 2012).  After the price floor is established, depending on the industry the organization is in, they may use mark up pricing by adding a fixed percentage to the price floor in order to establish their profit, similar to what retail stores do.  If the organization is in a service industry, they may use cost plus pricing, where a fixed amount is added to the price floor to cover their time and equipment use, similar to a contractor adding a fixed amount to cover employees wages and tools being used.  Cost based pricing is very simple and easy to use but there may be other factors to consider when creating pricing strategy so as not to miss out on profit for a quality brand or overprice for an unproven product (Finch, 2012). 

Customer Based Pricing

Customer based pricing is driven by demand or perceived value (Finch, 2012).  If a product is popular, demand will be high and an organization may be able to charge a higher price and generate more profit until the demand goes down for the product.  Also, is a brand is considered a premium brand, an organization can charge a premium price because of the perceived value or the superior quality of the product (Finch, 2012).  According to Finch (2012), there is an equation to determine the total economic value of a product called the Economic Value Formulation.  In this equation, a products economic value is equal to the customers next best alternative plus the differentiation value (Finch, 2012).  An example of this would be like breakfast cereal. The price you pay for the generic brand Frosted Flakes would be the next best alternative and the price you pay for the Kellogg’s Frosted Flakes is higher because of the perceived value is the differentiation value. 

Competition Based Pricing 

Competition based pricing is like reactive pricing.  Prices are adjusted based on how competitors are pricing their products.  If an organization wants to know about where prices should be set, pay attention to where their competitors are setting their prices.  If an organization is a market leader, competition pricing will not affect their sales much.  Common sense tells you that if you want to increase your market share, then price your product below competition.  If your organization has a premium brand or product, then set your prices higher than your competition.  If you stay at your current market share, then use parity pricing and keep the prices the same as your competitors (Finch, 2012).  A perfect example of this would be the gasoline industry.  Usually the market leader changes the price and within a few days all stations are charging the same price.  

Finch, J. (2012).  Managerial marketing . Retrieved from https://ashford.content.edu

Katherine Olivera

YesterdayAug 27 at 9pm

Manage Discussion Entry

Pricing Strategies

Finch (2012) identifies pricing strategies as cost-based, customer-based, and competition-based.  Cost-based pricing focuses on the actual costs incurred by the company and how much profit the company makes per unit.  Markup pricing and cost-plus pricing as two methods of cost-based pricing.  Markup pricing involves adding a predetermined percentage to the actual cost in order to determine the selling price.  Similarly, cost-plus pricing refers to adding a predetermined amount to the actual cost to determine the selling price. (Finch, 2012).

Customer-based marketing is significantly more complex than cost-based pricing and involves comparing the price of alternative brands and raising or lowering the selling price based on the brand value.  Finch (2012) uses Economic Value Estimation (EVE) as an example of customer-based marketing. EVE considers the price of consumer’s closest alternative as the reference value used as comparison and then raises or lowers the price based on the value added by the superior brand. Customer-based marketing is a strategic way for companies to remain competitive in a crowded market.

Competition-based pricing focuses on adjusting pricing based on competitors’ prices.  Finch advises that companies should assess competitors’ behavior.  The three types of competition-based pricing are above-competition pricing, parity pricing, and b