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PRICING STRATEGIES
There are three types of pricing strategies;
1. Cost based method
2. Value based method
3. Competitor based method
1. Cost based method
As their name applies, cost based method determines the final price to charge by starting with the cost. Cost based methods do not recognize the role that consumers or competitors prices play in the market place. Although relatively simple compared to other methods used to set prices, cost based pricing requires that all costs can be identified and calculated on a per unit basis. Moreover, the process assumes that the costs will not vary much for different levels of production, If they do then the price might need to be lowered or raised according to the production level. Therefore, cost based pricing, pricing are usually set on the basis of estimates of average.
2. Value based method
Includes approaches to setting prices that focus on the overall value of the product as perceived by the consumer. Consumers determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product.
3. Competitor based method Most firms know that consumers compare prices of their products with the different product/price combinations competitors offer. Thus, using a competitor based pricing method they may set their prices to reflect the way they want consumers to interpret their own prices relatively to the competitor`s offerings. For example setting the price very close to a competitors price signals to consumers that the products are similar while setting the price much higher signals greater features, better quality, or some other valued benefits
Examples of the competitor based methods include;
-Premium Pricing
This is where by high price is used as a defining criteria. Such a pricing strategy works in segments and industries where a strong competitive advantage exists for the company. For example in travel industry, some customers deem much expensive travel packages are of a better value than the less expensive travel packages even though they are of the same place and same hotel but of different pricing because of travel agency.
-Penetration Pricing
In this case price is set artificially low to gain market share quickly. This is done when a new product is being launched: it is understood that prices will be raised once the promotion period is over and market share objectives are achieved.
-Economy Pricing
This is a valuation technique which assigns a low price to select products. Economy pricing is widely used in the retail food business for groceries such as canned and frozen goods sold under generic food brands where marketing and production costs have been kept to a minimum
-Skimming Strategy
High price is charged for a product till such time as competitors allow after which prices can be dropped. This idea is to recover maximum money before the product or segment attracts more competitors who will lower profits for all concerned. For example when Jambo jet first came into the market in Kenya, they charged relatively high prices since it was the only available fast accessible public small aircraft until other aircrafts such fly 540 and fly SAX came into market and they reduced their prices
Mukamimuriuki answered the question on November 16, 2018 at 14:42
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