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PRICING Price is perhaps the most important of the four Ps (product, promotion, and place being the others) of marketing since it is the only one that generates revenue for a company. Price is most simply described as the value exchange that occurs for a product or service. Broadly, price is the total of all values exchanged for a product or service. Price is dynamic. When establishing a price for a product or service, a company must first assess several factors regarding its potential impact. Commonly reviewed factors include legal and regulatory guidelines, pricing objectives, pricing strategies, and options for increasing sales. Advances in Internet technology have resulted in the increased use of dynamic pricing by some sellers. LEGAL AND REGULATORY GUIDELINES The first major law influencing the price of a company's product was the Sherman Antitrust Act of 1890, passed by the U.S. Congress to prevent a company from becoming a monopoly. A monopoly occurs when one company has total control in the production and distribution of a product or service. As a monopoly, a company can charge higher than normal prices for its product or service, since no significant competition exists. The Sherman Antitrust Act empowers the U.S. Attorney General's Office to challenge a perceived monopoly and to petition the federal courts to break up a company in order to promote competition. Another significant piece of legislation that has a major effect on determining price is the Clayton Antitrust Act of 1914, passed by Congress in order to prevent practices such as price discrimination and the exclusive or nearly exclusive dealing between and among only a few companies. Like the Sherman Antitrust Act, this act prevented practices that would reduce competition. The Robinson-Patman Act of 1936, which is technically an extension of the Clayton Act, further prohibits a company from selling its product at an unreasonably low price in order to eliminate its competitors. The purpose of this act was to prohibit national chain stores from unfairly using volume discounts to drive smaller firms out of business. To defend against charges of violating the Robinson-Patman Act, a company would have to prove that price differentials were based on the competitive free market, and not an attempt to reduce or eliminate competition. Because regulations of the Robinson-Patman Act do not apply to exported products, a company can offer products for sale at significantly lower prices in foreign markets than in U.S. markets. Another set of laws influencing the price of a company's product are referred to as the unfair-trade laws. Passed in the 1930s, these laws were designed to protect special markets, such as the dairy industry, and their main focus is to set minimum retail prices for a product (e.g., milk), allowing for a slight markup. Theoretically, these laws would protect a specialty business from larger businesses that could sell the same products below cost and drive smaller, specialty stores out of business. Fair-trade laws are a different set of statutes that were enacted by many state legislatures in the early 1930s. These laws allow a producer to set a minimum price for its product; hence, retailers signing pricing agreements with manufacturers are required to list the minimum price for which a product can be sold. These acts prevent the use of interstate pricing agreements between manufacturers and retailers, grounded in the belief that this would promote more competition and, as a result, lower prices. An important aspect of these acts is that they do not apply to intrastate product prices. PRICING OBJECTIVES A critical part of a company's overall strategic planning includes the establishment of pricing objectives for the products it sells. A company has several pricing objectives from which to choose, and the objective chosen will depend on the goals and type of product sold by a company. Four pricing objectives are competitive, prestige, profitability, and volume pricing. Competitive Pricing The concept behind this frequently used pricing objective is to simply match the price established by an industry leader for a particular product. Since price difference is minimized with this strategy, a company focuses its efforts on other ways to attract new customers. Some examples of what a company might do in order to obtain new customers include producing high-quality and reliable products, providing superior customer service, and engaging in creative marketing. Prestige Pricing A company may chose to promote, maintain, and enhance the image of its product through the use of prestige pricing, which involves pricing a product high so as to make it available only to the higher-end consumer. This limited availability enhances the product's image, causing it to be viewed as prestigious. Although a company that uses this strategy expects to have limited sales, a profit is still possible because of the higher markup on each item. Examples of companies that use prestige pricing are Mercedes Benz and Rolls-Royce. Profitability Pricing The main idea behind profitability pricing is to maximize profit. The basic formula for this objective is that profits equal revenue minus expenses (P = R − E). Revenue is determined by a product's selling price and the number of units sold. A company must be careful not to increase the price of the product too much, or the quantity sold will be reduced and total profits may be lower than desired. Therefore, a company is always monitoring the price of its products in order to make sure it is competitive while at the same time providing for an acceptable profit margin. Volume Pricing When a company uses a volume-pricing objective, it is seeking sales maximization within predetermined profit guidelines. A company using this objective prices a product lower than normal but expects to make up the difference with a higher sales volume. Volume pricing can be beneficial to a company because its products are being purchased on a large scale, and large-scale product distribution helps to reinforce a company's name as well as to increase its customer loyalty. A subset of volume pricing is the market-share objective, the purpose of which is to obtain a specific percentage of sales for a given product. A company can determine an acceptable profit margin by obtaining a specific percentage of the market with a specific price for a product. PRICING STRATEGIES Companies can chose from a variety of pricing strategies, some of the most common being penetration, skimming, and competitive strategies. While each strategy is designed to achieve a different goal, each contributes to a company's ability to earn a profit. Penetration-Pricing Strategy A company that wants to build market share quickly and obtain profits from repeat sales-generally selects the penetration-pricing strategy, which can be very effective when used correctly. For example, a company may provide consumers with free samples of a product and then offer the product at a slightly reduced price. Alternatively, a company may initially offer significant discounts and then slowly remove the discounts until the full price of the product is listed. Both options allow a company to introduce a new product and to start building customer loyalty and appreciation for it. The idea is that once consumers are familiar with and satisfied with a new product, they will begin to purchase the product on a regular basis at the normal retail price. Retailers with high sales volumes frequently use the penetration-pricing strategy. High sales volume allows retailers, in some cases, to reduce prices even more. Price-Skimming Strategy A price-skimming strategy uses different pricing phases over time to generate profits. In the first phase, a company launches the product and targets customers who are more willing to pay the item's high retail price. The profit margin during this phase is extremely high and obviously generates the highest revenue for the company. Since a company realizes that only a small percentage of the market was penetrated in the first phase, it will price the product lower in the second phase. This second-phase pricing will appeal to a broader cross-section of customers, resulting in increased product sales. When sales start to level off during this phase, the company will price the product even lower. This third-phase pricing should appeal to those consumers who were price-sensitive in the first two phases and result in increased sales. The company should now have covered the majority of the market that is willing to purchase its product at the high, medium, and low price ranges. The price-skimming strategy provides an excellent opportunity for the company to maximize profits from the beginning and only slowly lower the price when needed because of reduced sales. Price adjustment with this strategy closely follows the product life cycle, that is, how customers accept a new product. Price skimming is a frequently used strategy when maximum revenue is needed to pay off high research and development costs associated with some products. This strategy is effective if product image and quality support the higher price and if an adequate number of customers exist at that price. Producers of high-definition televisions have used price skimming as a strategy to maximize revenue. Competitive-Pricing Strategy Competitive pricing is yet another major strategy. A company's competitors may either increase or decrease their prices, depending upon their own objectives.
There has been a strong push for companies to create a presence on the Internet as a way of boosting sales. It is claimed by supporters of electronic commerce, or e-commerce, that the Internet will open up larger markets to organisations. There has been a mixed reaction to this phenomenon. Some companies have recorded an increase in sales due to the Internet and the ability for a customer to shop electronically. Others have found this system to be an expensive and unsuccessful venture.
There has been a strong push for companies to create a presence on the Internet as a way of boosting sales. It is claimed by supporters of electronic commerce, or e-commerce, that the Internet will open up larger markets to organisations.
Information Technology - Issues and effects of changes to information
systems: increased or decreased profits from conducting electronic sales
via the Internet
Increased or decreased profits from conducting electronic sales via the
There has been a strong push for companies to create a presence on the
Internet as a way of boosting sales. It is claimed by supporters of
electronic commerce, or e-commerce, that the Internet will open up larger
markets to organisations. There has been a mixed reaction to this
phenomenon. Some companies have recorded an increase in sales due to the
Internet and the ability for a customer to shop electronically. Others have
found this system to be an expensive and unsuccessful venture.
Click here for discussion questions on electronic sales.
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