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
YesterdayAug 27 at 9pm
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 below-competition pricing. Companies that utilize above-competition pricing set prices above competing companies to maintain an already achieved high-end brand image. Parity pricing involves setting prices that match the competition and is generally used by new brands seeking to establish a place in the market. Below-competition pricing refers to setting prices below the competition and is a strategy used to attract customers who seek a bargain.
Same Product, Different Prices
I recently ordered a pair of Skechers Flex Appeal 3.0 sneakers from Fingerhut and paid $55.99. After a quick search for the same exact shoe offered by several different stores’ websites, I realized I could have gotten a better deal and should have researched prices before I purchased. DSW advertises the same exact shoe for $49.99 on its website. Amazon appears to currently offer the best deal at $45.16 and several other stores fall in the $54-$56 range. I think that Fingerhut is generally somewhat pricy and I would guess it utilizes cost-based pricing as all of the products I have seen in its marketplace seem to have similar markups. I don’t think that Fingerhut has the brand image power to set its prices toward the top of the market using customer-based or above-competition based pricing. Amazon offering the lowest price is not surprising as it is an empire with significantly more resources than the competition to fulfill orders at a lower cost allowing it to underbid its competition. DSW is different in that it is a shoe store instead of a store that sells a variety of products including shoes. It makes sense that DSW would offer a competitive price in order to remain viable in the current market.
Motivations in Choosing a Pricing Strategy
Generally, I think that customer-based pricing provides a strategic formula for companies to remain competitive. However, there are many considerations involved in selecting the right pricing strategy for a company in order to maximize its profitability. Cost-based pricing is part of every strategy even if it isn’t the sole method used. The actual cost of providing the product needs to be considered in order to make money and the actual cost will vary. In the above example, I wouldn’t be surprised if DSW gets a better price from Sketchers than Fingerhut does as DSW likely orders higher quantities. The type of product is also a consideration in choosing or changing prices. Companies that sell products that expire will oftentimes lower prices on overstock products approaching expiration dates. Additionally, companies that sell many different products may choose to use below-competition pricing on a popular product to attract customers into the store to possibly buy other items priced with a different pricing strategy. I think it is important for companies to continually assess their pricing strategies and remain flexible in order to succeed in the marketplace.
Finch, J. (2012). Managerial marketing. Retrieved from https://ashford.content.edu
YesterdayAug 27 at 9:59pm
Identity three types of pricing strategies -Cost, customers and competition are three types of pricing strategies used to set focus on the pricing. To further understand finch states “Pricing products below cost cannot be sustained in the long run. Pricing beyond customers‘ willingness to pay will not be successful. Setting prices that fail to deliver a competitive value will lead to a brand’s demise in competitive markets. In general, there are three approaches to making pricing decisions, and each uniquely reflects the priority of one of these three Cs” (Finch, J. (2012).
Select a good or service and compare the prices of two different companies associated with the goods or service. – Two companies that are often put within the same competitive group are Walmart and Target. They supply very high in demand products but the pricing is very different. Walmart products are often marked down however the service may not be the best. The association of good or service is truly based on the supply demand, setting the price lets consumers know the value of your product; it’s used to send a message. Economic Value Estimation is a very useful tool for developing profitable pricing strategies for many types of goods and services. Consider a brand that is well positioned and superior to competitors’ alternatives for a given segment of the market. The price of the buyer’s next-best alternative is the buyer’s reference value or basis for comparison (Finch, J. (2012). Why do different organizations have different pricing strategies for the same good or service? -IOU – The reason for organizations to have different pricing for the same good or service is so consumers believe that brand products are best. When some products are marked down the public may think that it’s cheap or less useful. It’s all on the basis of what the organization is trying to project. Reference: Finch, J. (2012). Managerial marketing . Retrieved from https://ashford.content.edu
YesterdayAug 27 at 8:47pm
Product development and introduction of novel products is crucial for the success of a variety of product markets (Finch, 2012). When a company chooses its targeted customers, and determines their needs and preferences. It will define the appropriate mix of 4P’s for that market. It is ready to develop and launch new or improved products (Finch, 2012). The product that will be used is the MacBook Pro. The 8 stages of the new product development will be discussed.
Apple identifies customer’s needs and issues concerning the MacBook Pro and approaches the obstacles take steps to correct these issues such as customer complaints about MacBook having longer battery life without having to charge. The Apple marketers will check out the competition through study and analysis of completive products.
The ideas will be screened to determine those that are promising, marginal or the rejects such as give to MacBook Pros longer cords so that Business users can plug them in to save battery or the recharge them. Favorable ideas are appraised by the team and surviving promising ideas are screened through this process. The poor ideas are dropped at this time because they will more than likely cause the MacBook Pro improvement plan to fail. The ideas are discussed in detail to determine target market, product price, development cost and rate of return enabling.
Concept Development and Testing
Apple marketing team should determine the attractive ideas into listable product concepts. Each concept represents a category for each attractive idea. For each idea to improve the MacBook Pro the next assignment is to decide where each concept would position it in relation to its idea. They would buy a MacBook Pro that has been improved, the team then determines the targeted consumer group of young business leaders and the improved MacBook Pro processes to the next stage after ideas testing concepts that qualify a marketing strategy.
Marketing Strategy Development
This stage determines the target market, planned product placing, as well as sales and profit objectives in three to five years. It also determines the MacBook price of $1999. This stage deals with long term sales and profits and marketing mix strategy over time. After product concept/ marketing strategy is developed, Apple will evaluate the proposal’s business attractiveness in the next stages (Finch, 2012).
Management will prepare sales, costs, and profits projections fro the next five years to determine whether they satisfy Apples objectives. If they match Apples objectives, then the MacBook Pro concept moves to the development stage (Finch, 2012). The MacBook Pro first time sales plus replacement sales needs to be added to estimate using market research methods with demand forecasting methods. The risk analysis will provide three estimates optimistic, pessimistic, and realistic based on the calculations; profitability is projected for the next five years. If MacBook Pro concept passes the business analysis teat, it moves onward to the product development stage (Finch, 2012).
Apple determines if the MacBook improvement will translate into technically and commercially feasible product. Ideas are provided in aspect to R&D to make the physical improvements of the MacBook Pro. Apple will have consumer testing to determine the life span of the battery, and determine if it is user friendly.
Now that MacBook pro is prepared to be branded with Apples logo, and packaging and go into a preliminary market testing. Apples objectives of market testing can be to test the MacBook Pro in actual market setting, and lean about how consumers handle, use, and repurchase the Mac. Real consumers respond to Mac and their positive behaviors and strong sales performance is required to trigger a full-launch on a market wide basis (Finch, 2012).
After The Mac has been successful during the market testing Apple will decide on when to launch the improved Mac, where to launch, the targeted customers and how to launch the market strategy.
Review the reasons why new products fail and make two specific recommendations to improve the high failure rate of new products.
New products fail because the company entered the way market and not determining who the targeted customer are. Companies that do market reach correctly and ask for feedback from their customers will improve the high failure rates of new products. Sometimes companies fail in launching the product (Finch, 2012). The MacBook Pro was thought through, clearly met market need and had the right set of features and its design is sleek and light weight.
Finch, J. (2012). Managerial Marketing. San Diego, CA: Bridgepoint Education, Inc. Retrieved from Ashford Edu https://content.ashford.edu/books/AUBUS620.12.1
YesterdayAug 27 at 9:54pm
The new product development process is, according to Finch (2012), a six step process, idea generation, screening, concept development and testing, business analysis, market testing, and commercialization. The automobile industry has a slightly different process broken down in five phases, plan and define program, product design and development, process design and development, product and process validation, and product launch, feedback and corrective action (Sanongpong, 2009). The car manufacturers have become proficient of overlapping these processes and doing many of the processes at the same time in order to streamline and to maximize resource utilization (Sanongpong, 2009).
According to Finch (2012), idea generation is simply gathering a pod of ideas for consideration and evaluation for possible products. How is the car going to look, what is the target market for the car, what size will the engine be, will it be two wheel drive or four wheel drive, will it be a sports car, SUV, luxury, or economy car? These would be questions asked during the idea generation phase. The idea generation could fit into two different phases of the automobile model, the plan and define program or product design and development.
Screening is the phase where questions from the idea generation phase are answered against the criteria used by the organization. Some more specific questions are answered as well. Does the idea fit into the organizations overall strategy? Does it utilize the resources and core competencies of the organization? Is the idea have enough going for it to make it to market (Finch, 2012). This phase would fall under the automobile industries plan and define program phase.
Concept Development and Testing
Customers, distribution channel intermediaries, engineers and employees all contribute to this phase. Scale models, tensile testing, customer surveys, and United States testing procedures for safety are happening during this phase. Will the vehicle, based on screening, make it to production. Basically, if the idea can make it through the screening process, it is a good idea or worthy of the investments that happen in concept development and testing.
Business Analysis sends the idea or concept through the rigorous financial evaluations and analysis. Costs, sales, profits, return on investments, cash flows, and long term potential growth are a few of the evaluations and analytics that the idea must pass through before moving to evaluating the best and worst case scenarios (Finch, 2012). Concept development and testing along with the business analysis phases also could fall into two of the automotive industry model as process design and development and product and process validation.
This phase is essentially rolling out the automobile on a limited basis in a very selective sample of the target market (Finch, 2012). The market testing has to provide positive feedback to make it to the next stage.
This is the stage where the organization fully commits to the automobile and open the production and distribution to the entire market. Commercialization fits into the automotive industry model at product launch, feedback assessment and corrective action (Sanongpong, 2009).
Phases in the product development process can be called anything but they essentially follow the same path to reality. There are two key factors to gaining a competitive advantage, the ability to generate new intellectual property that offers superior value and the ability to capitalize on it quickly (Sanongpong, 2009). There are challenges and obstacles that can stop the new product development process in its tracks. Cost control and communication can cause headaches if not cancel the commercialization of a new product. Communication between development and management must be complete and truthful in order to production. The process has to adapt to changing conditions that happen constantly, both in the organization and customer needs (Sanongpong, 2009). The process of selecting suppliers is very critical to the cost control. The organization needs to have an optimal plan for the selections of there suppliers to avoid this pitfall.
Finch, J. (2012). Managerial marketing . Retrieved from https://ashford.content.edu
Sanongpong, K. (2009). Automotive Process-based New Product Development: A Review of Key Performance Metrics. Proceedings of the World Congress of Engineering Vol. 1. July 1-3
YesterdayAug 27 at 10:43pm
One product that ran its course was the Apple Ipod. When it first hit the market it was very popular and in high demand. Once the Apple phone was upgraded to carry music and movies on its itunes application the ipod became obsolete. The reason for the lost in interest by the public was due to the iphone being able to play music, watch movies, make phone calls and text. The ipod became another useless device to carry around. Knowing how to reach the public by strategizing, reaching generations, business analysis, development, testing, and commercializationis the key to keep the public interest. Apple created a product that ruined its other product. Now, if the intention was to keep it provable they must rethink its marketing. Reinforcing brand preference within one’s existing customer base is an essential advertising function. A brand image created and maintained by years of extensive promotions and positive customer experience represents a tremendous investment to create positive brand equity. Consequently, reinforcing brand preference and positioning through ongoing investments in the promotions mix is a financially sound decision. This basic goal can be pursued by marketing managers in several ways (Finch, J. (2012). Reference:
Finch, J. (2012). Managerial marketing . Retrieved from https://ashford.content.ed
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