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How The Pricing Strategy Of A Product Can Affect Revenue

1344 words - 6 pages

Topic: Pricing Strategy
Introduction
All goods and services offer some utility or power to satisfy wants. This utility is the individual preference associated with each goods. The sum of all the values that consumers exchange for the benefits of using the product or service is called the price of that product. It can mean “rent, tuition fee, fare, rate, interest, toll, premium, honorarium, dues, assessment, retainer, salary, commission, wage, even bribe and income taxes “(Schwartz 1981). Price is one of the key components of the classic “four Ps: product, price, place, and promotion” grouping of the marketing mix (McCarthy 1960) The marketing mix is defined as the set of controllable marketing variables that marketers employ to “obtain the desired responses from their target markets” (Kotler and Armstrong 1991).
Factors influencing Pricing strategy
Pricing decisions can be “difficult and often speculative due to the uncertainties” prevailing in the market.(Burley & Kortge 1994).The factors that affect the pricing strategy can be broadly divided into Internal and external Factors.
Internal Factors
Capacity Utilization: “Excess capacity increases production and lower prices” (Cavusgill, 1996)
Internal cost structure: The fact that most firms use cost plus pricing strategies suggests that “cost advantages are translated into advantages in price levels” (Govindarajan & Anthony, 1983; Monroe, 1990).
Market contribution rate: It is defined as the “percentage of total firm profits” represented by one particular product (Forman, 1998). A product accounting for a significant profit contribution to a firm will acquire more attention than a less profitable product, thus affecting the pricing strategy selected.-
External factors
Price sensitivity of customers
To implement pricing strategy “understanding price elasticity of the product “over different levels of output is necessary (Monroe, 1990). The number of substitute products and the price elasticity of a firm’s product affect consumer’s price sensitivity.
Switching costs
Customer switching costs can vary between products. Firms can capitalize on these differences
By “employing appropriate pricing strategies” (Stango, 2002).Firms trying to enter markets where the switching costs are high may implement pricing strategies that can be useful in facilitating the entry.
Barriers to entry
Barriers to entry include nontariff trade barriers, patents, or technological advantages.
Pricing strategies
Transfer pricing strategy
When MNCs sell products to their divisions in other countries Transfer pricing strategy is used. Prices of products between divisions will differ depending on variables such as the taxation rates Prices are charged when tax rates are less favorable in the receiving divisions.
Cost-plus pricing strategy This is the most widely used pricing strategy. When entering countries for the first time, it will be easy to develop a price based on internal cost figures. “Cost-plus...

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