15.1 Determining the Price

Price selection is one of the most important functions of a business. The right price enables a company to generate high profits and consequently increase liquidity by generating more cash. On the other hand, an incorrect price could result in a company suffering a loss. If the price is low, it will result in low profit margins and lower growth opportunities and may even jeopardize business sustainability. If the price is high, it will result in low sales volume, reduced revenues, and consequently low profits for the company.

In general, price is determined by the following factors:

• The cost – price must cover the cost, or businesses cannot survive. This is the lowest price level.
• The competition – prices must be set to match the competition’s price or even lower than the one offered by the competitor. This price is also the highest price level. If a product price is higher than the competition, customers will switch to the competition (Coursera, 2023).
• Market forces – supply and demand – price that is set based on market forces is the one that the customer is willing to and able to pay. This price is also the optimum price, which lies between the highest and lowest levels of price. (BDC, n.d.)

Types of Pricing Strategies

The most common pricing strategies used by businesses are penetration pricing, skimming pricing, and flexible pricing.

• Penetration pricing strategy – A pricing strategy where companies enter a market using low prices in anticipation of capturing a large market share and, consequently, large sales volume. Increased sales translate to a decrease in costs due to economies of scale, and reduction in cost results in high profits (See Chapter 9). Also, when this strategy is successful, and the company acquires a larger share of the market by getting rid of the competition, the company can then raise the price and increase profits even further (FITT Team, 2015). This strategy works when the market is sensitive to prices. Dell Computers is one of the companies that benefited from this strategy (eWeek Editors, 2001).
• Skimming pricing strategy – This strategy involves charging premium prices when the product is first introduced to the market, and there is no competition. These are generally innovative technology items which require high research and development costs, and charging premium prices helps the company recover their costs quickly (Bora, 2022). Once newer versions of the product become available or the market gets saturated with similar products, the company lowers the price to reach more price-sensitive customers. Apple is one of those companies that persistently follows a price-skimming strategy (YFZHA, 2016).
• Flexible pricing strategy – This is a dynamic strategy where the same products are offered at different prices to different groups of customers. This strategy can be used as a response to changes in customer demand or changes in other conditions, such as season or customer needs (Bjelobrk, 2022). Airlines and hotel chains use this strategy to maintain their revenue stream in low seasons, or they offer discounts when they need to fulfil extra capacity.

International trade adds additional complications to the selection of pricing strategies. When selecting the pricing strategy in international trade, aside from internal factors (company’s desired profit margin and production and distribution costs), companies must also perform an in-depth analysis of all factors applicable to the target market, including market factors and economic factors

• Market factors include foreign exchange rates and applicable laws and regulations, competition, and market share.
• Economic factors include the inflation rate and the purchasing power of potential customers in the target market.

References

BDC. (n.d.). 7 Steps to setting the right price foe your products or services. BDC. https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/steps-setting-right-price-your-products-services

Bjelobrk, M. (2022, January 27). Flexible pricing – all you should know about it. P2S. https://www.price2spy.com/blog/flexible-pricing-all-you-should-know-about-it/

Bora, G. (2022, April 7). How to develop effective pricing strategies for your export product. The Economic Times. https://economictimes.indiatimes.com/small-biz/trade/exports/pre-exports/how-to-develop-effective-pricing-strategies-for-your-export-product/articleshow/89609499.cms

Coursera. (2023, November 29). What is a pricing strategy? How to choose one for your business. https://www.coursera.org/articles/pricing-strategy

eWeek Editors. (2001, April 9). Dell remains committed to pricing strategy. eWeek. https://www.eweek.com/pc-hardware/dell-remains-committed-to-pricing-strategy/

FITT Team. (2015, October 23). Which pricing strategy is the best fit for your international marketing plan? Trade Ready. https://www.tradeready.ca/2015/fittskills-refresher/pricing-strategy-best-fit-international-marketing-plan/

YFZHA. (2016, May 1). Apple skimming pricing strategy. T1 2016 MPK732 Marketing Management (Cluster B). [Blog]. Deakin Business School. https://mpk732t12016clusterb.wordpress.com/2016/05/01/apple-skimming-pricing-strategy/