Blog 9 The Method Behind the Madness: Pricing

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Walking through the stores in the mall you get a mix of emotions looking at the price tags in the different stores. Its a mix of sticker shock and then moments of success when you feel you have found a deal. You can't help but wonder, how does the store and brand determine the cost of their products? How did they manage to figure out how to calculate the number on that sticker? Well for the organization and brand to start determining this, they look at four approaches they can take to figuring out this price level. They can do this by looking at:

    1. Demand        

    2. Cost

    3. Profit

    4. Competition

Looking at demand pricing tactics, this is when a company looks at the numbers and response from consumers. There are a few typed of demand pricing strategies that could be used.

The first is skimming pricing. This is done by setting an initial high price that desiring customers would be willing to pay. This pricing is possible if:

1. There is a demand there tends to be success
2. Enough prospective customers are willing to immediately buy
3. An initial high price that doesn't attract competitors
4. In lowering the price it has minor effect on sales volume
5. Customers interpret high price as high quality

An example of skimming price would be that of new technologies that hit the market. At the time of their immediate release such as the release of a new laptop or television by certain brands, the price is higher due to the updated new technologies it contains. This differs from penetration pricing, which is the setting of an initial low price to appeal to mass markets. This is done if: 

1. Many segments of the market are price sensitive
2.  Setting a lower price damages competitors 
3.  Unit production and marketing costs decrease dramatically due to sales

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In demand oriented approaches, there are factors such as tastes and preferences that customers have which companies and brands keep in mind while setting their pricing strategies. Seen in all these pricing strategies, this also includes prestige pricing, which is when the prices are set at a higher bar. Then there is odd even pricing which is when a certain price is set a few dollars or cents around the set price. An example of this is the $19.99 price instead of $20.00 you may see in stores. In addition there is bundle pricing which is when companies bundle together different products to make them one single price. Examples of this would be some technological bundles like cell phones. One other type of demand pricing, yield management pricing, This is a strategy of changing different prices to maximize revenues, say the different types of tickets you can buy for a flight in an airplane such as economy or first class. 

There are different pricing strategies for cost, profit and competition oriented pricing approaches. Those are applicable to other situations, but for the purposes of this holiday season and the high demand that comes with this time of year, these are some of the pricing strategies that can most likely be seen in the products around you as you walk through the mall this December. 

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