Price Skimming

Pennsylvania State University **We aren't endorsed by this school
Nov 7, 2023
Uploaded by blackcheetha on
Price Skimming Price skimming is named for its similarity to a farmer skimming cream from the top of a dairy product. Think back to diffusion of innovation, discussed in a previous lesson. As explained there, innovators and early adopters are willing (and sometimes even expecting) to pay higher prices. This helps a company developing a new, innovative product recoup some of the costs involved in R&D and in generating brand awareness. Price skimming is the strategy used here: The company starts with higher prices, which then drop over time as demand transitions from just innovators to more of the mass market. Skimming is also useful as competitors begin to enter a market over time, requiring prices to decrease. It is supported by the development of economies of scale, in which, over time, a company finds it cheaper to produce the product, passing its savings on to the consumer in an appeal to the mass market. Penetration Pricing This pricing approach is the complete opposite of skimming: Companies set low initial prices in order to obtain the largest market share possible. Because of these low prices, competitors are less likely to enter the market. Odd-Even Pricing This is a very popular pricing strategy. When you see a price of $49.95, do you think it is just above $40.00 or just below $50.00? Marketers believe that this type of pricing creates more value if your answer were "Over $40.00"; however, there is no strong research that supports this theory. Target Pricing Although not a popular strategy, some companies use market research to identify what price the target market will pay for their products. Then, they will work backward through the pricing process to determine what price they can charge. The target pricing method is used most often by public utilities, like electric and gas companies. Bundle Pricing This pricing strategy packages several complementary goods into one deal with a reduced price (when compared to buying them individually). McDonald's value meals and satellite/cable TV packages are examples of bundle pricing. Yield Management Technology has enabled companies to monitor supply and demand in "real" time, adjusting their prices accordingly. The price of gasoline serves as an example of yield management. Another example is airline ticket pricing. Consider the following vignette. Standard Markup Pricing
Some manufacturers and middlemen set their prices using markups—amounts added to the cost of their products. Markups are usually calculated as a percentage of the selling price (unless otherwise stated). This type of calculation reduces confusion and establishes consistency in pricing. For example, retailers receive goods from a manufacturer for a base price; this base price is the retailer's cost. In order to make a profit, retailers add a markup. Hence, if the cost of a product is $100 and the retailer wants to add a 50% markup, the selling price would be $150 (cost × markup + cost = selling price). However, due to products not selling well or to seasonal variations, a retailer might mark a product down. This markdown comes off of the selling price— not the cost. Calculating a markdown based on cost would lead to major errors and a huge loss in profit! Cost-Plus Pricing Cost-plus pricing involves calculating the total cost for delivering a product or service, and then adding a set amount of profit (a markup) to it. You'll find cost-plus pricing to be quite common in business-to- business marketing. Target Profit Pricing Target Profit Pricing This approach involves setting an annual target of a specific dollar volume of profit. It depends on an accurate estimate of demand. The target profit pricing method is used most often by public utilities, like electric and gas companies, and companies with high capital investments, like automobile manufacturers. Target Return-on-Sales Pricing Target Return-on-Sales Pricing This approach involves setting a price that will generate profits that represent a specified percentage of sales volume. Supermarkets often use this method by stating profit goals as 2% of sales volume. Target Return-on-Investment Pricing Target Return-on-Investment Pricing This approach involves setting a price based on a predicted return on investment (ROI). This method is used by large, publicly owned companies and public utilities. Kerin and Hartley (2020) provide an example: "An electric or natural gas utility may decide to seek a 10% ROI. If its investment in plant and equipment is $50 billion, it would need to set the price of electricity or natural gas to its consumers at a level that results in $5 billion a year in profit" (p. 301). Customary Pricing Customary Pricing This pricing strategy is used to set a price because "that's what it's always been." Coffee, canned-good, and candy-bar manufacturers have difficulty raising prices because of customers' expectations; this has led them to decrease the size of products but keep the same price.
Above-, At-, or Below-Market Pricing This pricing strategy is very literal. Knowing what the market price points are, companies decide that their products are premium (e.g., Starbucks, Rolex), charging high prices, or that their products are value products (e.g., Walmart's Equate and Old Roy brands), charging a lower price. Loss Leader Pricing Retailers often use this method to attract customers into a store. Think bargains of the week, usually found in sales flyers: The retailer is hoping that, when customers come to the store to buy these products, they will also buy other products that are offered.
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