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by Laurus Nobilis
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Finance Management

Basic Pricing Strategies (E)

 

Basic Pricing Strategies

 

 

 

What are basic pricing strategies? What is the difference between Cost-based, Competition-based and Value-based pricing strategy?

 

Posted: Oct 2008


1.      “Cost-based” pricing strategy: pricing a brand based on achieving a given margin over and above costs of manufacturing, marketing and distribution. Often associated with sales- or production-led organizations; tends to encourage a mechanistic approach to cost control and pricing. Examples:

  • Cost-Plus: Price = full cost + mark-up (as a % of  full cost)

  • Break-Even Analysis: Price = variable costs + fixed costs / quantity. This formula does not depend on any cost controlling technique (Full Cost or Direct Cost); it provides a useful decisional support for different marketing strategies, taking into account return on investments.

  • Mark-Up: Price = direct cost + mark-up (as a % of direct cost). This technique is to be preferred to Cost-Plus for products with a relevant percentage of direct costs on total costs.

 

2.      “Competition-based”: pricing strategy based on the competitive strategy and on “attack/defense moves” of competitors against a given brand. Often associated with “competitive intelligence-led” organizations; characterized by an “against-someone” positioning.

  • Pure Parity: Price = Price of a chosen competitor. Typical strategy of “price takers” who set price equal to one of the “price makers” and align constantly to it. This can also be a pricing strategy for specific channels, e.g.: vending; impulse

  • Dynamic Parity: Given a chosen competitor, the gap with its price is kept constant in time, in order not to change competitive positioning in the consumer perception. This is most common amongst category leaders and the #2 brand, and is usually expressed as an index, i.e.:
    #2 brand will aim for 90% of the category leader’s price.
     

  • Premium Pricing Strategy: Price is always above the average of competitors, allowing a precise positioning of high perceived price and high perceived benefits.

  • Discount Pricing Strategy: Price is always below the average of competitors, allowing a precise positioning of low perceived price and low perceived benefits.


3.     “Value-based”: pricing based on value of a brand as perceived by the consumer. Value perceived by consumer may have little to do with the cost of manufacturing, marketing or distribution. Often associated with marketing-led organizations, tends to focus organizations on maximizing the value creation process. Some sample techniques:

  • Elasticity: The price decision results from the calculation of the sensitivity of volumes to price changes. By simulating different price scenarios it is possible to set the optimal price to the one maximizing expected revenues and profits.

  • Conjoint Analysis: the consumer quantifies the economic value of the perceived utility for each product attribute, making it possible to determine the ideal pricing of each product configuration.

  • Buy-Response: Price comes out from market research estimating the consumer’s intention to buy at different price levels. The outcome is a quantification of perceived value.

 

 

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