Chapter 3 Pricing based on other economic conditions

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Competition Oriented Pricing:

Competition Oriented Pricing Going Rate Pricing Loss Leader Customary Pricing Price Leadership Imitative Pricing And Suggested Prices

Going Rate Pricing:

Going Rate Pricing Opposite of FCP which is based on cost of production It is based on market situation The firm will adjust its own price policy in time with the general pricing structure prevailing in the industry. Happens in Oligopolistic, Pure competition and Monopolistic Competition. In some industries like clothing, automobiles, electronic goods, etc firms even tailor the cost of production to the prevailing (or going ) price. Followed in case of products whose development has reached a stage of maturity. Producers and consumers accept a stable price relationship. Firms Tailor costs given the prices. In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market. Hence GRP is very convenient. May follow pricing leads of rivals especially where those rivals have a clear dominance of market share. Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets.

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GRP is adopted when: Costs are difficult to measure The firm wants to avoid tension of price rivalry in the market When there is price leadership of a dominant firm in the market.

Loss Leadership Pricing:

Loss Leadership Pricing A loss leader is an item which produces a less than customary contribution or a negative contribution to the overhead but which is expected to create profits on increased future sales or sales of other items. Firms charge relatively low price on some popular products hoping that customer would buy some other products produced and sold by the firm. Such product is the firm’s loss leader. Actual Price is lower than what could be charged. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. Aims to eliminate competition in order to gain an advantage in the market consequently building your own image. Widely used in retailing business. Aims at increasing profits. Basic idea of making a popular product a loss leader is that the profits thus sacrificed will be made good by profits on the other products.

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For example, you buy a portable TV from your suppliers at £160 and the additional costs of selling the TV add up to £40, totalling a break-even selling price of £200. You sell the TV for a reduced price of £189 therefore making a loss of £11 for each one sold. But to the customers, they will see this price as a bargain due to other shops selling the TV at say, £230. With the TV example, you may further offer them insurance, and with your powers of negotiation, you could talk them into making a purchase for a better model TV which will generate a profit. You may also display and advertise a related product with the TV, say, a video recorder which is compatible because of the same brand or design. You could then price this product with a figure that will make a good profit and also compensate for the loss made on the TV. The diagram below illustrates how you may price other products:

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When to Use Loss Leader Pricing Move Overstock: If you have inventory that isn't moving or if you're overstocked on a particular item, a loss leader can move it. By cutting the price of such an item, you'll not only free up the shelf space and reduce inventory, but you'll also increase cash flow. Brand Awareness: If you would like to be known for having low prices then the loss leader pricing strategy will help associate your business with that belief. Keep in mind that people want good quality merchandise for less money and not junk. Increased Traffic: Using loss leaders as a marketing tool can help gain new customers and increase return visits. People like a bargain and will likely come back to shop. Benefits of the Loss Leader Strategy Gives you a competitive advantage due to reduced prices. Creates brand building for the business as people will associate you with 'good quality for less money‘. Potential related sales and return visits for similar goods. Good for 'word of mouth' promotion.

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Examples of Loss Leaders The razor and blades business model, pioneered by American businessman King Gillette, is similar to the loss leader business model. Razor handles are given away for free or sold at a loss, but sales of disposable razor blades are very profitable. In 1979, American businessman Earl Muntz decided to sell blank tapes and VCRs as loss leaders to attract customers to his showroom, where he would then try to sell them highly profitable widescreen projection TV systems of his own design. His success continued through the early 1980s. Inkjet printers are also often sold to retail customers below their margin price and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges and specialty papers supplied by the manufacturer. Many consider printer manufacturers activities surrounding their printers' ink anti-competitive. Cell phones are offered for free or at a low cost to subscribers who enter into a contract that is typically between 12 and 24 months. The carriers profit by retaining customers for a longer period of time, and this offsets the cost of the device. These artificially lowered prices make it difficult for those selling standalone devices and unlocked handsets to compete.

Customary Pricing:

Customary Pricing Prices are fixed as they have prevailed for a long period of time. Any change in costs for such products gets reflected in the quality or quantity of the product rather than price. Even if entrants come with low price, the existing firms can’t change the customary price. After sometime they will realize that they can’t survive if they can’t set their prices closer to customary prices.

Price Leadership:

Price Leadership Price leadership is an observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. One firm whose cost of production is low, they dominate the industry. Thus the price is fixed by the leader. Cadbury in chocolate industry HUL in soaps Pricing and any change in price of both the price leader and followers is generally in the same proportion. Price changed may not be equal to the Price Leader. There might be insignificant difference in price. Thus will have their own markets to cater. This policy is adopted as a strategy of co-existence. Pricing under this doesn’t fluctuate much. Easy to maintain when Prices increase but difficult when prices decrease.

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In the long run price leadership could have a negative impact on the dominant firm. Over time, as the supply from the fringe (smaller) competitors in the market increases the residual demand of the dominant firm decreases. In such a scenario, if the dominant firm intends to continue as the price leader in the market, it can do so only at the cost of decreasing its supply to the market, consequently sacrificing its market share. Unheeded to, the gradual loss in market share could see the once dominant player lose its position of dominance in the market. An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such covert cooperation as price leadership tends toward higher profitability for all, though it is an unstable arrangement. In dominant firm price leadership , follower firms set the same price as an established leader. The price leader may be the largest firm that dominates the industry. In barometric firm price leadership , the most reliable firm emerges as the best barometer of market conditions, or the firm could be the one with the lowest costs of production, leading other firms to follow suit. Although this firm might not be dominating the industry, its prices are believed to reflect market conditions which are the most satisfactory, as the firm would most likely be a good forecaster of economic changes.

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Imitative Pricing Often used in retail business In oligopoly, firms follow price leader.In non-oligopoly, it is useful to imitate the price set by other firms. Makes decision making easy as no need for demand and cost analysis.

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Suggested Pricing The ( manufacturer's ) suggested retail price ( (M)SRP ), list price or recommended retail price ( RRP ) of a product is the price the manufacturer recommends that the retailer sell it for. The intention was to help to standardize prices among locations. While some stores always sell at, or below, the suggested retail price, others do so only when items are on sale or closeout. Feasible for wholesalers and manufacturers given the market situation as it can help in control and stabilize prices. Saves retail management of individual market and cost condition analysis. Gives management spare time to devote to other decisions. But limits flexibility to meet local conditions. Much of the time, stores charge less than the suggested retail price, depending upon the actual wholesale cost of each item, usually purchased in bulk from the manufacturer, or in smaller quantities through a distributor. Suggested prices can also be manipulated to be unreasonably high, allowing retailers to use deceptive advertising by showing the excessive price and then their actual selling price, implying to customers that they are getting a bargain.

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