Price is an important factor for marketing products. In addition to utilizing the laws of supply and demand, price communicates information about the products. A high price may be an indication that the product is a luxury good; whereas, the lowest price indicates the product is a decent substitute for higher-priced items. Pricing policy is the method companies use to set prices for products. Procedures for pricing policies include target pricing, market pricing, premium pricing and low-cost pricing.
Target or Cost-plus Pricing
Target pricing is used when a seller wants to achieve a percentage over variable costs. For example, if a t-shirt seller determines that his costs for each t-shirt sold are $4 for raw materials, and $8 for labor, his variable costs total $12. If he wants to achieve a 10 percent markup on each t-shirt, he would sell each t-shirt for $13.20 ($12 + $1.20). Target pricing is used in markets where there are many sellers with slightly differentiated products. Examples of industries that use target pricing are clothing, cereal and beef industries.
Market, or going-rate, pricing, is used in markets where there are many sellers and buyers buying similar goods, or a competitive market. When consumers do not differentiate between products that are widely available, neither the consumer nor the seller have control over the price, and both are price takers. Examples of industries that use going-rate pricing strategies are gasoline, produce and milk.
When customers value a brand or status symbol, a seller can charge a higher price to maintain the image that the product is only available for a select few. Premium pricing is used in markets where products are highly differentiated, like luxury items. Examples of industries that use premium pricing are the cosmetics, designer clothing and luxury automobile industries.
Some companies are successful at offering the lowest price on luxury and commodity items. For example, generic and store brands offer low prices on items such as perfume, frozen vegetables and shampoo. Companies can use this strategy as a long-term or short-term strategy. When used as a long-term strategy, companies must also keep their own expenses low. For example, generic brands succeed at cutting costs by eliminating advertising. Wal-Mart cuts its costs by demanding lower costs from suppliers. As a short-term strategy, a company might use penetration pricing to gain acceptance from customers. They can sell products at a loss for a period of time before raising prices. Examples of products that have been offered using penetration pricing are satellite television and magazine subscriptions.
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