Three Pricing Strategies

There are three basic pricing strategies: cost-plus pricing, competitive pricing, and value pricing.

In cost-plus pricing, you look at the cost of what you sell-that is, the total marginal cost–then add on the profit you need to make. That’s your price. Cost-plus means “cost plus profit.”

This method of pricing is straightforward and ensures that you will make money on what you sell. Unfortunately, it does not ensure that you will sell it. The success of this pricing strategy depends on targeting a “reasonable” profit and controlling your costs. It also depends on not being under-priced by a competitor.

A competitive pricing strategy aims to price the product at the lowest price among all recognized competitors. Low prices are one way to compete effectively, and sometimes competitive pricing is essential. For instance, in an industry selling a commodity, the outfit with the lowest price will usually succeed. That’s because when the products themselves are not differentiated, price becomes the differentiating factor.

Competitive pricing is not just for commodities. In retail, for example, portable CD players are not a commodity, but once a customer has decided she wants to buy one, price will play a big role in which type she buys. So competitive pricing is common in retailing. In fact, some retailers offer to beat any other advertised price.

In general, the success of a competitive pricing strategy depends on achieving high volume and low cost – preferably the lowest in the industry – so you can maintain the lowest price and still make a profit. Success also depends on avoiding a destructive price war.

A value pricing strategy is the alternative to basing your prices on your costs or your competitors’ prices. Instead, you base your prices on the value you deliver to customers. In this strategy, you deliver as much value as possible to your customers – and charge them for it. With this strategy, you charge a high price and justify it by delivering high value.

Value pricing is common in high technology and luxury items, such as clothing, restaurants, and automobiles.

In practice, a business considers all three pricing strategies. You have to consider you costs, or your profits will suffer. You have to consider your competitor’s prices, even if you’re not competing on price. You must consider the value you deliver because no matter what you sell, customers want value for their money.

Ex. 1. According to the text.

1. A cost plus profit pricing is

a. a straightforward method;

b. a method that ensures that you will make money on what you sell;

c. a method that includes total marginal cost and profit you need to make;

d. all of the above.

2. A competitive pricing strategy aims

a. to beat any other advertised price;

b. to price the product at the lowest price among all recognized competitors;

c. to compete effectively;

d. all of the above.

3. A value pricing strategy suggests that you should base your prices on

a. your costs and expenses;

b. your competitor’s prices;

c. the value you deliver to customers.

Ex. 2. Speak on the following issues:

1. Advantages and disadvantages of cost-plus, competitive and value pricing.

2. You own a business. What type of pricing would you prefer? Why?

Text 3

As you read the text, write a short heading for each paragraph.

Market Leaders, Challengers and Followers

In most markets there is a definite market leader: the firm with the largest market share. This is often the first company to have entered the field, or at least the first to have succeeded in it. The market leader is frequently able to lead other firms in the introduction of new products, in price changes, in the level or intensity of promotions, and so on.

Market leaders usually want to increase their market share even further, or at least to protect their current market share. One way to do this is to try to find ways to increase the size of the entire market. Contrary to a common belief, wholly dominating a market, or having a monopoly, is seldom an advantage: competitors expand markets and find new uses and users for products, which enriches everyone in the field, but the market leader more than its competitors. A market can also be expanded by stimulating more usage: for example, many households no longer have only one radio or cassette player, but perhaps one in each room, one in the car, plus a Walkman or two.

In many markets, there is often also a distinct market challenger, with the second-largest market share. In the car hire business, the challenger actually advertises this fact: for many years Avis used the slogan “We're number two. We try harder.” Market challengers can either attempt to attack the leader, or to increase their market share by attacking various market followers.

The majority of companies in any industry are merely market followers which present no threat to the leader. Many market followers concentrate on market segmentation: finding a profitable niche in the market that is not satisfied by other goods or services, and that offers growth potential or gives the company a differential advantage because of its specific competencies.

A market follower which does not establish its own niche is in a vulnerable position: if its product does not have a “unique selling proposition” there is no reason for anyone to buy it. In fact, in most established industries, there is only room for two or three major companies: think of soft drinks, soap and washing powders, jeans, sports shoes, and so on. Although small companies are generally flexible, and can quickly respond to market conditions, their narrow range of customers causes problematic fluctuations in turnover and profit. Furthermore, they are vulnerable in a recession when, largely for psychological reasons, distributors, retailers and customers all prefer to buy from big, well-known suppliers.

Ex. 1. Find words in the text which mean the following.

1) a company's sales expressed as a percentage of the total market;

2) short-term tactics designed to stimulate stronger sales of a product;

3) the situation in which there is only one seller of a product;

4) companies offering similar goods or services to the same set of customers;

5) a short and easily memorized phrase used in advertising;

6) the division of a market into submarkets according to the needs or buying habits of different groups of potential customers;

7) a small and specific market segment;

8) a factor which makes you superior to competitors in a certain respect;

9) a business's total sales revenue;

10) a period during which an economy is working below its potential.

Ex. 2. Which of the following three paragraphs most accurately summarizes the text, and what is wrong with the others?

First summary:

In most markets there is a definite market leader, with the largest market share, which frequently helps other firms to introduce new products. In many cases, there is also a market challenger, which wants to replace the leader, and various market followers, which seek out particular niches that do not interest the leader. Other followers merely imitate the products of larger companies, but this is a dangerous strategy during recessions.

Second summary:

In most markets there is a leader that strongly influences other firms in the introduction of new products, price changes, promotions, and so on. There is frequently also a market challenger, with the second-largest market share, which can attempt to increase its market share by attacking either the leader or some market followers. Market followers concentrate on profitable niche products that are in some way differentiated from the products of larger companies.

Third summary:

The first company in a particular market nearly always becomes the market leader, a position it will try to keep by regularly attacking distinct market challengers and followers. Most followers can either concentrate on small market segments or niches, or follow the safer strategy of imitating the leader’s products.