Missing the Boat with Strategic Pricing

By Clark, Scott A. | THE JOURNAL RECORD, May 24, 1999 | Go to article overview

Missing the Boat with Strategic Pricing


Clark, Scott A., THE JOURNAL RECORD


How do you set your prices? If you don't have a pricing strategy, you may be missing the boat and throwing away additional profits.

First, you must determine your pricing objectives, each of which will result in different pricing strategies. For example, your company's pricing objective might be one of the following: increase near-term sales, maximize long-term profits, dissuade new competitors, discourage price cutting, stabilize market prices, rapidly establish market position, recover development costs promptly, or build traffic.

Here are some examples of the more common pricing strategies: * Fixed profit pricing. Multiply your product cost by a fixed percentage to obtain your selling price. This is the procedure that most businesses use because it is easy to calculate, but it usually sacrifices additional profits. Furthermore, it does not take marketplace pressures into account. * Break-even pricing. Calculate the overall sales revenue needed to cover all fixed and variable costs within your business, then set price and volume to achieve this break-even point. This achieves a price/volume floor, forfeits profit income, and does not take market demand into account. * Target return pricing. Compute similar to break-even pricing, but set the goal at a fixed percentage return over the break-even point. While above the floor and thereby allowing some additional profit, it still does not account for market demand. * Going-rate pricing. This involves several options: (1) set your prices EQUAL to the competition; (2) set your price a certain percentage BELOW the competition to capture a portion of a new market or drive a competitor out; and (3) set your selling price at a fixed percentage ABOVE the competition, because you have a better product or a stronger warranty. * Demand-modified break-even pricing. This involves extensive marketing research, because you need to determine estimates of real market demand at each feasible price. …

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