penetration pricing is based on what assumption

#Penetration pricing is based on what assumption plus#

Leader pricing involves pricing one or more items low to get people into a store. IKEA also sets a price for a product-which is what the company believes consumers want to pay for it-and then, working backward from the price, designs the product. Similarly, people have certain prices they are willing to pay for wedding gifts-say, $25, $50, $75, or $100-so stores set up displays of gifts sold at these different price levels. If you shop before the holidays, you might see a table of different products being sold for $5 (mugs, picture frames, ornaments) and another table of products being sold for $10 (mugs with chocolate, decorative trays, and so forth). They start with the price demanded by consumers (what they want to pay) and create offerings at that price. Knowing that people have certain maximum levels that they are willing to pay for gifts, some companies use demand backward pricing. Typically, parents set an amount such as $5 or $10 for a teacher’s gift. Remember when you were in elementary school and many students bought teachers little gifts before the holidays or on the last day of school. You may see a lot of movies and CDs for $15.99, $9.99, and perhaps $4.99, but you won’t see a lot of different price levels. In other words, there may be only a few price levels ($25, $50, and $75) for the ties, but a large assortment of them at each level. Neckties are often priced using a strategy known as price lining, or price levels. Many times, two different stores carry the same product, but one store prices it higher because of the store’s perceived higher image. Some stores have a quality image, and people perceive that perhaps the products from those stores are of higher quality. Prestige pricing occurs when a higher price is utilized to give an offering a high-quality image. Mike Mozart – Kingsford, Charcoal – CC BY 2.0. See Figure 15.4 for an example of odd-even pricing. Likewise, a $20,000 automobile might be priced at $19,998, although the product will cost more once taxes and other fees are added. For example, instead of being priced $10.00, a product will be priced at $9.99. Odd-even pricing occurs when a company prices a product a few cents or a few dollars below the next dollar amount. Many pricing approaches have a psychological appeal. Potential markdowns or price reductions should be considered when deciding on a starting price. When products go on sale, companies mark down the prices, but they usually still make a profit. When companies add a markup, or an amount added to the cost of a product, they are using a form of cost-plus pricing. The strategy helps ensure that a company’s products’ costs are covered and the firm earns a certain amount of profit. Many stores use cost-plus pricing, in which they take the cost of the product and then add a profit to determine a price. We’ll examine some common methods you often see.

#Penetration pricing is based on what assumption plus#

Lowe’s emphasizes their everyday low pricing strategy with the letters in their name plus the letter “t” (Lowest).Ĭompanies can choose many ways to set their prices. Companies like Walmart and Lowe’s use everyday low pricing. That is, the price initially set is the price the seller expects to charge throughout the product’s life cycle. Penetration pricing is used on many new food products, health and beauty supplies, and paper products sold in grocery stores and mass merchandise stores such as Walmart, Target, and Kmart.Īnother approach companies use when they introduce a new product is everyday low prices. The goal is to get as much of the market as possible to try the product. Often, many competitive products are already in the market. In contrast to a skimming approach, a penetration pricing strategy is one in which a low initial price is set. Over time, the price of the product goes down as competitors enter the market and more consumers are willing to purchase the offering. Price skimming is a pricing approach designed to skim that top part of the gravy, or the top of the market. When the gravy is chilled, the fat rises to the top and is often “skimmed” off before serving. The easy way to remember a skimming approach is to think of the turkey gravy at Thanksgiving. This way, a company recoups its investment in the product faster. The idea is to go after consumers who are willing to pay a high price (top of the market) and buy products early. As mentioned in Chapter 7 “Developing and Managing Offerings”, a skimming price strategy is when a company sets a high initial price for a product. The same is true for DVD players, LCD televisions, digital cameras, and many high-tech products. Since then, the price has dropped considerably even for new models. Remember when the iPhone was first introduced, its price was almost $700. Think of products that have been introduced in the last decade and how products were priced when they first entered the market.