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Pricing plays a big part in the decision making for a business and it is has a vital role in marketing strategy. Ever since competition became an important aspect in our current marketplace as it keeps growing in our society; it has influenced in the needs and wants of customers. Today marketing managers have to be aware of the influences that cause the setting of prices (Finch, 2012). Shoppers usually like to see the product price reduced in order to determine the value of it, this is known as getting the biggest bang for your money. Many asked themselves how companies decide what price strategy to use? They are actually three methods that marketing managers use in order to secure the best pricing decision for a product: Cost-based pricing, customer-based pricing, and cost-based pricing.
* Cost-Based Pricing: This strategy requires that the marketing manager have a clear understanding of the product in order to use the cost-based pricing to create a pricing strategy. This strategy must first determine the minimum cost to cover the product variable and fixed cost and everything after that is measured as a profit. If real cost is known then this strategy pricing becomes more effective (Finch, 2012).
* Customer- Based Pricing: Customer based pricing is influenced by the consumer and the preference they may have. It is also called demand-driven or value based. The retailer cost is not considered when you use this strategy. The benefit of using this pricing strategy by the marketing personnel is the fact that they already have a strong understanding of the brands they are competing against and the buyers view to greater product worth (Finch, 2012).
* Competition-Based Pricing: Businesses define what they are going to charge for a product by comparing it to the price already given by the competition, this is why it is called competition based pricing. Their two methods used by the vendor; one being that they assign lower prices than the competition in order to attract more buyers or they may assign higher prices in order to prove the higher quality of their product, more of a premium brand than what the competitors are selling (Finch, 2012).
Adidas Futureshell Sneakers by Alexander Wang
The Adidas Futureshell Sneakers are very popular since there release. I like them because of their space looking design, very futuristic. These are not easy to purchase and a pair can be purchased only for a limited time that is till supply last. This is the case of a limited edition item with high demand. The certified vendor is Adidas that is the original brand because some stores are selling similar sneakers but not the original design/brand. Also, several other stores are beginning to sell these sneakers after the release date but a higher price. Adidas sales price for the Futureshell sneakers is $125 plus tax which varies from state to state. Shopbob is an online store that sells this sneaker for $250. Shopbob and other retailers increased the price because of its limited edition and high demand. These vendors are certain that shoppers will buy this product due to the demand and responses this brand and shoe have received since its release. Shopbob marketing strategy is to use the customer-based pricing also known as demand-driven (Finch, 2012). Adidas has continued to keep the initial price regardless of the approach of other stores as they continue to increase the price due to the demand. Even though the selling price is greater than most Adidas other brand’s it is still reasonable because the sneakers are a first-class design. Adidas method seems to be more geared towards competition-based pricing.
Finch, J. (2012). Managerial marketing [Electronic version]. Retrieved from https://ashford.content.edu
To market a successful product, you must price it appropriately to ensure success in sales and meeting the needs of the consumers. Pricing strategies include cost, customers, and competitors. Cost strategies include pricing that takes the base value for production costs and determines the profit margin above the base. The profit margin is created by either markup pricing or cost-plus pricing. Customer strategies include pricing created from consumer’s perceptions of the value of the product. Competitor strategies include prices which are created in response to prices being used by competitors for similar products (Finch, 2012).
Deciding on the price is difficult since not only cost and profit needs to be evaluated but also other factors such factors of what is considered a good value to the consumer. Right before deciding what product to discuss in this post, I finished my favorite lunch of sardines on a bagel. Sardines are super healthy and full of nutrients including omega 3. I know it’s not a crowd pleaser. However, I wonder why the same small, smelly can of sardines that I love so much had such a vast array of prices. Before you poke fun, I must say I only eat them skinless and boneless in water on a tasty bagel drenched in lemon juice. Tastes like chicken (only tastier). Two main brands I usually purchase are Season Brand and King Oscar.
Season brand – sourced from Morocco with sustaining harvesting practices
- Contains 3.75 ounces of whole bristling sardines
- Pack of 12 cans – Amazon price $33.99
- Pack of 2 cans – Walmart price $7.58
King Oscar – sourced from Norwegian coastal waters
- 3.75 ounce can with two layers of bristling sardines
- Pack of 12 cans – Amazon price $32.49
- Pack of 2 cans – Walmart price $4.88
Companies sometimes offer more than one version of a product at different price points. While this did not hold true for sardine products, some companies produce products that can be sold for less than their brand name counterpart. Companies may make nearly the same product but with a different label. This allows customers a lower price point in which to choose.
Finch, J. (2012). Managerial Marketing. Retrieved from https://ashford.content.edu. (Links to an external site.)
There are three main approaches to price setting. They are cost-based pricing, customer-based pricing and competition-based pricing.
Cost-based pricing is a pricing method bases pricing for goods by determining the cost to produce and market the product and use that information to develop a price floor or a price that will cover all of the cost associated with producing that product. Marketers then determine a fixed percentage or dollar value profit margin that will determine the final price.
Customer based pricing is determined by assessing a potential buyers’ perceptions of value a product holds when compared to the price of the customer’s best alternative to said product. This pricing approach uses the EVE (Economic Value Estimation) which is defined as the price of the customer’s best alternative plus the economic value of whatever differentiates the offering from the alternative.
Finally, competition based pricing is when competitors set and change their prices for a product in direct correlation with other companies with the similar product. This approach involves monitoring market prices and determining prices off of other competitors.
When comparing the prices for a 24-pack case of Rockstar Recovery Energy Drinks, I found that Walmart charges $35.48. The same 24-pack case purchased on Amazon is selling for $30.19.
Different organizations will implement different pricing strategies for the same product for several reasons. If an organization sells several products, they may use a cost-based pricing strategy that may result in a lower price when compared to competitors in order to get consumers into their stores in hopes that they purchase other products which have a higher price margin. An example of this may be a grocery store advertising very low prices on soda for example. They sell the soda using cost-based pricing method in hopes that the consumer will then do all of the rest of their grocery shopping there. A convenience store or gas station may sell that same soda using customer based pricing which may result in a slightly higher price when compared to the grocery store. They do this so that they can have a higher profit margin on that soda because they offer fewer products overall. Other organizations may use different pricing strategies simply because they can. Using a can of soda as an example again, purchasing soda at Disney World or a sporting event will be more costly because those organizations are able to be the exclusive provider of that product in that particular environment. They can use customer based pricing because a consumer may value that soda more when sold in a souvenir cup that can only be found at Disney or the ballpark.
Finch, J. (2012) Managerial Marketing (Electronic version) Retrieved from https://ashford.content.edu