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Shaping the Market Offering (Price: Cost vs. Consumer)

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Shaping the Market Offering

You are an executive for a large multinational corporation and are meeting with other managers to discuss the following topic: Is the right price a fair price?

Prices are often set to satisfy demand or to reflect the premium that consumers are willing to pay for a product or service. Some critics shudder, however, at the thought of $2 bottles of water, $150 running shoes, and $500 concert tickets.

Take a position:

Prices should reflect the value that consumers are willing to pay.

vs.

Prices should primarily just reflect the cost involved in making a product or service.

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Solution Preview

Prices do not just reflect the cost involved in making a product or service

There are five general pricing strategies:

Product Line: Setting price steps between product line items
Optional Product: Pricing optional or accessory products
Captive Product: Pricing products that must be used with the main product
By-Product: Pricing low value by product to get rid of them
Product Bundle: Pricing bundles of products sold together

New Product Pricing

There are two new product pricing strategies:

Market-Skimming: Initially set high prices to "skim" revenue layer by layer from the market. Works when:
- Quality and image support the higher price
- Enough buyers want the product at that price
- Cost of producing a small volume cannot be high
- Competitors should not be able to enter the market easily

Market Penetration: Set a low initial price in order to penetrate the market quickly and deeply to win a large market share. Works when:
- Market is highly price sensitive
- Production and distribution costs fall as sales volume increases
- Low price must help keep out the competition

Price Adjustment

The following are price adjustments based on changing situations:

Discount & Allowance: reduced prices to reward customer responses such as paying early or promoting the product
Discriminatory: adjusting prices to allow for differences in customers, products, and locations
Psychological: adjusting prices for psychological effects. Ex: $299 vs. $300
Value: adjusting prices to offer the right combination of quality and service at a fair price
Promotional: temporarily reducing prices to increase short-run sales
Geographical: adjusting prices to account for geographic location of customer.
International: adjusting prices in international markets

An organization can adopt a number of pricing strategies. The pricing strategies are based much on what objectives the company has set itself to achieve.

Penetration pricing: Where the organization sets a low price to increase sales and market share.

Skimming pricing: The organization sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.

Competition pricing: Setting a price in comparison with competitors.

Product Line Pricing: Pricing different products within the same product range at different price points. An example would be a video manufacturer offering different video recorders with different features at different prices. The greater the features and the benefit obtained the greater the ...

Solution Summary

In a 1,764 word response, the solution provides detailed answers and discussion about the subject of price versus value or price versus cost.

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