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Types of Pricing Strategies and Methods

Discuss the different types of pricing strategies and methodologies confronted by Purchasing and Supply Management professionals in the acquisition of goods and services - in particular cost- and market-based pricing, value-based pricing, penetration and predatory pricing, life cycle pricing, and segmented pricing.

Differentiate between customer-driven and competition-driven pricing and their affect on the buying organization's willingness and ability to purchase a particular good or service.

What is the role of Purchasing and Supply Management professionals as 'gatekeepers' who control the flow of information and external contacts with suppliers? Are these professionals considered decision makers with respect to product and supplier selection as well as price acceptance?

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1. Pricing decisions are based on factors such as cost, demand, and competitor's prices. Following are some of the pricing methods commonly used by companies:

Cost based pricing methods: In cost based pricing, all fixed and variable costs associated with products or services are determined and then a profit margin is added as a markup. This method is simple but does not involve considering market or competitor factors in determining price. Cost-based pricing generally leads to high prices in weak markets and low prices in strong markets, thereby impeding profitability because these prices are the exact opposites of what strategic prices would be if market conditions were taken into consideration.

Value based pricing: This method is based on the consideration that price of a product or service is the perceived value by customers and not just company's cost to produce and provide it. The value of product is determined by analyzing customer's preferences, needs, expectations, and competitor's offerings. This method involves setting prices to tap into products and services perceived attributes.

Demand based pricing: This method considers demand of the product rather than cost of producing it. To determine prices based on demand, demand schedules are used through which managers ...

Solution Summary

The solution discusses different types of pricing strategies and methods.