This course explains pricing models your business might adopt. Learn how to set prices, calculate costs, assess competitors and much more.
Duration of the course: 00:30:00
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1.3 Course Topics
Some of the questions answered in this course are:
• How do I set prices and succeed using the cost-based pricing model?
• How do I set prices and succeed using the customer-based pricing model?
• How do I set prices and succeed using the competitor-based pricing model?
• How do I perform a breakeven analysis?
• How do I determine which pricing model is best for my business?
Many additional resources are identified to help you. Visit the resource icon in the course player or locate additional tools, templates, and mentors on SBA.gov once you finish the course.
Let's get started!
1.4 Introduction to Pricing-Recap
Let's begin by reviewing the major points discussed in the Introduction to Pricing course. In that course, we discussed:
• Pricing as part of the marketing mix,
• Pricing as it relates to sales promotion,
• Common pricing mistakes, and
• Various pricing models.
1.5 Pricing as Part of the Marketing Mix-Recap
Pricing is one of the four Ps of the marketing mix, along with product, promotion, and place. Price is the only component that generates revenue. Product, promotion, and place are all cost centers. However, the determination of price is influenced by the costs incurred by creating the product, the product's promotion, and the place in which it is sold. Other pricing
influences include competition, market conditions, brand, and quality of the product.
At various points in a product's life cycle, a firm needs to come up with a marketing model. This involves selecting the target market and performing product positioning. Usually, there has to be a balance between product quality and price. In this way, price plays an important role in the marketing mix.
Pricing will always be determined by these tradeoffs among the marketing mix elements.
1.6 Pricing and Sales Promotion-Recap
Pricing is very important in sales promotion because it determines the market positioning of a product. Select each of the major sales strategies based on pricing to learn more about it.
Skim pricing is where the organization sells at a high price, targeting the customers who are less price-sensitive at a time when the product is new to the market and there are fewer competitors.
Penetration pricing is where the organization tries to maximize the number of customers for one product - typically a new product - and to increase its market share by lowering the price. Profit is only considered for the long term in this strategy.
Leader pricing is where a product is sold at a lower price to attract customers with the assumption that, once attracted, they will also buy premium products. This is also called a loss leader because the product is often sold at a loss.
Premium pricing is where the product is priced at the high end of the possible price range to create a sense of perceived quality and attract status-conscious customers.
With differentiated pricing, products are sold to different customers at different prices.
With psychological pricing, pricing is set in such a way that, looking at the price, the customer feels it is low. For example-$3.99 instead of $4.
When using discounts and sales, pricing is based on attracting price-sensitive customers to the store.
1.7 Common Pricing Mistakes-Recap
Common pricing mistakes include:
• Not having a model or not sticking to the model you decided on
• Underestimating the costs involved in running the business
• Using only low prices to compete with other players
• Setting a pricing model and never modifying it to suit changing conditions
1.8 Legal Issue-Recap
In addition, some business owners make the mistake of being unaware of legal issues related to pricing. Select each button below to learn more about the legal issues business owners often confront.
Anti-trust law prohibits:
• Conspiring between firms to fix prices
• Corporate mergers that can result in marked reduction in competition in a particular market, and
• Hostile acts with the goal of achieving or maintaining monopoly power in a market
If you are using a loss leader pricing model, you have to make sure that the advertised product is in stock and sold at the advertised price.
Various laws prohibit price discrimination, which gives customers the advantage. Also, if a dominant player in the industry forces some buyers to pay a higher price than others, it can be considered a violation of anti-trust laws.
1.9 Pricing Models-Recap
In the Introduction to Pricing course, we introduced three pricing models:
• Cost-based Pricing: Cost-based pricing only considers the costs needed to produce the product and the desired profit margin. There are many ways to calculate cost-based pricing, but all of them are based in costs and include a markup for profit. For example, if the cost to produce a product is one dollar, and the company needs a 10 percent profit margin, the price will be set at $1.10.
• Customer-based Pricing: Customer-based pricing is also called value-based pricing. In this, the firm first analyzes the customers to understand what they may be willing to pay for a product or service for the transaction to be profitable. The firm then charges the price each customer is willing to bear. A garage sale is a good example of the use of customer-based pricing, where a set price may be negotiated by the buyer.
• Competition-based Pricing: In the competition-based pricing model, prices are set using the price of the competitors' products. This model is used in industries with one or two dominant companies. Sometimes this model is referred to as "follow the leader."
In the remainder of this course, we will explore these price models in more detail, and explain some of the ways you can evaluate which price model is most appropriate for your business. We'll start by discussing cost-based pricing.
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