7.4 Pricing policies
An extension of pricing objectives is pricing policies that provide directions for price movements over the length of the product life-cycle. This implies that prices are consciously set by the organisation and is known as administered prices .
There are basically two policies used to administer prices effectively ¾ fixed price policies and flexible price policies ¾ the latter including price reductions and price increases
If a price decrease is not likely to cause a change in demand or brand switching, and if the firm wants to avoid antagonising competitors, or the government calls for voluntary price restraint, then a fixed price policy is the right option.
Price reduction is generally an offensive strategy to gain a higher market share in response to competitive pressures. Price reduction is most appropriate where the firm enjoys technological advantages that enable low-cost production, and where a price reduction is a dominant consumer need: for example, cheap groceries in the midst of a recession as can be observed in the price wars of the supermarkets.
Obviously, a price increase happens when inflation pushes costs up, but the trick is to ensure that the price-increase will offset any fall in demand that results! It is used, often unethically, when a firm has a virtual monopoly on the market, but is most appropriate when there is an increase in quality to justify the price.
As services are variable, price is more often subject to negotiation than physical products. You will find that there is no fixed price for legal, investment, management consulting or market research services. On the other hand, the price of services can also be subject to government regulation or self-regulation. Examples of this regulation are the medical and telecommunications services.
Furthermore, organisational buying of services is often via service contracts that are awarded as a result of a tender . Each potential service provider has to submit a bid that takes into consideration not only its costs but also what price the competitors are likely to offer.
Usually in Australia , a business will charge a single, non-negotiable price and not use a flexible price policy but, in some industries, flexible (or negotiated) prices are common. Many services follow a flexible price policy because of the characteristic perishability of services, but so do many car dealers and furniture stores.
For new products, pricing policies depend on the stage the product has reached in the industry life-cycle. Some options available if you are dealing with a new product at the introductory stage of the life cycle are price skimming and penetration pricing.
A skimming price policy is the use of a high initial price, often three to four times the factory cost. This is often used when much has been spent on research and development and the product is innovative. Besides, it is easier to start with a high price at the top end of the market and then lower it later to tap the mass-market than it is to start with a low price and raise it. Good examples of pricing at the top end then altering price to attract the mass-market are plasma televisions and recordable DVD players that are in some cases a few thousand dollars cheaper than when first introduced .
Penetration pricing does the opposite to skimming pricing by entering the market with a tangible product or service at a low price in order to appeal to the mass-market immediately. Penetration pricing tends to be used where the market is very price elastic and economies of scale can be achieved early. Such a pricing strategy can also eliminate a weaker competitor or discourage another competitor from entering the market.
Turn now to cover both your text's material on pricing policies for both tangible products and services.
In your text
Kotler et al. (2004) Chapter 13, pp. 505-509, 'New product pricing strategies' and 'Product mix and service mix pricing strategies'.
Consider this
If your new product is being launched in the introductory stage of the life-cycle, but is not an innovation, what are two factors which would stop you being able to price it above the market?
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