Public policies and pricing strategies
Pricing plays an important role in the success of a business. However, contrary to what some may believe, companies cannot set their prices to what ever they want. Federal, state, and local laws regulate the price competition to keep companies from practicing unfair pricing strategies. There are unfair pricing practices that occur both within the levels of the channel, as well as across the levels of the channel. The image below, gives a visual representation of these practices.
Price-fixing occurs when sellers discuss their prices amongst each other and using that knowledge to decide on prices. Predatory pricing is done by selling goods below cost in order to drive-out competition and gain higher profits in the long-run. Retail price maintenance occurs when the manufacturer forces the retailer to sell its goods at a certain price. Discriminatory pricing is when a manufacturer charges different retailers different prices for the same product. Lastly, deceptive pricing occurs when a retailer advertises a price that is misleading or not available to consumers. Each of these deceptive pricing strategies are illegal, and there are regulations preventing them.
Not all pricing strategies are negative. Market-skimming pricing occurs when a company introduces a new product at a certain price, and in time, this price drops. As the price drops, it is known to drop in “layers,” each layer appealing to a new customer with a new price range. This strategy works when the product’s quality, image, and demand meet the initial high price-point. In addition, the cost of making the product must be low enough, that when the price drops, the company is still making a profit. Lastly, the product, combined with the price, should not allow competitors to come into the market and sell their similar product for less.
Here is an example I gave in Written Assignment Three for market-skimming pricing: "An example of a product using the market-skimming pricing strategy is the Apple iPhone. When the iPhone is introduced, the price to purchase the phone is close to $600. This price point attracts a line of customers outside the Apple store who are all willing and able to pay the price for the brand new phone. This price later drops when a new version comes out, and a new set of customers are able to purchase the phone at the lower price. Lastly, the price drops even more right before that specific version of the iPhone will no longer be sold. Again, this drop attracts a new set of customers that are now able to purchase the phone."
Lastly, market-penetration pricing occurs when a company introduces a new product or service at an initially low price. This strategy is known as penetrating the market because it attracts a large number of customers and earns market share as soon as the product is introduced, rather than having to wait to accumulate these things. In order for market-penetration pricing to work, price must play an important factor in the market. The low price must be noticeable in order to increase the number of customers and gain the initial market share. In addition, the low price must remain constant and must keep out competition. In order to remain constant, it is important for the company to be able to decrease costs as volume increases.
Here is an example I gave in Written Assignment Three for market-penetration pricing: "An example of a company using the market-penetration strategy is Walmart. From the start, Wal-Mart penetrated the market with its incredibly low prices. Since, it has managed to continue these low prices, while removing competition (Kokemuller, 2014)."
Not all pricing strategies are negative. Market-skimming pricing occurs when a company introduces a new product at a certain price, and in time, this price drops. As the price drops, it is known to drop in “layers,” each layer appealing to a new customer with a new price range. This strategy works when the product’s quality, image, and demand meet the initial high price-point. In addition, the cost of making the product must be low enough, that when the price drops, the company is still making a profit. Lastly, the product, combined with the price, should not allow competitors to come into the market and sell their similar product for less.
Here is an example I gave in Written Assignment Three for market-skimming pricing: "An example of a product using the market-skimming pricing strategy is the Apple iPhone. When the iPhone is introduced, the price to purchase the phone is close to $600. This price point attracts a line of customers outside the Apple store who are all willing and able to pay the price for the brand new phone. This price later drops when a new version comes out, and a new set of customers are able to purchase the phone at the lower price. Lastly, the price drops even more right before that specific version of the iPhone will no longer be sold. Again, this drop attracts a new set of customers that are now able to purchase the phone."
Lastly, market-penetration pricing occurs when a company introduces a new product or service at an initially low price. This strategy is known as penetrating the market because it attracts a large number of customers and earns market share as soon as the product is introduced, rather than having to wait to accumulate these things. In order for market-penetration pricing to work, price must play an important factor in the market. The low price must be noticeable in order to increase the number of customers and gain the initial market share. In addition, the low price must remain constant and must keep out competition. In order to remain constant, it is important for the company to be able to decrease costs as volume increases.
Here is an example I gave in Written Assignment Three for market-penetration pricing: "An example of a company using the market-penetration strategy is Walmart. From the start, Wal-Mart penetrated the market with its incredibly low prices. Since, it has managed to continue these low prices, while removing competition (Kokemuller, 2014)."