Price Quotes and Pricing Decisions Applied Problems
Penetration pricing refers to a strategy in which the products’ price is set to be below the market price. The main aim of doing this is to attract more customers that are new. Moreover, an organization expects that since it is introducing new brand, then more customers will be attracted to the lowered prices. Additionally, the pricing strategy aims at ensuring increased market share rather than profit making. Thus, prices are raised later upon gaining of the market share (Foster & INTELECOM Intelligent Telecommunications (Firm), 2012).
There are many benefits associated with penetration pricing. An organization that adopts this strategy is likely to diffuse and adopt faster. Moreover, goodwill got from the strategy also facilitates more trade. Additionally, the low prices discourage competitors. Finally, penetration pricing all through the distribution channel, facilitates maximum stock turnover (Morin & Stevens, 2004).
However, in as much as the strategy has all these benefits, expectations for long-term prices for the product are realized. More so, the company and brand get image preconceptions. Thus, this becomes challenging when the firm has to raise the prices. Nevertheless, it is possible to overcome this problem. An organization should embrace sales promotion through setting long-term market pricing but offer some discount. Another problem of using this strategy is the sustainability of low profit margins. Thus, the strategy fails to be effective for the firm (Foster & INTELECOM Intelligent Telecommunications (Firm)).
Consequently, penetration pricing is best where the demand of the brand enjoys maximum price elasticity. In addition to this, in availability of economies of scale, where there is likelihood of stiff competition and where in industries there is need for standardization, then this is the best pricing strategy.
Skimming pricing on the other hand entails setting high prices initially when penetrating the market. Thereafter, a firm lowers the prices. Thus, the firm recovers all the costs incurred before competition becomes stiff. The main aim of this strategy is to meet the consumer surplus.
The commonly applicable market for this strategy is the technology. Firms set high prices in their first stage of product’s life cycle. After maturity of the product then the firm lowers the prices gradually (Foster & INTELECOM Intelligent Telecommunications (Firm), 2012).
Skimming pricing best works where the demand curve is inelastic. The strategy however, encourages competitors in the market. More so, there is likelihood of turn rate for inventory lowering. Additionally, adaptation and diffusion of stuff slows in rating. Finally, the high profit margins make the firm inefficient (Foster & INTELECOM Intelligent Telecommunications (Firm), 2012). It is important to note that any firm wishing to adopt this strategy has no option than to carefully follow the law. Discrimination of prices in most jurisdictions is unlawful. It is however, considered as either a yield management form or price discrimination form. For price discrimination, characteristics of the market like price elasticity are useful. The market characteristics are useful in adjusting of prices. On the other hand, product’s characteristics are useful in adjusting of prices. Indeed, marketers see the legal distinction as quant. They see it that way because most of market characteristics cases correlate with most product characteristics. Product characteristics in skimming strategy enable marketers stay lawfully (Foster & INTELECOM Intelligent Telecommunications (Firm), 2012).
Therefore, it is advisable to use penetration pricing because it is the most favorable where there is need to expand the market share. Skimming pricing may not work well in this kind of market since by adopting it more competitors will emerge hence hindering the main goal.
The firm’s opportunity costs and accounting costs makes the firms economic costs. In order to determine the economic profits of a firm, the economic costs are subtracted from the firms’ revenue. Economic profits enable firms to make crucial decisions and not the accounting profits. Firms’ main aim is to make the maximum of the economic profits and not accounting profits (Gu, Wang, & Statistics Canada,, 2013)
In order to determine the total revenue of a firm, multiply the market price with quantity of product sold. Total costs on the other hand is the product between production cost average totals and quantity of products. Therefore, to determine the economic profit, get the difference between the price of market share and that of the total average cost of production and then multiply by the quantity of product produced (Gu, Wang, & Statistics Canada,, 2013).
Where the market share price exceeds the cost of total average at a certain quantity, the economic profit is positive, otherwise, it will be negative and this means a loss. Thus, since the business at start will have a lower market price compared to the average costs total, it will not make an economic profit in its initial stages. In order to make better profits in long-term, the business should ensure that they work in a way that the average total costs go down (Morin & Stevens, 2004).
Bid pricing, whether done correctly or not, affects two basic areas of the company. It indicates first, the chances of winning or not winning the contract. Additionally, it indicates the chances of making gains or incurring losses. Therefore, it is important to do correct pricing (Morin & Stevens).
In order to win the contract, the company gathers pricing intelligence. This aims at predicting the government buyers’ pays and that for competitors. Therefore, the company looks for a range. It ranges from too low to too high (Morin & Stevens, 2004)
Pricing contracts to win, the company starts close and thereafter expands. Certainly, government agencies divulge their past payments on services and products. More so, other firms talk to them before publication of the procurement. Internet is one of the most reliable sources of pricing information. One should be careful since the prices especially in e markets for government shown may be higher than those competitors bid (Gu, Wang, & Statistics Canada,, 2013)
In order to maximize the expected value the company looks keenly on the expected costs. A new firm to federal contracting, and in estimation costs, uses the Certified Public Accountants (CPA) with experience. The most experienced financial team members have a role to play also; hence, it is important to involve them (Gu, Wang, & Statistics Canada)
Contract bidding demands margins and costs evaluation. However, both should be for a particular specified work. In addition, contract bidding demands a considerate analysis concerning the changes of future work’s probability. Consequently, this may be one of the most difficult things to do however it in order to realize reasonable gains in contracting world, it is very necessary (Costantini, 2006).
References
Costantini, P. (2006). Cash return on capital invested: Ten years of investment analysis with the CROCI economic profit model. Amsterdam: Butterworth-Heinemann.
Foster, G., & INTELECOM Intelligent Telecommunications (Firm). (2012). Pricing strategies. (What the market will bear.) Pasadena, CA: INTELECOM.
Gu, W., Wang, W., & Statistics Canada,. (2013). Productivity growth and capacity utilization in Canadian business industries.
Krugman, P. R., & Wells, R. (2006). Economics. New York: Worth Publishers.
Morin, N., & Stevens, J. J. (2004). Diverging measures of capacity utilization: An explanation. Washington, DC: Federal Reserve Board.
