Price is the money consideration for goods and services, i.e ., the exchange value, whereas price mix is the placing of price on a particular product that will suit the customers and fetch higher revenue to the manufacturer. The components of price mix are discounts, margins, freights, payments, credit terms, allowances, mark-up, setting base price.
Basic Pricing Policies
There are various pricing strategies but we shall limit ourselves to the following:
- Market Penetration: This is a strategy in which the price of the product is set relatively low in order to gain instant dominance of the market. Low prices are set in order to penetrate the market, to gain a major market share within a short time. Market penetration pricing policy is good for new products.
- Market Skimming: This is a strategy of setting the price relatively high to appeal to the more affluent segment of the market. High prices are set in order to make as much profit as possible in the short run. The skimmer can start with high price and then lowers it as competition increases.
- Target Return Pricing: This policy is aimed at securing in a given period of time a predetermined rate of returns on investment. The process involves the calculation of an average mark-up on average costs and at the same time projecting sales revenue at various stages of the product’s life cycle.
- Product Line Pricing: This is a policy in which a firm selling a wide range of products gear pricing to a range of products rather than to individual product. Under this strategy some products are made loss leaders. Loss leaders products are basically non-profitable but they stimulate buying of other profitable lines.
- Variable Pricing: This policy is most commonly applied to products or services with known variable time demands. It may be used to take advantage of extra-profit at peak period to reduce production and overhead cost by stimulating demand in non-peak period, e.g. soft drinks, fruits and cold water may be high prices during the dry season and low in the rainy season.
- Bid Pricing: This policy is used when contracts are awarded as a result of tender, e.g. government contracts. Such organisations must clearly attempt to determine the level of competitive bids. If the object is to obtain the contract, cost will be considered mainly to determine the level of minimum price.
- Pricing with the Market Leader: This is a policy in which a firm charges prices that will be in conformity with the one charged by the market leader. A new company entering into the market will have to follow the price levels set by old companies in the industry.
- Pricing Above the Market: Under this policy, a firm will charge prices that are higher than those of the competing firms. This is normally used for goods sold to wealthy individuals.