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Dynamic Pricing

Dynamic Pricing, Pricing Objective  Assignment / Homework Help

By 2001 various companies like IBM, Hewlett-Packard and Dell have adopted dynamic pricing for their e-commerce operations. Pricing in each of these companies depended on different factors. The sales figure of computer memory chips and processors helped in setting prices for Dell. In IBM pricing relied on the life-cycle of the product. Every 6-8 months a new model of laptop is introduced. The price is highest at this stage. With its introduction the older ones see a fall in their price. Thus pricing is different at different stages of life-cycles of the product.

Hewlett-Packard used 'contextual pricing' as its approach to dynamic pricing. For instance, on the launch of a product special promotional deals were offered. The total number of items bought during such occasions would decide what customers would pay overall.

By early 2000s sites like e-bay held online auctions. Here the customer would bid for a product. Companies trying to get rid of excess stocks could now sell the product at some profit rather than sell the product to some third party reseller for absolutely cheap rates. Apart from auction e-bay also has products at sale for fixed prices. Customers get better deals at sites like e-bay and Priceline.com than they would thorough traditional ways. Customers bid for cheaper air tickets, automobiles etc and guarantee their payment with a credit card. The site then looks for sellers willing to sell at this offered price. To make such deals more practical buyers are needed to show flexibility regarding brand-names, features, time of delivery etc.

Price is one of the four major 'P's of the marketing mix. The four 'P's that make the marketing mix are price, place, product and promotion. Pricing is of great importance as
  • Price is closely related to product positioning
  • It effects all the other 'P's

When developing the price of a new product there is no single method that can be adopted. However these steps are generally taken before the price for a product is set.
  • A marketing strategy must be developed. This requires a market analysis. A close study of market segments plus targeting and positioning need to be done.

  • Marketing mix decisions are taken. Product needs to be defined. How should the product be distributed along the distribution chain? What promotional tactics need to be undertaken? All these questions have to be answered beforehand.

  • Demand curve for the product need to be studied. This helps in understanding how change in price effects the demand for a product. Manufacturers can experiment by increasing and decreasing the price from its current value and observe the elasticity of demand. Incase of an inelastic demand curve price can be hiked.

  • Cost of the product must be calculated. This should include both fixed and variable cost.

  • Various environmental factors like competitor's actions must be kept in mind. Legal issues and constraints that may arise must be studied before price is set.

  • The manufacturer must be clear about his pricing objectives for example profit maximization or revenue maximization or price stabilization. The firm might have to face situations like market decline and overcapacity. In this case the objective must be to select a price that will cover the cost and help in the company's.

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