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Pricing Policy

Sales Promotion  Assignment / Homework Help
There are various strategies which can be adopted for setting the price of a product. These include:

Premium Pricing

It is a common buying behavior that expensive products are considered superior to non-expensive ones. Manufacturers exploit this tendency and price their products at an artificial high. This of course is not a justifiable act. Whether or not a premium priced product is sustainable and profitable depends upon certain conditions turning favorable for the manufacturer.For instance, lack of information regarding the product. In case where the consumer has no way to test the claims of a pricey product he accepts it to be superior.

Secondly, when a product acquires a certain luxury status its price soars high. Luxury items are always priced higher because their product and services are considered exclusive. A dinner at Taj, Sabyasachi saree or an Inox ticket is always highly priced.

Thirdly, premium pricing relies heavily on how the product has been positioned. A product's Unique Selling Proposition helps to create a difference in the customer's mind which makes him believe that the product is worth much more. There are several Chinese restaurants on a popular street in Bangalore. Which one will a consumer choose? He might choose the one closest, but if one of these shops carries a banner which reads "judged the best Chinese restaurant in Bangalore three times in a row by CNN IBN", the choice is obvious. Thanks to its strong U.S.P prices can be fixed at a comparative high in this restaurant.

Penetration Pricing

This approach is adopted by manufacturers who want to penetrate the market at a quick pace. Unlike premium pricing here the price of a product is set at an artificial low. The idea is to lower the price which will lead to increase in sales and thereby the product gains a market share. The focus is more on obtaining market share than make a short term profit. An introductory offer from TATA Sky DTH (Direct to Home) waives off Rs. 1000 and offers free installation. This offer aims at increasing the sales of Sky and gaining a foothold in the DTH market.

A careful study of the market is required before adopting this strategy. For instance, when a manufacturer has lowered his price his competitor will further lower the price of his product to gain back the market share. In this situation, is the first manufacturer ready to further lower the price? For how long can both parties lower prices and keep both profit and their share of the market? This policy may fail in such situations so a thorough market study is recommended before adopting penetration policy.

If a manufacturer adopts penetration pricing and lowers the price of his products or services he may stop competitors from entering the market. This happens because now the competitors will have to enter the market at lower than existing prices. This reduces their profit not to mention the risk they face as new entrants in acquiring market share.

This strategy works for product demands that are price elastic. This means that a small change in price should not change its demand.

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