Price Strategies and Price Reduction Analysis

Price Strategies and Price Reduction Analysis

Price strategy refers to establishing the appropriate price for a service or product to maximize shareholder value and profits as well as considering the market and consumer demand. The price elasticity is crucial when choosing the price strategy to implement as it determines the effects on consumer demand regarding the changing price of a product or service. This paper entails the analysis of pricing strategies with price reduction decisions.

Competitive pricing strategy focuses on the competitor’s prices to set a price, which is slightly lower from that of the competitor without accounting the product’s cost or consumer demand. The decision to reduce price assist a business to prevail in a competitive environment (Ingram, n.d.). Hence, competitive pricing is essential to a company competing in highly saturated areas.

Furthermore, penetration pricing is a type of strategy which reduces the prices of products extremely when entering the market to draw the attention of consumers away from other competitors with relatively high prices. The penetration pricing method is mostly applied by new businesses entering competitive marketing by lowering the costs to attract consumers from a different company. The price reduction decision of the strategy causes temporary losses to the business as penetration pricing is sustainable for a short time (Agarwal, 2015).

Additionally, promotional pricing entails the decision to reduce the price to improve the interest in consumers towards the product or service. The strategy gets implemented when the sales of a product or service decrease. Thus, facilitating the business to decide on lowering the price to increase consumers’ interests. Promotional strategy is also used by producers to present information about their products and to improve the consumers’ demand.

Skimming pricing refers to placing the highest price possible to a new and substantial product in the market and lowering the price after a short period when the product becomes more available and familiar to consumers. Skimming pricing enhances recovery of sunk costs of the business due to the high price of the new product. However, the strategy requires appropriate decision making on when to reduce the price to prevent diversion of consumers to competitors.

The price reduction decisions are also involved in the differential pricing where the price of the same services or goods varies, although from the equal provider (Agarwal, 2015). The price differentiation gets enhanced by the market friction and product heterogeneity, affecting the long run marginal-cost pricing. The differential pricing needs market segmentation and discount, which prevent competitors and resellers. Hence, the strategy is commonly applied in services where resale is impossible such as movie theaters and airlines. The price differentiation considers the elastic demand first before increasing or decreasing the prices.

References

Agarwal, R. (2015). Pricing decisions: Influencing factors, methods, and economical approach. Your Article Library. https://www.yourarticlelibrary.com/accounting/pricing-decisions/pricing-decisions-influencing-factors-methods-and-economic-approach/52788

Ingram, D. (n.d.). Pricing strategy analysis. Small Business – Chron.com. https://smallbusiness.chron.com/pricing-strategy-analysis-4682.html