Question

Q2. It’s no secret that small businesses play a vital role in the US economy. However, most non-employer small businesses average just $44,000 a year in annual revenue, with many of these companies earning $25,000 or less. While various factors can affect a business’ revenue potential, one of the most important is the pricing strategy utilized by its owners.

Good pricing strategy helps you determine the price point at which you can maximize profits on sales of your products or services. When setting prices, a business owner needs to consider a wide range of factors including production and distribution costs, competitor offerings, positioning strategies and the business’ target customer base.

While customers won’t purchase goods that are priced too high, your company won’t succeed if it prices goods too low to cover all of the business’ costs. Along with product, place and promotion, price can have a profound effect on the success of your small business.

Here are some of the various strategies that businesses implement when setting prices on their products and services. Analyze pricing strategies. (7 marks)

Answer 1

Here are various pricing strategies:

1) Price Skimming: In this strategy the company sets high rate during the introductory phase of the product or the service and gradually reduces rate when the competitors catch up on the product or the service. In this strategy the main motive is to cash on the early adopters and then gradually milk the cow when the other product or service of similar nature has entered the market. It provides an illusion of premium product initially and helps organizations to recover the development costs on the product. It is generally adopted by those companies who are great at introducing innovative products regularly.

2) Market penetration pricing strategy: It is used by those organizations who wants to draw the attention of customers to their product or service in a well-established market. It usually tends to create loss for the organization in the initial phase but when the brand and identity is established it provides a way to increase and stabilize the price and create profit at the later stage. It is usually done by start ups to create market share.

3) Premium Pricing: It is used by those organizations who create quality product or service and wants to sell at a premium to the customers. They create perception of value in the mind of the customer for their product or service. It generally done at the start of the product or service lifecycle and used by those organizations who believe in innovation and quality in their offerings and wants to be in niche category.