Pricing Strategies. Several major factors influence the pricing for a product or service.

Pricing analysis is an important part of marketing.

The following are the foremost strategies that businesses are likely to use:

• Competition-based pricing
• Cost-plus pricing
• Creaming or skimming
• Limit pricing
• Loss leader
• Market-oriented pricing
• Penetration pricing
• Price discrimination
• Premium pricing
• Predatory pricing
• Contribution margin-based pricing
• Psychological pricing
• Dynamic pricing
• Price leadership
• Target pricing
• Absorption pricing
• Marginal-cost pricing

First, strategic goals greatly influence pricing.
For example, if the business really wants to get into a new market, then it might charge lower than usual prices in order to generate more customers who buy the service.
Penetration pricing is one of the methods to be used in this case. Next, the business might consider changing pricing if the demand for its products is very high or low.  Promotional pricing is going to be appropriate in this situation. The lose leader strategy may be implemented as a kind of a promotional pricing. Finally, competitor pricing also has a great effect.  If competitors are charging much less, then the business might do well to lower prices. Similarly, if the competitor is charging much more, then the business might consider increasing its own prices.  Market pricing method may be used here.

Below are examples of companies that use different pricing methods appropriate to their particular circumstances.

1. Penetration pricing: Price way low to enter the market.

This practice generally involves pricing below the competition to gain market entry. Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. For example, penetration pricing was implemented by Vietnamese manicure and pedicure salons to gain market entry and to increase its market share. About twenty years ago, only wealthy women routinely had manicures and pedicures. Then, Vietnamese manicure/pedicure salons were introduced. While the old shops charged about $25 for a manicure and $45 for a pedicure, at a Vietnamese shop the price was as low as about $25 for both plus additional free services. As a result, many traditional salons lost their loyal customers to new Vietnamese places. In addition, many new customers for these services appeared since prices became more affordable. Today millions of ‘regular’ women make the weekly or biweekly trek to have a manicure and a pedicure in these salons regardless of slightly increased prices.

1. Personalized pricing: Firms charge different prices to different consumers.

Many companies use personalized pricing to sustain competition, to remain in business, and to grow their business. For example, the United States Postal Services has been offering Negotiated Service Agreement (NSA). It’s a contractual agreement between the Postal Service and a customer to provide pricing incentives to the customer in exchange for a shift in their business mailing practices. According to Stephen M. Kearney, Vice President of Pricing and Classification,

Negotiated Service Agreement, or “NSA,” simply means negotiating pricing with our customers. In many cases, the customer’s behavior change may result in a substantial increase in their mail volume that benefits both the customer and the Postal Service… Today more than ever, the marketplace is very competitive. Businesses need to negotiate pricing to retain customers, to reflect customer needs (such as volume or ease of service), to encourage customer reliance for long-term growth, and to encourage customers to try new products or services. There are many alternatives to mail, and most of them claim to offer better economics, either in cost or return on investment (ROI). Many Postal Service competitors negotiate pricing to win business. The Postal Service needs to negotiate pricing in order to retain and grow its business.

Note: Please read complete interview at the USPS web site at http://www.usps.com/mailerscompanion/mayjune2004/mc0604art1.htm

3. Market pricing: Pricing at the same level as the competition.

A firm has to assess how its product relates to a competitive product and set its price at a comparable level to stay competitive. For example, most agricultural commodities are sold in markets where price has been established by broad market forces. For example, livestock, milk and dairy products, meats, grain, poultry, eggs, etc. are sold at this pricing. While producers in such markets can’t set price, they usually have a ready market for their entire production. Sellers in commodity markets are basically price takers and have to accept the market price. The Upstate Dairy Farms (NY), our local dairy company, is using a market pricing technique for its products. In fact, prices for their milk, butter, and other dairy are very close to similar products of other producers. Another example of companies that use market pricing is fast food restaurants. Their prices are based on market prices that is, what the market will bear. For instance, the market has a set price for a cheeseburger, and restaurants must follow that price. If McDonalds or Burger King will offer a $15 cheeseburger, a vast majority of their current customers (if not all) will not buy it. In other words, the market simply wouldn’t bear it.

1. 4. Cost-plus pricing: The cost of production plus a designated percentage is cost-plus pricing.

This method is useful in situations where costs are not known in advance. An example would be custom orders in the initial stages of developing a new product. For example, a group of friends of mine opened a company named InfoTech some time ago. They provide different IT services. As they explained to me, often it is very difficult to set a price at the beginning of the project, since projects sometimes are very different and additional details are reviled only in the middle or at the end of the project. So, first they calculate approximately what the price should/could be in order to cover all expenses and add  money on top of it. The price quoted to the buyer is “cost plus” rather than a specific price, and the final price will be established after completion of the project, when all costs are known. The company uses this method because it is relatively easy to implement. However, the cost-based pricing ignores the competition and doesn’t consider what the product is worth to the buyer. A pricing procedure that is not responsive to changes in the market may work initially, but can be a significant obstacle to long-run success.

5. Loss leaders: A company loses money on one service but earns on a related product.

This strategy is often implemented as a part of a promotion campaign. The intent of this practice is not only to have the customer buy the (loss leader) sale item, but other products that are not discounted. These bargains will attract customers who may then purchase other products/services even if they don’t buy the product which price had been initially reduced. This is where a company will make up for the loss as it will be selling other items that generate high profits. One example is HP inkjet printers that are often sold to retail customers below their true value, at a price which seems to be affordable to most consumers. Moreover, these printers are sometimes offered for free – free after rebate, free with a purchase of an HP computer, etc. However, consumers have to pay the regular price for ink cartridges. It is ink cartridges, not the printers that generate high profits for the HP. Another example is Gillette’s safety razor handles that are sold at a loss, but sales of disposable razor blades are very profitable.

Major forces influencing pricing are company’s strategic goals, demand for its products or services, and/or competition. Management should pay particular attention when deciding on pricing methods since the success of the entire business depends on it.

Short WIKI.

What is MBA anyway?

An MBA is a post graduate degree in business communication. MBA stands for Masters of Business Administration and is a very popular course for business students the world over. The MBA program is recognized worldwide and is considered as a major step towards a successful business management career.

Game of Strategy in Social Science. Prisoner dilemma: a study in conflict and cooperation.

Game theory is a branch of applied mathematics that is used in the social sciences, most notably in economics, as well as in biology, engineering, political science, international relations, computer science, and philosophy.
Game theory attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others. While initially developed to analyze competitions in which one individual does better at another’s expense (zero sum games), it has been expanded to treat a wide class of interactions, which are classified according to several criteria. Today, “game theory is a sort of umbrella or ‘unified field’ theory for the rational side of social science, where ’social’ is interpreted broadly, to include human as well as non-human players (computers, animals, plants)” (Aumann 1987).

Traditional applications of game theory attempt to find equilibrium in these games. In an equilibrium, each player of the game has adopted a strategy that they are unlikely to change. Many equilibrium concepts have been developed (most famously the Nash equilibrium) in an attempt to capture this idea. These equilibrium concepts are motivated differently depending on the field of application, although they often overlap or coincide. This methodology is not without criticism, and debates continue over the appropriateness of particular equilibrium concepts, the appropriateness of equilibria altogether, and the usefulness of mathematical models more generally.

Nash equilibrium

In game theory, Nash equilibrium (named after John Forbes Nash, who proposed it) is a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his or her own strategy unilaterally. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.

Prisoner’s dilemma: a study in conflict and cooperation.

The Prisoner’s Dilemma is the best-known game of strategy in social science (Dixit & Nalebuff, n.d.). This dilemma represents a common problem in achieving cooperation in any number of social settings. The dilemma “illustrates the tendency toward noncooperative behavior, despite general advantage from cooperation” (Lee & McKenzie, 2006, p.233). The Prisoner’s Dilemma classic game scenario as well as several related real world situations is presented below.

The prisoners’ dilemma is a well-known problem in game theory.

In a classical game, two people are apprehended as suspects for a major crime. They are separated from each other and interrogated. There are two options available to each of the two suspects. Each can either confess, thereby implicating the other, or keep silent. No matter what the other suspect does, each can improve his own position by confessing. If the other confesses, then one had better do the same to avoid the especially harsh sentence that awaits a recalcitrant holdout. If the other keeps silent, then one can obtain the favorable treatment accorded a state’s witness by confessing. Thus, confession is the dominant strategy for each. But when both confess, the outcome is worse for both than when both keep silent (Dixit & Nalebuff). However, each prisoner chooses to defect even though both would be better off by cooperating, hence the dilemma. In the classic form of this game, no matter what the other player does, one player will always gain a greater payoff by playing defect. Since in any situation playing defect is more beneficial than cooperating, all players will play defect, all things being equal .However, it should be noted that multiple repetition of the game will lead to different results (“Prisoner’s Dilemma”, n.d.).

The Prisoner’s Dilemma has applications in business and economics.

Example 1

Suppose there are two firms, A and B, selling similar products. Each has to decide on a pricing strategy. Both firms are better off when they both charge a high price; each makes a profit of $10 million per month. However, if one firm cheats and sells its product for lower price, it wins a lot of customers from the competitor. Assume its profit rises to $12 million, and the competitor’s profit fall to $7 million. If both set low prices, the profit of each is 9 million. In this situation, the low price strategy is like the prisoner’s confession, and the high price strategy equals to keeping silent. If we call the low price strategy cheating, and the latter cooperation, then cheating is each firm’s dominant strategy. However, the result when both cheat is worse for each than if both firms were to cooperate (Dixit & Nalebuff, n.d.).

Example 2

Lee and McKenzie (2006) gave an example of a Prisoner’s Dilemma game with respect to the healthcare decisions we make. An employer typically buys insurance policies with low deductibles. This feature of insurance policy has encouraged excessive use of healthcare services. This, in turn, drives employee’s insurance premium up. As a result, some workers can not afford to have the insurance anymore. We are in a Prisoner’s Dilemma with respect to our healthcare decisions. Collectively, we would be better off if we all moderated the amount of health care services. But because of insurance and government subsidies, it is in the interest of each of us to ignore most of the cost when we choose how much healthcare to demand (Lee & McKenzie, 2006).

Example 3

An example of a real world situation we have been observing for a number of years is the use of performance-drugs in professional sports, particularly those that are forbidden by the organizations that regulate competitions. For example, the 2007 Tour de France was rocked by a series of doping scandals.

• Pre-race favorite Alexander Vinokourov (Kazakhstan) tested positive for blood doping after winning the Stage 13 .The incident led his  Astana Team  to quit the Tour after Stage 15.
• Cristian Moreni (Italy) tested positive for testosterone after Stage 11. When his positive test was announced after Stage 16, his entire  Cofidis (cycling team) team pulled out of the Tour. Moreni acknowledged his offense, choosing not to have his B sample tested. He was detained by French police, who searched the hotel rooms where the Cofidis team was to spend the evening after Stage 16.
• After the end of the Tour, it was revealed that Spanish rider Iban Mayo  tested positive for EPO late in the race. (“Doping in Sport”)

Doping is considered to be unethical by most international sports organizations and especially the International Olympic Committee “…because of the health threat of performance-enhancing drugs, the equality of opportunity of the athletes and the exemplary effect of “clean” (doping-free) sports in the public” (“Doping in Sport”). Moreover, there are disciplinary actions employed against athletes tested positively on the doping drugs usage. However, using drugs in professional sports continues because of the strong incentive. It is a classic Prisoner’s Dilemma (Scheiree n.d.). To illustrate, Schneier (2006) gives the following example:

Suppose there are two competing athletes: Alice and Bob. Both Alice and Bob have to individually decide if they are going to take drugs or not. Imagine Alice evaluating her two options: “If Bob doesn’t take any drugs,” she thinks, “then it will be in my best interest to take them. They will give me a performance edge against Bob. I have a better chance of winning. Similarly, if Bob takes drugs, it’s also in my interest to agree to take them. At least that way Bob won’t have an advantage over me. So even though I have no control over what Bob chooses to do, taking drugs gives me the better outcome, regardless of his action.” Unfortunately, Bob goes through exactly the same analysis.

As a result, both athletes cheat, taking performance-enhancing drugs and neither has the advantage over the other. If they could trust each other, they could abstain from taking the drugs and maintain the same non-advantage status. They both would be better off since they would escape any legal or physical danger. But competing athletes can’t trust each other, and everyone feels he has to dope in order to compete (Schneier, 2006).

As Lee and McKenzie (2006) have pointed out, “Overcoming Prisoner’s Dilemmas is a pervasive problem in the development of social and management policies” (p.41). Studying principles of the game theory and its application to business will assist managers in choosing the most effective business solutions.

Search for: Game of Strategy in Social Science

Search for: Prisoner Dilemma.

References

Dixit, A. & Nalebuff, B. Prisoners’ dilemma. The Library of Economics and Liberty. Retrieved November 8, 2007 from http://www.econlib.org/Library/Enc/PrisonersDilemma.html

Doping in sport. Wikipedia. Retrieved November 7, 2007 from http://en.wikipedia.org/wiki/Doping_(sport)

Lee, D.R. & McKenzie, R. B. (2006). Microeconomics for MBAs. New York.

Cambridge University Press.

Prisoner’s dilemma. Wikipedia. Retrieved November 8, 2007 from http://en.wikipedia.org/wiki/Prisoner’s_dilemma

Schneier, B. (2006). Drugs: Sports’ Prisoner’s Dilemma. Retrieved November 8, 2007 from

http://www.wired.com/politics/security/commentary/securitymatters/2006/08/71566

Related article:

Mike Shor’s lecture notes for a course in Game Theory taught at the Owen Graduate School of Management at Vanderbilt University. Page contains links to lecture notes and supporting materials http://www2.owen.vanderbilt.edu/mike.shor/courses/game-theory/

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Economics and its Effect on Business. This is economics and history as they are meant to be: fascinating, informative, and motivating.

Economics and its Effect on Business and on Human Resources and Marketing

In short: Economics is the study of how people choose to use resources.

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, “management of a household, administration”) from οἶκος (oikos, “house”) + νόμος (nomos, “custom” or “law”), hence “rules of the house(hold)”.[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences

What is Money?

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science. The expanding domain of economics in the social sciences has been described as economic imperialism

Economics is the study of how society manages its scarce recourses (Mankiw, 2004, p.4). Since all businesses are part of the economy, the way economy works has a major influence on all functional areas of business. This paper shows how changes in economic activity and inflation affect business as a whole and its Human Resources and Marketing functional areas in particular (“Level 2 Business,” n.d.).

Economic activity changes due to different reasons. Rate of growth at which economic activity changes is called economic growth (“Level 2 Business,” n.d.).  At the time of slow economic growth or recession, people loose their jobs, unemployment level goes up, and income level decreases. As a result, demand for goods and services falls and sales slow down.  Businesses have to consider accommodating to such changes in demand. To illustrate, in order to adjust to a falling demand, a company tries to cut prices to increase sales while suffering lower revenue and decreased profit margin .Thus, the firm might decide to cut back on production and/or reduce number of employees (“Level 2 Business,” n.d.). At the time of economic growth demand and sales increase, unemployment falls, and production goes up as businesses try to cope with the increased demand, Businesses try to accommodate these changes. For example, in order to keep up with the growing demand and increase in production level, firms might reconsider changes in the use of production equipment, changes in equipment or production facilities,  amount of  recourses needed (“Economics Basic,” n.d.  Time and Supply section, para. 1).  All of the above might bring production costs up. This, in turn, brings up prices for goods and services (“Level 2 Business,” n.d.). To control growing cost of production, businesses might decide to cut waste, to change the way people work, to use new technology, or to reconsider number of staff they employ.

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Money, Banking and the Federal Reserve

(45minutes video documentary ..we might not agree with some of the opinions but it worth to watch…

This is economics and history as they are meant to be: fascinating, informative, and motivating.
Thomas Jefferson and Andrew Jackson understood “The Monster”. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.

Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.

How an Economy Grows and Why It Doesn’t (by Irwin Schiff)

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Inflation is a rise in a general price level over a period of time (Mankiw, 2004, p.12). For example, prices for goods and services, prices for raw materials, and prices for individual as well as firms insurance go up. It becomes difficult for businesses to plan ahead since inflation affects not only the amount received from for sales but also the prices of input.  Businesses might start paying higher salaries to their employee to keep up with inflation. In addition, prices of raw material go up.

As prices of input increase, a cost of production goes up causing an increase in prices. If wages do not rise by the same level as inflation, spending power is affected, savings level can also fall. This leads to a decrease in income and decrease in demand and sales follow. Again, firms take action in order to accommodate these changes (“Level 2 Business,” n.d.).

Motivators More Powerful than Money?

What Is Economics?

Human Resources (HR) and Marketing areas of business are affected by changes in economic activity and inflation. Because Human Resources functional area is responsible for recruitment, retention, training, conditions of work, health and safety, and worker representation, it has to consider rising or falling unemployment that results from changes in economic activity or inflation. When unemployment rate is rising, the HR department must deal with issues associated with laying off firm’s employees, for example. The department can take necessary actions to make this process less painful and less problematic as possible for both the company and its employees. For example, it assists employees to understand and adjust to a new situation. In addition, Human Resources may provide job training to the remaining employees in order to meet changes in their new or expanded job duties.

During increase in economic growth or inflation,   when the level of unemployment is low and firms are in need of more workers, it becomes difficult to recruit necessary employees. The department has to make additional efforts in recruitment in order to get labor. Human Resources is also responsible for retention of company’s labor. The department usually plans for and takes actions that will help a firm to retain its workers. For example, they can provide develop and foster programs aimed at increasing employee satisfaction. The department often considers a possible pay raise to hire new or retain its existing labor force.
Because Marketing department is responsible for market research, market analysis, market strategy, and sales, it pays particular attention to the economic situation to see how current or future demand, prices and sales are going to be affected. This helps to determine actions a firm should take or plan on taking in order to succeed or, at least, to stay in business. For example, observing slow economic growth or inflation when demand and sales are falling, the department will try to cut production and selling costs (“Level 2 Business,” n.d).

Changes in Economic Activity

Moreover, it may reconsider and adjust projected sales and prices as well as company’s marketing strategy.  In the time of economic growth when demand and sales increase, unemployment falls, and production goes up, Marketing must consider how to accommodate these changes and adjust production and sales strategy as well as prices accordingly.
In addition, knowledge of current or anticipated economic situation is essential when planning for a new product. Based on the discovery and recommendations of the Marketing department, other departments can properly plan or adjust their work.

To summarize, all functional areas of business including Marketing and Human Resources are affected by changes in economic activity, changes in inflation rate, and other possible changes in economics. These departments as well as entire company should recognize the impact of current and possible future economic situation on business, and take actions in order to accommodate these changes.

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References

Economics Basics: Demand and Supply. Investopedia: A Forbes Media Company

Retrieved September 3, 2007 from http://www.imvestopedia.com/university/economics/economics3.asp

Level 2 Business and economics: The Economic context of business. Level 2

Business and Economics Education. Retrieved September 3, 2007 from

http://www.bized.co.uk/educators/level2/external/lesson/context1.htm

Mankiw, G. (2004). Principles of Economics. Mason, OH: Thomson South-Western

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