Extracts from this document...

Introduction

Price research 1. Philosophies and Importance of Price Research Pricing decisions seem to be one of the most perplexed problems facing management. Price is closely related to the product itself. It is often difficult to gain a competitive advantage through pricing strategy; it is easy to be come non-competitive through poor pricing practices. It is possible to isolate pricing decisions; two broad areas can be separated. First, business firms are faced with the problem of establishing pricing policies and strategies. These are the broad guidelines under which more specific pricing activities take place. Second, managers are faced with the actual task of determining specific prices. The most important factors bearing on price policy decisions are external environmental elements and internal constraints. Research for policy decisions tends to rely on studies of industry structure and examination of internal secondary data. This research reveals the nature of price as a competitive variable and constraints on the flexibility of pricing. New product pricing reflects the additional complexities with pricing a new product for the first time. Relevant issues here include the product and market characteristics (E.g. differences from existing offerings, ease of copying, patent protection); the choice of price strategy at the time of the launch and its adjustment over time (E.g. market skimming versus market penetration); and the integration of the new product pricing strategy with the promotional and distribution strategies adopted during introduction to the market. The challenge facing the decision maker when pricing a new product, there is often pressure to recuperate development and launching costs, both of which can be very substantial, within a short period in order to maintain a healthy cash flow and ensure a quick return on the investment linked with the new product. ...read more.

Middle

The source of this information would most common be survey research, as well as a thorough review of pricing practices by competitors in the industry. Market-oriented pricing Managers are much more concerned with price-related information derived in the marketplace as an initial base for pricing decisions. This information is acquired from one or both of two sources, customers and/or competitors. Customer-based information provides estimates of the relationship between price and demand. Pricing which is based on competitive information can obviously rely on the going rate in the marketplace. A more difficult area of competitive pricing is competitive bidding. The differentiated oligopolistic environment is created when a firm is able to discriminate on a profit basis, customer basis, location basis or time basis. (Demand) Q = 400 - 2P Q = 150 - .5P (Revenue) R = 200Q - .5Q R = 300Q = 2Q (Cost) C = 10,000 + 2Q(q + Q ) Where: Qi = Quantity in segments I for I = 1,2 Pi = Price in segments I for I = 1,2 Ri = Total revenue in segment I for I = 1,2 C = Total cost Using the standard assumptions of the marginal analysis model, profits are maximized when marginal revenues in each segment equal marginal cost. Firms who are faced with the prospect of price discrimination between segments must utilize both internal secondary sources of information (in order to develop appropriate cost functions) and demand analysis (to provide demand in the form of revenue functions). Some firms often faced with the dilemma of making pricing decisions when internal company records do not provide adequate cost information. ...read more.

Conclusion

In practical terms, understanding elasticity means understanding the relationship between prices, sales volume, revenue, and profit. While lower prices generally lead to greater sales volume, they also mean less money with each sale that is made, and potentially lower overall revenue and profitability. The question of how to price a product is always a critical issue and, in many ways, the key element of the marketing mix. Several research approaches attack the pricing issue, including conjoint analysis, traditional purchase intent analysis and van Westendorp analysis. In conjoint analysis, various approaches (adaptive, Choice-based, Preference-based, etc) are used to force target customers to make tradeoffs between price and other product features. Target customers are asked to indicate their likelihood of purchase or preference for various versions of your product that are stated in terms of differing levels of the attributes of the product such as price. By analyzing the choices they make, we are able to estimate the relative values they associate with each attribute and with the levels of each attribute. These estimated values or utilities are used to optimize a product, segment the market and simulate market response to different product offerings. Traditional purchase intent analysis relies on asking a sample of target customers to indicate their likelihood of purchasing a particular product. Often they are asked to state their likelihood at different price points. We use our intent translation model to adjust raw survey responses to provide estimates of actual sales. In van Westendorp analysis we ask target customers a series of questions that permit us to identify an Optimal Price Point as well as points of marginal Expensiveness, Marginal Cheapness and an Indifference Point. ...read more.

This student written piece of work is one of many that can be found in our University Degree Marketing section.