Reflection 9 – Pricing Strategy
Pricing strategy follows three main strategies: Customer value based pricing, cost based pricing and competition based pricing. Customer value based pricing takes into consideration a buyer’s perception of value as the focus for setting the price. Understanding how much value a consumer places on a product is essential in determining the price point. Value based pricing requires the marketer to consider price prior to the marketing program and as part of the marketing mix. Cost based pricing is generally product driven. The company will design a product, add up the cost of making a product and then determine the price. The goal of marketers will be to convince buyers that the price is justified by the product’s value. Customer value perception will usually set ceiling price of the product whereas the cost based pricing will set the minimum the company can charge. Competition based pricing involves setting prices based on its competitors strategies. Ensuring that a company is comparing itself evenly with its competitor is important in knowing what price point to consider.
Types of costs include variable costs, costs that vary with level of output and production and fixed costs, costs that remain the same regardless of the level of output. The total costs are the sum of the variable and fixed costs for any given level of production. A simple way to determine pricing is cost plus markup. This would include a standard markup on the products costs. Break even analysis is another approach determining price. Analysis can be used to determine what the minimum number of units needed to breakeven or the number in revenue needed to be sold in order to breakeven. Breakeven analysis can be used to set profit at a particular percentage whether its zero or higher.
Muddy Buddy used cost based analysis and competition based analysis to determine its price point. Initially it had priced itself at $1.79 per bar with intent at a higher profit margin, but after a breakeven analysis was conducted, fixed and variable costs were determined, and an analysis of its competition’s price range, it elected to enter the market with the lower cost of $1.49 average per bar. The average cost per bar is due to the difference in prices for single serving vs. packages of six and takes into consideration the number of promotional bars and samples that will be distributed through advertising.