Top 8 Specific Problems of Pricing
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Problem # 1.Pricing Over the Life Cycle of the Product:
Every product has its own life cycle and its sales and profitability change over time. The product life cycle hypothesis was developed in an attempt to recognize formally distinct stages in the sales history of representative products.
Problem # 2.
The Rate of Market Growth:
This itself is often influenced by pricing policies. In practice, some products are inherently less likely to gain rapid market than others. These products are, therefore, unsuitable for a penetration price policy, involving initially low, and perhaps even negative, margins.
Problem # 3
The Erosion of Distinctiveness
The second factor is the likely rate of erosion of the distinctiveness of the pioneer product. This will, in turn, depend upon the number of competitive products entering the market and the extent to which they can reproduce the characteristics of pioneer products.
Problem # 4.
The Significance of Cost:
The third major factor is the cost structure of the producers. A reduction in average cost is likely if there is learning effect. In Figure 19.8, AC1 shows the unit cost of producing various quantity of a product within a period, say a day.
Problem # 5.
Post-Skimming Strategies:
Choice of a skimming price is not enough. Subsequent decisions will have to be made about the timing and size of future reductions from the initial price. In some instances, the producer’s hand may be tied by the actions of competitors. In other instances, however, producers may have more discretion.
Problem # 6.
Mixed Strategies:
Many firms do adopt a strategy which falls between the two extremes of the skimming and penetration prices. This policy is followed by many large companies in case of many new products. For example, Du Pont followed a mixed strategy for both nylon and cellophane.
Problem # 7.
Pricing in Maturity:
Maturity is generally defined in terms of the product’s rate of sales. It is the stage between the growth period, when sales increases rapidly and the period of decline, when sales falls sharply. The concept of product life cycle is useful for multi-product firms.
Problem # 8.
Pricing Products in Decline:
An analysis similar to the above one can be applied to products whose sales have begun to decline.
However, three additional strategies bear relevance at the decline stage:
1. Product Reformulation Strategy:
First, there is need to reformulate the product drastically and sell at a much lower price. This is a common practice in the book business where a saturation of the market by a hard-bound edition is often the sign for the introduction of a paper-back edition.
2. Price Reduction Strategy:
The second strategy is one of reducing price substantially to induce a temporary revival of sales. This has happened in case of Britain’s Ford Anglia, whose popularity had diminished under the impact of changes in styling and performance in competitive models.
The company had a goodwill as a reliable family car maker. And a price cut, allied to this reputation, created a good image of the company and helped in raising its sales.
3. Withdrawal of Advertisement Support Strategy:
Finally, as Livesey has pointed out, “even if a price reduction fails to make a significant impact on sales, additional profits may still be wrung out of declining products if the producer is strong- willed enough to withdraw advertising support, thus formally accepting the status of the product”.
source :
http://www.economicsdiscussion.net/price/problems-price/top-8-specific-problems-of-pricing/20128
