>Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the When a product is first launched into a market a firm will have to decide what price to charge.

Penetration pricing This strategy uses a very low price to enter the market and gain market share. It makes sense if there are cost advantages to producing on a large scale. It can also be beneficial if the market is price sensitive, so that a lower price generates significantly higher sales.

Price skimming This strategy uses a high price to enter the market. Even though the price is high, some people may still be eager to try a new product. Once sales from this group of people have been exhausted, the price can be dropped to attract a new segment. When this segment is exhausted the price can be cut again. A price skimming strategy is appropriate if the firm can protect its idea or invention so that competitors cannot enter with a cheaper version. It may be protected using a trademark (which protects the firm logo) or a patent (which protects a new invention). Price skimming also makes sense if the market is particularly price sensitive, so that a price cut would not generate a large increase in sales. This strategy is often used with new technology: the latest computer or computer accessory enters the market with a high price which then falls quite rapidly a year or so later.

Competitive Pricing Some firms set their price at the same level as their competitors. This makes sense if the market is highly competitive and consumers can easily compare the offerings of different firms. Competitive pricing is common when consumers can make a direct comparison between different products. Many retailers offer to refund the difference if you can find a similar product cheaper in another local store.

Pricing strategies for existing products

For firms already competing in markets, pricing strategies may include:

Price leadership This tends to occur when a firm dominates a market and others follow its lead. When leading petrol companies (such as BPAmoco) drop the price of their petrol, many competitors follow suit.

Price taking Price takers are firms that accept the price which dominated in the market. A small independent garage, for example, may have to accept the price set by the major sellers. Independent bookshops may have to follow the prices of major bookstores, such as Waterstones.

Predator pricing this occurs when a firm sets out to destroy (or at least weaken) the competition through low prices. This usually occurs if the firm has more financial resources than the competition and son can sustain lower profits for longer.

Cost Plus pricing This method of pricing considers the total cost per unit and then adds on a percentage to arrive at the final price. For example if the cost of producing a single unit of output is ?100 and the firm has a 20% profit margin, the selling price would be ?100 20% = ?100 ?5 = ?105. This method is simple to operate but does not consider the situation in the market. It ignores competitors prices and what consumers might be willing to pay. Nevertheless, it is a simple method of pricing and is common in sectors such as retailing, where firms buy products in at a certain price and add on a percentage before selling it on.

Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the

hat competitors cannot enter with a cheaper version. It may be protected using a trademark (which protects the firm logo) or a patent (which protects a new invention). Price skimming also makes sense if the market is particularly price sensitive, so that a price cut would not generate a large increase in sales. This strategy is often used with new technology: the latest computer or computer accessory enters the market with a high price which then falls quite rapidly a year or so later.

Competitive Pricing Some firms set their price at the same level as their competitors. This makes sense if the market is highly competitive and consumers can easily compare the offerings of different firms. Competitive pricing is common when consumers can make a direct comparison between different products. Many retailers offer to refund the difference if you can find a similar product cheaper in another local store.

Pricing strategies for existing products

For firms already competing in markets, pricing strategies may include:

Price leadership This tends to occur when a firm dominates a market and others follow its lead. When leading petrol companies (such as BPAmoco) drop the price of their petrol, many competitors follow suit.

Price taking Price takers are firms that accept the price which dominated in the market. A small independent garage, for example, may have to accept the price set by the major sellers. Independent bookshops may have to follow the prices of major bookstores, such as Waterstones.

Predator pricing this occurs when a firm sets out to destroy (or at least weaken) the competition through low prices. This usually occurs if the firm has more financial resources than the competition and son can sustain lower profits for longer.

Cost Plus pricing This method of pricing considers the total cost per unit and then adds on a percentage to arrive at the final price. For example if the cost of producing a single unit of output is ?100 and the firm has a 20% profit margin, the selling price would be ?100 20% = ?100 ?5 = ?105. This method is simple to operate but does not consider the situation in the market. It ignores competitors prices and what consumers might be willing to pay. Nevertheless, it is a simple method of pricing and is common in sectors such as retailing, where firms buy products in at a certain price and add on a percentage before selling it on.

Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the

ilers offer to refund the difference if you can find a similar product cheaper in another local store.

Pricing strategies for existing products

For firms already competing in markets, pricing strategies may include:

Price leadership This tends to occur when a firm dominates a market and others follow its lead. When leading petrol companies (such as BPAmoco) drop the price of their petrol, many competitors follow suit.

Price taking Price takers are firms that accept the price which dominated in the market. A small independent garage, for example, may have to accept the price set by the major sellers. Independent bookshops may have to follow the prices of major bookstores, such as Waterstones.

Predator pricing this occurs when a firm sets out to destroy (or at least weaken) the competition through low prices. This usually occurs if the firm has more financial resources than the competition and son can sustain lower profits for longer.

Cost Plus pricing This method of pricing considers the total cost per unit and then adds on a percentage to arrive at the final price. For example if the cost of producing a single unit of output is ?100 and the firm has a 20% profit margin, the selling price would be ?100 20% = ?100 ?5 = ?105. This method is simple to operate but does not consider the situation in the market. It ignores competitors prices and what consumers might be willing to pay. Nevertheless, it is a simple method of pricing and is common in sectors such as retailing, where firms buy products in at a certain price and add on a percentage before selling it on.

Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the

the competition through low prices. This usually occurs if the firm has more financial resources than the competition and son can sustain lower profits for longer.

Cost Plus pricing This method of pricing considers the total cost per unit and then adds on a percentage to arrive at the final price. For example if the cost of producing a single unit of output is ?100 and the firm has a 20% profit margin, the selling price would be ?100 20% = ?100 ?5 = ?105. This method is simple to operate but does not consider the situation in the market. It ignores competitors prices and what consumers might be willing to pay. Nevertheless, it is a simple method of pricing and is common in sectors such as retailing, where firms buy products in at a certain price and add on a percentage before selling it on.

Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the

>Contribution Pricing The contribution of a product is the difference between the selling price and the variable cost per unit (such as cost of materials). If the firm can cover the variable costs any remainder can be used to put towards its fixed costs (E.G. rent). This pricing method is often used when firms consider accepting a special order. Imagine a business received as large order forma new customer; however, the price is offered is below the normal selling price. Assuming the firm has sufficient capacity, it may accept the deal as long as the price covers the extra (or variable) costs involved in making the product. This special order decision can ignore costs such as the rent of the factory, the managers salaries and interest payments on loans, because these are paid regardless of whether the order is accepted.