Pricing Decision free essay sample

Week 4 Assignment Pricing Decisions BUS 612-Advanced Project Procurement October 01, 2012 Pricing Decision One of the most important and complex decisions a firm has to make is how much to pay for its items and services. The buying professional should be able to detect easily exceptionally high prices. Thus, it is necessary to give meticulous consideration to pricing decision when buying products and services. Pricing is one of the most important decisions a marketer makes regarding a product since price plays a crucial role in competitiveness and consumer demand.Marketers must determine price at the initial stage of a products life and re-evaluate pricing to manage the delicate balance between production and profits (Benton, 2010). No product can succeed if its pricing is too out of line with standards in its industry. A thirty ounce can of peanuts no matter how good cannot be priced at ten dollars and expect to draw a consumer following that allows it to achieve beyond a niche in the market. We will write a custom essay sample on Pricing Decision or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page When developing pricing strategy, managers must do a thorough evaluation of competitor pricing to determine the prevailing pricing structures and how their product is positioned. Pricing StrategyPricing strategy refers to method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labor and advertising expenses and then add on a certain percentage so they can make a profit. There are several different pricing strategies, such as penetration pricing, price skimming, discount pricing, product life cycle pricing and even competitive pricing (Stevenson, 2010). When considering how a price should be set, one fundamental question should be answered, what the organization is attempting to achieve with this price (Indounas, 2009). How the product is priced has an effect on the success of the company. â€Å"Price reflects more than cost and profit; pricing decisions also must be based on the degrees of competition and buyer seller relationships† (Benton, 2010 p. 297). Prices must cover cost, be set to preserve equilibrium in the market place, and set to assure sales. â€Å"In order for the purchasing professional to survive as an effective buyer, she or he must have an adequate understanding of economics and psychology. In addition, the federal, state, and local laws that affect price also must be followed† (Benton, p. 294, 2010). In today’s competitive environment in which customers are demanding more service and quality, market pricing is perhaps the most popular approach. Market pricing is in the interests of both the selling firm and the buying firm. In the end, the buying firm must determine whether the purchase price fits its competitive cost structure (p. 294). Pricing strategy refers to method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labor and advertising expenses and then add on a certain percentage so they can make a profit.There are several different pricing strategies, such as penetration pricing, price skimming, discount pricing, product life cycle pricing and even competitive pricing. Benton (2010) discusses pricing strategy as Price-Setting strategy: Economic and Price-Making Strategy: Psychological. The price setting, economic focus on â€Å"target† market pricing, target pricing is practiced when the buying firm determines whether the purchase price fits its competitive cost structure. Price-making strategy consists of several types of discounts, trade discounts, quantity discounts, and cash discounts (Benton, 2010).Mullins (p. 307, 2010) outlines several other pricing strategies, such as, market skimming, market penetrations, price adaptation and cost-plus pricing. Market skimming involves charging the highest possible price for a given product; market penetration is a strategy to keep prices relatively low in order to gain market share; price adaptation keeps prices relatively low in order to gain market share, and cost-plus pricing assures that all costs, both fixed and variable are covered in the desired percentages (p. 71). Company Using Purchasing Strategy Dell is a company that has used a purchasing strategy to improve the financial impact of the company. Historically, prices were determined through bargaining or negotiations between buyers and sellers. Different prices were set based on the buyer needs and bargaining skill. The establishment of one price for every customer is relatively new phenomenon that came about with the rise of retailers but price still remains a major factor in affecting consumer-buying decisions.The ability of price to affect consumer decision and its flexibility makes pricing strategies important in meeting Dell’s objectives in a competitive environment (Dell 10-K, 2005). The main objective of Dell is to produce the low price and profitable notebook for the customer. For Dell Company, all the prices that they sell are posed to the internet and that is usually based on the e-commerce market (eweek, 2001). The main reason for successful pricing strategy is having a reasonably precise idea of supply and demand.Dell Company has set different types of pricing based on the home user, small business user and medium or large business user. The pricing structure changes as the products move through their life cycle. Dell is the low-cost leader in the industry. Dell’s highly efficient supply chain management and manufacturing organization, efficient direct business model, and concentration on standards-based technologies allow â€Å"Dell to maintain the lowest cost structure among its major competitors, and to pass those savings to its customers.