Companiesexist to make profit, but this can only be achieved if they are ableto set the right price for their products. Businesses apply differentstrategies to set prices depending on the goals (such as the profitmargin) that wish to achieve. This paper will provide a discussion ofthree major pricing strategies, their application in business, andthe biggest difference between them.
TheMost Significant Digit Pricing
Thisis a pricing approach that plays with the psychology of theconsumers. The strategy is founded on the assumption that buyers tendto focus on a figure that is the most significant in the price tag(Geeta, Shaila, Buyya, Iyengar & Patnaik, 2014). Although theprice tag in general has an influence in the buying decision, usersof this pricing approach believe that there is at least one digitthat influences potential buyers than the rest. In most cases, thedigit that is located furthest to the left hand side of the price isconsidered to be significant to the majority of potential buyers.
Thepsychological effect is achieved when the price of the product isreduced slightly in a way that makes the significant digit appearsmaller. A smaller significant figure creates a perception that theentire price is also low. The strategy is quite popular in the fieldof e-commerce since the internet gives buyers the opportunity tocompare prices offered by different sellers (Kalb, 2013). A pricethat is lowered by a few cents, with the objective of appealing tobuyers results in a higher rate of conversion of products into cash.
Forexample, the pricing approach can be applied by reducing the pricetag of an item costing $ 20 by five cents to $ 19.95. In thisscenario, customers are likely to compare digits “1” and “2”in the two tags and select the price with the least value in thefurthest left (Kalb, 2013). The item with a digit “1” mightappear significantly cheaper than the one with the value of “2”.
GrossMargin Target (GPMT)
Companiesthat use the GPMT to price their goods are concerned about the needto recover all expenses incurred in the process of manufacturing theproducts. A profit is earned when the price is above the costincurred when producing the goods. In other words, a company needs toconsider at least two factors when applying the GPMT strategy. Thesefactors include the cost of sales and its target gross profit margin(Kalb, 2013). The process of setting the price is guided by theamount of gross profit margin that the company intends to make.
Theprice of a given product is likely to increase and decrease with timedepending on changes in the cost of manufacturing. Since the targetmargin profit is fixed, the objectives of the company can only beachieved by varying the price. In real business environment, theapproach is mainly applied in setting prices for the manufacturedgoods. A price is set above the total cost of raw materials andoverhead expenses.
TheWhat the Market Will Bear Strategy
Thepricing strategy holds that companies should sell their productsdepending on the ability of the potential buyers to make thepurchases. Users of this approach ignore the cost that they incurredwhen producing the goods and pay attention to the willingness as wellas the financial capacity of the consumers (Kalb, 2013). Companiesthat apply the WTMWB assume that a single price can work for theentire market. A complete market is comprised of consumers andcompanies that supply different products.
Thenature of the market presents a unique challenge because its members(including consumers and companies) have different needs. Forexample, consumers have different abilities as well as thewillingness to pay for products offered by companies in the market.Consequently, any price that is set by the management of the companywill satisfy a percentage of consumers and leave out the rest (Kalb,2013). For an instant, setting a high price will enable the companyreach consumers who can pay more, but lose a profitable business byleaving out the low-income earners.
Althoughthe WTMWB strategy has several drawbacks, companies can apply it in areal business environment to maximize profitability by using twoapproaches. First, the management can compromise and set a price thatlies in between the low and the high ends. Secondly, the market canbe divided into small segments. A particular price should be set foreach market segment (Kalb, 2013). This idea is founded in the factthat members of each market segment have different levels ofwillingness as well as the capacity to pay. Therefore, a careful useof the WTMWB strategy can help the company reach all consumers.
Companiesselect the type of pricing strategy depending on the objectives thatthey intend to achieve. The pricing strategies discussed in thispaper differ in several ways. The MSD approach differs from the restof the strategies because it involves playing with the psychology ofconsumers. The GPMT is differentiated by the fact that the company ismotivated by the desire to set a price that will cover all expensesand make a fixed gross profit margin. The WTMWB is different from MSDand GPMT because its users based their prices on the willingness ofthe potential buyers to pay for their products.
Geeta,R., Shaila, C., Buyya, K., Iyengar, S. & Patnaik, L. (2014).MSSS:Most significant single-keyword search over encrypted cloud data.Karnataka: University Visvesvaraya.
Kalb,I. (2013). Three ways companies decide the price of a product.Strategy.Retrieved October 10, 2016, fromhttp://www.businessinsider.com/3-powerful-pricing-strategies-businesses-should-always-consider-2013-10.