深国交商务实践社BPC：让你钱包空空的N种定价策略

Pricing strategies — what make your wallet empty

1

Introduction

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Although setting a reasonable price can help a company to obtain higher revenue, there are still many merchants who ignore the importance of pricing. Especially for some small-scale businesses, they just add a little premium to the cost of production to set the official sale price.

This tweet will introduce some of the most common pricing strategies to provide inspiration for students preparing to participate in BPC’s 12th Business Practice Competition. If you are not one of the participants, you are still very welcomed to continue reading this article! Perceiving merchants’ pricing strategies will also help you to avoid falling into tricks played by the merchants in your future purchase of goods.

2

Pricing

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What Is “Pricing”?

"Pricing" has been mentioned for multiple times from the very beginning, but what exactly is pricing? Pricing is, quite literally, the amount of money a consumer has to pay for the product or service. But do not underestimate this simple number, which contains the merchant’s positioning of the brand, and also contains the important factors that affect the consumer's decision to buy the product.

What Kind of Pricing Is Appropriate?

1. An appropriate price reflects the nature of the product

In this era of increasingly symmetrical commodity information, many consumers still have a price bias. For instance, people often have the subconscious as "you get what you pay for” and "the more expensive means the better”. Therefore, merchants need to consider what kind of first impression the price of a product will indicate to consumers: it can be a low price that brings a feeling of "small profit and high turnover", or a slightly higher price than the market price, which brings a sense of superiority of "exclusive customization”.

2. An appropriate price makes the product competitive in the market.

Generally speaking, as long as the lower price is well-advertised, so that consumers know where to buy to spend relatively less amount of money, the merchant will naturally be in a competitive position. But if the price is higher than the average market price, the merchants needs to highlight its own unique selling point and convince consumers of the difference between its product and similar products in the market.

Knowing the importance of pricing and the two criteria for an "appropriate" price, let's take a look at some common pricing strategies.

3

Common Pricing Strategies

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1. Cost Plus Pricing

- This method is most commonly used by small businesses such as individual merchants, mainly because it is the most straightforward method of pricing.

price = cost x (1 + markup)

- Eg: I used this pricing strategy to sell roses when I was young. The wholesale price was 4 yuan, and I sold them for 5 yuan, so my profit was 25%.

2. Value Based Pricing

- Different from the first strategy, this one focuses on the value assigned to the product by the consumer, rather than the cost to the producer. The advantage is that the final price will be more acceptable to the public, but the difficulty is to know how much consumers are willing to pay for your product.

3. Competitive Pricing

- Competitive pricing, as the name implies, refers to the price set by competitors as a reference, which saves some costs of market research. This generally applies to a perfectly competitive market, where prices of all merchants tend to be the same, or an oligopoly scenario: iQiyi, Tencent Video, and Mango TV members have similar prices.

- But in implementing this strategy, don't ignore your own production costs and blindly follow the trend.

- (Oligopoly is when a market is dominated by a small number of companies. Unlike a perfectly competitive market, oligopolies can work together to raise prices and become price setters.)

4. Price Skimming

- You must be wondering, can the price also skim? !

- Skimming pricing, compared with the previous ones, has a lot more of depth. Its main principle is: in the absence of similar product competition, charge at a higher price towards consumers with higher capability of purchasing to speed up the recovery of initial investment costs and reduce the investment risk. When competitors rush into the market, the price will be lowered gradually to maintain the cost performance.

- Eg: Apple earned more profits by this strategy.

5. Penetration Pricing

- Penetration pricing refers to the practice of gaining market share by entering a new market at a very low cost, and then gradually raising prices when competitors exit the market due to fierce price wars. If you look at the new takeout restaurants around you, you'll notice that the discounts they offer when they open are very high, and after a while the coupons taper off.

- (However, for small companies, this strategy is accompanied with many risks. Last year, when a new takeout shop opened, I ordered takeout for 3 weeks at a single digit price, but the shop closed down within two months. It can be seen that customer loyalty is not high enough to make them cover the higher price of 10 yuan.)

- Tip: Penetration pricing may ignite the price war, allowing vicious price competition between merchants.

This is what really exists！

6. Parity pricing

- The last pricing strategy is also very easy to understand, the merchants play with the price of a little thought. Instead of charging 9 yuan, they will charge 9.99 yuan, which not only adds 0.99 yuan, but also keeps customers' illusion that it's only in the single digits, reducing people's sensitivity to the price. Merchants will get a lot of extra profit out of what looks like a few pennies.

7. Price Discrimination

- Price discrimination can be either a pricing strategy or a sales model. It is defined as charging different customers different fees to sell the same product, so as to increase the demand and total revenue. Price discrimination is also divided into three categories: first-tier price discrimination, second-tier price discrimination and third-tier price discrimination.

- Here we start with the least common, but most basic, form of first-tier price discrimination. In first-tier price discrimination, a merchant knows exactly what a consumer's reserve price is (that is, the maximum price a consumer is willing to pay for a product) and then charges buyers one by one. Perhaps you can see the reason why first-tier price discrimination is really rare in life. It is difficult for most businesses to fully understand individual consumption preferences. If it is to be obtained through market research, it will take a lot of time and labor costs. However, some businesses, such as Automobile 4S shops, employ sales to negotiate the price with customers. In many cases, the back and forth bargaining will make the selling price gradually close to the reserve price.

- If you are interested in this scenario, you can look up the car buying scene (in Fresh Off The Boat) in which the reserve price of Lewis Huang and his wife is lower than that of most customers in the market, but still higher than the marginal cost of the manufacturer, so they finally reach a point close to the reserve price by bargaining all the way. If it were a more affluent customer, they might order as soon as the first sale offers a small discount because they have a higher reserve price.

Consider using algebra:

P=D(Q)

(p=price D(Q) is the demand curve and Q is the quantity produced)

When price discrimination is applied, merchants will choose to produce the same quantity as they would in a perfectly competitive market.

Here is another question that you might want to have a try:

Suppose a monopolist has two demand curves:

D(p1)=100-p1

D(p2)=100-2p2

And the marginal cost is 10 yuan. Please calculate the price under price discrimination and the price under non-price discrimination respectively.

Reference Answer:

When price discrimination is possible, you can separate the two equations and find the inverse demand function first:

P(y1)=100-y1

P(y2)=50-y2/2

When marginal costs are equal to marginal benefits, you can write the equation:

100-2p1=10

50-y2=10

We get y1= 45, y2 = 40

Substituting the original demand curve, we got:

 P1 =55 and P2 =20

When price discrimination is not allowed, meaning that the monopolist can charge only one price, we will add the two equations together to find aggregate demand:

D(p)=D1(p1)+D2(p2)=200-3p2

We also find the inverse demand function:

P(y)=(200-y)/3

When marginal costs are equal to marginal benefits, you can write the equation:

200/3-2/3y=10

We get y = 85, p = 115/3 S

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Ending

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The above is a general introduction of pricing and pricing strategies. I hope that after reading this tweet, you can better understand the thoughts of the merchants. You can use it when you start a small business in high school.

If there are any unclear points in this article, welcome to BPC Academic Department and let’s discuss together~

#END#

Writing｜Emily

Translation｜Sharon

Design｜Florence Yawen

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本篇文章来源于微信公众号:                 bpcscie