Analysis of the prices and quality of competitors' products
The difference between the upper limit of the price determined by demand and the lower cost created is the range for setting prices. Inside the given area the following factors become the main factors: the positions and behavior of competitors, the prices and the quality of their goods. Each enterprise should know not only the prices of competitors' products, but also the distinctive features of their products.
By examining products and price lists for competitors' products, making comparative purchases to compare prices and quality of specific products, asking customers about their attitude to these factors, the enterprise thus conducts a thorough analysis of the prices of goods and their quality, which allows him on this basis to objectively compare the positions of their products and competitors' products. At the same time, the received information can be used by the enterprise as the initial basis for pricing and determining its place among competitors. From the results of the analysis, the decision to establish either a higher price of the goods than that of competitors or, conversely, a low one, which will be the advantage of a specific product, depends.
If the product is similar to the products of the main competitor, then the enterprise is forced to set a price close to its price. Otherwise, the company may lose the market for its products. If the product is lower than the quality, you must ask for the same price as the competitor. To set the price higher than the competitor, it is possible only when the specific products are better in quality.Knowing the demand, own costs and prices of competitors' products, the enterprise can choose the price of the goods. The latter will be in the range between a too low amount that does not provide for the profit of the enterprise, and too high, which prevents the formation of demand. The lowest possible price is determined by the cost of production, the maximum - by the demand and availability of special, unique advantages of the goods. In this case, it is important to take into account the respondent price responses of competitors to the appearance of a new product on the market.
The prices of goods of competitors, as well as substitute products, allow to determine the average level that an enterprise should adhere to when setting a price. The optimal price should fully recover all costs for production, distribution and sale of goods, as well as provide the enterprise with a certain rate of return.
Choice of pricing method
Having passed all the stages of pricing associated with the choice of the type of market, the determination of the objectives of the price policy, the evaluation of the demand for goods (products, services), the analysis of costs and prices of competitors' products, the period of setting the initial price of the goods begins. To do this, apply two approaches - cost and value.
With cost approach are guided first of all by the cost (production, circulation, sale) of products (goods, services). With the value approach , first of all the value evaluation of products (goods, services) is carried out, i.e. its quality, novelty, attractiveness, special properties and usefulness.
Therefore, it is necessary to choose such an optimal and economically expedient pricing method that would maximally take into account the conditions, positions, objectives of the company's pricing policy, ensure cost recovery, the sale of goods and the receipt of a certain profit.
In this regard, there are three options for setting the price level:
1) the minimum, determined by costs;
2) the maximum, formed by demand, the presence of unique quality merits of the product;
3) the best possible, reimbursing all costs of production and ensuring the sale of goods and obtaining a certain rate of return.
From the whole variety of pricing methods, the following, the most commonly used methods of calculating prices, can be singled out.
The technique average costs plus profit is the most common and consists in charging a mark-up on the cost of goods. The amount of extra charge added by the firm can be standard for each product and widely differentiated depending on its type, unit cost of the product, sales volumes, etc. However, the standard mark-up does not allow in each specific case to take into account the specifics of consumer demand and competition, and therefore, determine the optimal price of the goods.
The popularity of this technique is explained by three reasons. First, no matter how carefully the sellers studied the demand of buyers and the price of competitors' products, they know better the costs. Therefore, when setting prices on the basis of costs, they do not have to review prices after the fluctuations in demand. Secondly, this method is the most fair in relation to the seller and the buyer. Thirdly, it reduces the price competition, because all firms in the industry determine the price by the same principle.
The cost-based costing method , focuses on getting the target profit. On its basis, the cost per unit of output is calculated taking into account the sales volume, which ensures the receipt of the target profit. If the cost price varies depending on the loading of production capacities and sales volumes, then the indicators of the degree of capacity utilization are used taking into account the influence of the market and other market factors. At the same time, to compensate for the cost of production, it is necessary to realize a certain volume of output at a specific price or a smaller quantity, but at a higher price. Here the price elasticity of demand is of particular importance. Using this method, the firm must calculate at what price level the sales volumes will be achieved, allowing to recover the gross costs and obtain the target profit.
The minimum cost method involves setting a price at a minimum level to cover the cost of producing a particular product, rather than by calculating total costs, including fixed and variable production costs and sales of products. Limit costs are determined, as a rule, at a level at which it would be possible only to recoup the sum of the minimum costs. The sale of goods at a price calculated by this method is effective at the saturation stage, when there is no growth in sales and the firm aims to keep sales at a certain level.
Such a pricing policy is also rational for a campaign to introduce a new product to the market, when one should expect a significant increase in sales volumes as a result of the supply of goods at low prices and, as a result, to obtain sufficient profits at the expense of increased sales.
Price calculation based on sensible value product by the consumer is one of the most original methods of pricing and is widely used in developed countries. At the same time, the price takes into account, first of all, demand, i.e. how much the buyer is willing to pay for the offered goods. When calculating prices using this method, non-costly landmarks are used, but the perception of the goods by the buyer. In order to increase the value of the product for him, the company uses non-price measures in its marketing policy: it provides service and attractive packaging, creates an improved interior of the store (salon), provides special guarantees to customers, the right to use the company's trademark in the event of resale and a quality level after-sales service. In this case, the price only reinforces the value of the goods in the mind of the buyer. The enterprise using this method of pricing should seriously engage in research on the model of consumer behavior, identifying a subjective evaluation of the buyer's value of goods or services.
The method of forming prices by targeting market prices is characterized by the fact that every enterprise (seller) that sells a particular product sets prices based on the market. This method is used in determining the price of difficultly differentiated goods (for example, cement, sugar, etc.). The price set in this way is selected from the price zone formed by the market, each company independently.
The method of consumer appraisal is that manufacturers (sellers) set prices for goods, focusing on consumer estimates, rather than on production costs. This method corresponds to the marketing method of product positioning. Entrepreneurs using this method determine the prices of their products on the basis of comparing its value and the cost of competitors' products for a particular client. To achieve success in the marketing of any product, the seller suggests that the customer compare it with a competitor's similarly useful product and explains the higher price of its products with certain surcharges (extra charges) for increased strength and reliability, better service and after-sales service, longer warranty on parts , knots, semi-finished products, while at the same time it implements a discount for the buyer as a cost advantage of the consumer.
As a result of these actions, the final price of the proposed product for the consumer, although it will be higher than that of the competitor's similar product, will ultimately prefer a product with a higher price, but, in his opinion, with the best consumer, technical, operational and quality indicators.
Using this method, the buyer intelligibly explains that although it is necessary to pay more for the goods, in reality he wins in quality and saves by providing a discount. Thus, the firm convinces the client of the advantages of its product.
In order to successfully apply this method, you need to know in detail your potential customers and real competitors, i.e. constantly use such marketing method as market research.The method of following the prices of the enterprise - the leader in the market is characterized by the fact that each firm is guided by the prices of the competitor-leader, and the account of own costs and demand plays a subordinate role in this case . According to this method, prices can be set equal, higher or lower relative to the prices of competitors.
For example, in the markets of oligopolistic competition (with a small number of large firms selling similar goods - steel, aluminum, oil, fertilizers, etc.), the main sellers, as a rule, set the same prices for products. In the markets of monopolistic competition with a lot of competitors-sellers, on the contrary, the prices of goods are different, they are set depending on the goal of the enterprise's pricing policy.
The company that holds the leading position on the market has the highest degree of trust from the buyers, and also has a wide range of opportunities to set prices on the market at a more profitable level than other firms.
Enterprises following in the formation of their pricing policy for the "price leader" are not competitive in terms of their degree of fame, and in the degree to which buyers recognize their trademark. Therefore, they adhere to their products for the level of prices determined by the enterprise leader.
This method of pricing is very popular all over the world. If it is difficult for an enterprise to forecast its own costs or the reaction of competitors, then a reasonable decision is to follow the leader enterprise.The method of establishing prestigious prices is that it is used primarily for goods related to luxury goods and others), for which the highest prices are set.
Currently, there is an expansion of the assortment of prestigious goods, which have the highest quality, special unique properties and attributes. These high-quality goods are highly profitable and long-term, as they serve to maintain the image of luxury and prestige. If such goods are sold at low prices, they will become easily accessible and lose their main attraction for buyers - exclusivity. With respect to prestigious and unique goods, it is expedient to set the highest prices, which will serve as a powerful incentive for buyers counting on the demonstration effect of the purchased goods, and will become a pledge of a higher level of sales. Thus, for this product, it is effective from the very beginning of entering the market to use the policy of establishing high prices and maintaining the image of an ultra-high class of goods. In this regard, firms that establish higher prices on sold prestigious goods than those of competing firms successfully use the prestige of the brand and their image.
The cost allowance method (costs) is a widely used pricing method whereby a surcharge corresponding to the industry-standard rate of return or the desired income is added to the cost of a particular product from turnover. For example, construction organizations evaluate their work, adding to the cost of the construction project the industry average profit. Firms performing architectural work, as well as R & D, adhere to such a principle as costs plus an agreed surcharge. The average premiums in Germany, for example, are about 17% for food, 30% for radio and television equipment, 31% for textiles, 33% for sports goods, and 39% for perfumes.
Many manufacturers and consumers are of the opinion that the method of premiums is the most correct and honest, as the interests of both parties are respected and none of them has the opportunity to cash in at the expense of each other.
The method of income for capital is also based on accounting for production costs and is that the firm calculates the prices of goods in such a way that the return on capital is provided at a rate of about 15 to 20%.
The price of the product in this case is calculated as follows:
The firm will be able to achieve the desired revenue if it correctly determines the costs and estimated sales.Pricing for competitive projects is a special pricing method used by a company (firm) whose goal in competitive struggle is to win a competitive project of a highly profitable consumer order. To do this, it is necessary to know well the prospective competitors and necessarily proceed from the fact that the higher the price for the company's competitive project, the lower the probability of obtaining a highly profitable order, and vice versa. Taking into account the profit put in this or that variant of the price, and the probability of obtaining at such a value of the subventions anticipated in the project, it is possible to estimate the expectation of profit. According to the theory of the probability of solutions it is necessary to offer the price that leads to the greatest expectation of profit. Thus, large companies participate in investment competitions and tend to maximize profits in the long run.
Competitive (auction) method of determining prices is used in central wholesale and commodity markets, securities and real estate markets, tenders and auctions. There are two varieties of this method:
• the upward bidding method, when the lowest price is first called, and then there is a raise, the product goes to the one who offers the highest price;
• the downward method of conducting an auction, when the highest price is first called, if there is no buyer at that price, there is a reduction. The right to conclude a purchase transaction is received by the buyer who first accepts the seller's price and thus agrees to the highest price unlike the other participants in the auction.
Normative-parametric pricing methods are based on comparing the enterprise's products with similar products of competitors and with various substitute products of the enterprise itself. These methods consist in a clear conviction of the consumer of the superiority of a product compared to other products that satisfy a similar need.
The most commonly used are the following normative-parametric pricing methods: 1) comparison of specific indicators of the product; 2) regression analysis; 3) aggregate; 4) point; 5) expert evaluation of consumer values and determination of prices based on it.
In practice, other methods of normative-parametric pricing may be used, the names of which depend on the specifics of the applied mathematical apparatus, the methods of expert evaluation of indicators, and the study of the consumer market.
Thus, to accept the price of goods, the enterprise chooses one of the pricing methods considered above and initially determines its initial value, which at subsequent stages, with careful consideration of a whole set of factors related to the objectives of pricing policy, psychological impact on the buyer, the influence of different elements marketing, reaction of competitors, state price policy, adjusts, and then sets the final price of the goods with the maximum degree of validity and accuracy.
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