#PENETRATION PRICING PROFESSIONAL#
#PENETRATION PRICING SERIES#

There is no point in setting a selling price below variable cost unless the company were contractually obliged to (for example, costs rose after the sales contract was signed) or the company was prepared to lose money initially to break into a new market eg promotional discounts. Whether the total contribution covers fixed costs so that the company breaks into profit depends on the fixed costs and the volume sold. That would generate a contribution of $30/unit. If the marginal cost for a product was $120, and the company had a policy of adding a mark-up of 25% then the selling price would be $150. In the rest of this article we will look at these different approaches. There are a number of different approaches to pricing which a company can adopt. Note that monopolists are not guaranteed to make a profit: they might be trying to sell a product no-one wants. If a company is a monopoly supplier, it has much more freedom to choose its selling price. Competitors вЂ“ Are there any? What is the strength of competition? What are they charging? If many competitors are selling very similar products then companies have little flexibility in their pricing: all have to fall in line with the current market price.If costs are too high, no-one will buy products вЂ“ or not in a high enough volumes. Customers вЂ“ what are they prepared to pay for the product? In effect this relates to the price elasticity of demand for the product and its demand function as explained in the first article.No company would ignore a cost-plus approach but as we will see it will not always give the best answers to pricing decisions. A cost-plus approach is then used so that a mark-up is added to the cost to produce a price. Costs can be calculated in a number of different ways: marginal cost, total absorption cost, lifecycle cost and relevant cost. Cost вЂ“ the selling price should cover the cost of production.The influences on pricing decisions are often listed as: This one deals with practical pricing approaches.

#PENETRATION PRICING SERIES#

This first article in this series dealt with the theoretical aspects of pricing.

#PENETRATION PRICING PROFESSIONAL#

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