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Companies often spend copious amounts of time and effort developing a business pricing strategy. These strategies typically relate to how a company prices the consumer goods or services it sells in the economic marketplace. Pricing strategies are important because companies who fail to recoup business costs will suffer poor cash flow and possibly bankruptcy. Companies choose the best strategy based on current market conditions, size of company operations, and number of competitors in the market. Some examples of business pricing strategies are penetration, economy, skimming, bundle, and promotional.
Current market conditions are important when selecting a business pricing strategy because consumer income fluctuates depending on a government’s fiscal and monetary policy. Governments typically dictate the amount of available money in the economic market. Tight monetary policies restrict the flow of money, which can lower incomes and purchasing power. Loose policies will provide more money in the market, but also increase inflation. Inflation is classically defined as too many dollars chasing too few goods; ultimately, inflation erodes purchasing power.
The size of a company and its competitors are two factors that work in tandem when selecting a business pricing strategy. Small companies may struggle to price goods competitively against larger competitors who have an economy of scale in their favor. Small business owners typically focus on niche markets or unmet consumer needs in order to charge a price where they can make a profit, even if the price is higher than the market average. Larger companies can often dictate the price they are willing to accept due to their market dominance. However, these companies must undercut competitors to retain market share, if necessary.
A business pricing strategy can change over time, depending on the life cycle of products and a company’s operation. Penetration pricing allows companies to set product prices that are artificially low in order to gain market share and then raise prices incrementally until they reach the level at which the companies plans to continually sell products. An economy business pricing strategy is one companies use to offer extremely basic products at the cheapest price possible. Companies use this strategy to undercut more advanced or popular products by providing substitute products in the economic market. Skimming is a strategy where companies set high initial prices because they have a competitive advantage or no competition exists. As competitors enter the market, prices will lower in order to maintain market share. Bundle pricing offers several products at one lower price that the combined prices of purchasing the products individually. Promotional pricing is where a company uses a special offer to increase sales. These offers can be buy one get one half price, getting a gift free with purchase or receiving a coupon for a discount on a future purchase.
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