The Strategy of Setting Price for Products and Services Essay

Introduction

Pricing is a basic and interesting subject in the concern. This paper will be described the scheme of puting monetary values for merchandises and services ; particularly it will concentrate on one specific scheme called monetary value favoritism, which is to bear down different monetary values to different clients for the same or similar merchandise and service. Price favoritism is one of the most effectual scheme to maximise a company’s net incomes when compared with a individual pricing. However, it represents a transportation of value from consumers to companies and people may reason it benefits less to clients than to companies. In the followers, three types of monetary value favoritism will be described, and existent illustrations will be used to exemplify them.

The advantages and disadvantages of monetary value favoritism every bit good as its benefit to consumers and society will be discussed.The first type of monetary value favoritismThe first type of monetary value favoritism is based on two constructs:reserve monetary valueandconsumer excess.For a merchandise and service, the reserve monetary value is defined as the maximal monetary value that a client is willing to pay ( Pindyck & A ; Rubinfeld, 2001, p.371 ) , and the consumer excess is difference between the reserve monetary value and the monetary value the consumer really pays ( Hubbard & A ; O’Brien, 2012, p.98 ) . The end of the first type of monetary value favoritism is to capture the consumer excess and turn it into its net income for a company.For illustration, a tea store sells a good trade name of tea.

Best services for writing your paper according to Trustpilot

Premium Partner
From $18.00 per page
4,8 / 5
4,80
Writers Experience
4,80
Delivery
4,90
Support
4,70
Price
Recommended Service
From $13.90 per page
4,6 / 5
4,70
Writers Experience
4,70
Delivery
4,60
Support
4,60
Price
From $20.00 per page
4,5 / 5
4,80
Writers Experience
4,50
Delivery
4,40
Support
4,10
Price
* All Partners were chosen among 50+ writing services by our Customer Satisfaction Team

For a cup of the tea, the competitory monetary value ( offered by many competitory providers ) and the monopoly monetary value ( offered by few dominant providers ) are $ 3.50 and $ 4 severally. It is supposed that there are three clients to purchase the tea, and the reserve monetary value of these three clients are $ 6, $ 5 and $ 3.5 severally. Based on the competitory market monetary value ( $ 3.

5 ) , their consumer excess would be $ 2.5, $ 1.5 and $ 0 severally.By utilizing the first type of favoritism, the tea store can inquire different monetary values to these three clients which is $ 6, $ 5 and $ 3.5.

By making so the store will sell three cups of the tea, and all consumer excess ( $ 4 ) would be captured. However, if the store sets a individual monetary value $ 4, so it can merely sell two cups of tea, and the 3rd client would be eliminated from service. Therefore, non merely the net income is reduced but besides the figure of clients served is reduced as good.Although it sounds great that a company can increase their net incomes and the measure of merchandises sold every bit good as the figure of clients serviced, in pattern it is difficult to carry on.

There are two grounds: foremost, it is hard to cognize each customer’s reserve monetary value ; 2nd, in order to cognize customer’s reserve monetary value, companies need a batch of attempts in marketing research and probe, which adds excess cost to the merchandise and so reduces the product’s net income.Therefore, it is more suited for some professional people such as tooth doctors, attorneies and accountant s, as they know their clients comparatively good. For illustration, a attorney may offer a decreased service fee to low-income client, but may bear down a higher service fee to upper-income clients as they have the ability to pay. The possible job is some clients who pay higher monetary value may object monetary value favoritism and argue that it represents a transportation of consumer excess from clients to companies, which benefits less to clients than to companies such ensuing an unfairness to rich people.The 2nd type of monetary value favoritismA company can know apart monetary values harmonizing to the measure purchased.

The pattern of puting different monetary values per unit for different measures is calledthe 2nd type of monetary value favoritism or “block” pricing( Pindyck & A ; Rubinfeld, 2001, p.374 ) .There are many companies who use this type of monetary value favoritism such as food market shops, providers of electricity, H2O and natural gas. For illustration, for electric power, consumers are charged different monetary value per kW depending on the measure consumed. It’s usual, a s an case, the first 100 kW of electricity consumed are charged at a higher rate, and after the first 100 kW, consumers are charged at a lower rate per kW.This monetary value scheme allows a company to change over portion of consumer excess into producer’s net income, and at average clip it increases the product’s measures sold and the figure of consumers served. Even though it has greater benefit to the company, it can non be widely used in some concern parts or countries.

For illustrations, in China, it has immense population but limited H2O and power resources, so individual pricing for power and H2O would be more suited than monetary value favoritism. The monetary value favoritism may promote people to utilize more power and H2O ; such may ensue in resources deficit and air pollution, and finally may damage the environment. Therefore, monetary value favoritism should be applied under conditions, and merely if it is used right, so it would make positive impact on the environment and society.The 3rd type of monetary value favoritismThird-degree monetary value favoritismis based on two stairss: spliting consumers into two or more groups and bear downing different monetary values to each group ( Pindyck & A ; Rubinfeld, 2001, p.

376 ) . One group may hold the ability to pay a higher monetary value such as upper-income clients ; another group may merely be able to pay a lower monetary value such as pupils and seniors. Companies besides would bear down clients a higher monetary value if the customers’ demand for it is inelastic such as a service is pressing and it must be done instantly, and charge other clients a lower monetary value if their demand for the service is elastic.This scheme may do monetary value competition among providers to offer price reduction to different groups, such competition may ensue in lower monetary value for merchandises. If it is used by few providers in some period of clip, so it may promote consumers to purchase more merchandises. However, if it is used from broad scope of providers over long period of clip, so it may do the merchandise for good cut down monetary value, and some companies may hold trouble to acquire net incomes.

To pattern this type of monetary value favoritism companies frequently set monetary values based on the consumers’ business, age, income, penchant, clip of usage. Some of them will be discussed in the followers:( a ) Based on business and income: Hubbard and O’Brien ( 2012 ) noted, “In mid-2009, Apple was selling an iMac desktop with a 24-inch show …for $ 1,499” to general public, “but university pupils and module members could purchase the same computing machine from Apple for $ 1,399” ( p.498 ) . In this illustration, apple assumed the fabricating cost of a computing machine is $ 400, so selling one iMac to university user would acquire gain $ 999, and selling one iMac to general user would acquire gain $ 1,099. In that period Apple sold 20,000 iMac to university users and 30,500 computing machines to general public users. The entire net income from these gross revenues is $ 53,499,500 ( $ 999*20,000 + $ 1,099*30,500 ) .However, if Apple used a individual pricing, and if it besides charged $ 1,399 in the general public market, it would sell 32,500 iMac ( Hubbard & A ; O’Brien, 2012, p.499 ) , and so the net income from these gross revenues would go $ 52,447,500 ( $ 999*20,000 + $ 999*32,500 ) .

The difference of the net income made between utilizing monetary value favoritism and puting individual pricing is $ 1,052,000 ( $ 53,499,500 – $ 52,447,500 ) . This illustration shows this scheme increased Apple’s net income. However, from another point of position that the entire iMac sold was reduced from 52,500 ( individual monetary value ) to 50,500 ( monetary value favoritism ) , monetary value favoritism reduced the figure of merchandises made/sold, and in bend it may act upon the figure of people employed and besides may bring forth negative consequence on the society.( B ) Based on penchant and clip: one illustration is that early adoptive parents of new merchandises would pay a higher monetary value, such as new type cell phones, new books, new released music DVDs. Airlines normally charge ticket otherwise harmonizing to clip. During the vacation such as Christmas and New Year, the tickets monetary value is usually higher than other times. Customers sometimes are argue that the air hose gets excess net income by exaction of customer’s excess and leaves really small to clients.DecisionsThis paper provides analysis on three types of monetary value favoritism.

Price favoritism is one of the most effectual scheme to maximise a company’s net income when it is compared with a individual pricing for the merchandises and services. All three types of monetary value favoritism raise a company’s net income, and they all have both positive and negative consequence on the society. I personally think that monetary value favoritism is a world and it is acceptable to many clients in most state of affairss. It exists in our day-to-day life, and it is used widely in assorted industries.

MentionsAguirre, I. , Cowan, S. , & A ; Vickers, J. ( 2010, September ) . Monopoly monetary value favoritism and demand curvature.The American Economic Review, 100( 4 ) , 1601-1615. Department of the Interior: 10.1257/aer.

100.4.1601Armstrong, M. ( 2006, October ) . Price favoritism. Retrieved from hypertext transfer protocol: //else.econ.ucl.

ac.uk/papers/uploaded/222.pdfHubbard, R. G. , & A ; O’Brien, A. P. ( 2012 ) .Microeconomicss( 4th edition ) .

Prentice Hall.Pettinger, T. ( 2013, March 6 ) . Examples of monetary value favoritism. Retrieved from hypertext transfer protocol: //www.economicshelp.

org/blog/7042/economics/examples-of-price-discrimination/Pindyck, R. S. , & A ; Rubinfeld, D.

L. ( 2001 ) .Microeconomicss( 5th edition ) . Prentice Hall.

Round, D. K. , & A ; McIver, R.

P. ( 2006, Jumping ) . Teaching third-degree monetary value favoritism.The Journal of Economic Education, 37( 2 ) , 236-243. Retrieved from hypertext transfer protocol: //www.

jstor.org/stable/30042708Shmanske, S. ( 1991 ) . Price favoritism and monopolistic competition.

Surveies in Economics and Finance, 14( 1 ) , 25-48. Retrieved from hypertext transfer protocol: //dx.doi.org/10.1108/eb028698