Agriculture Reference
In-Depth Information
brought to the market at a price at or just lower than the perceived value, it should receive a
favorable response from customers. The challenge is determining just what the perceived
value of the bundle is to the customer.
Economic value analysis
is one way to formulate a
price that refl ects the economic value in a product. Here, the price that should be charged
for a product is determined by dividing the product's economic value into two parts: the
reference value and the differentiation value.
The
reference value
of a product is the price of a competing product or the closest
substitute. This reference value forms a starting point for the price calculation. The
differentiation value
is the perceived value of the new product's unique attributes. To
determine the price, positive perceived values of attributes are added to the price of the clos-
est substitute (the reference value). Any negative perceived values of attributes are then
subtracted from the reference value to fi nd the total economic value of the product. The
marketer may use this value-based price directly in the marketing strategy, or the marketer
may use this price as a starting point from which to initiate some of the other pricing
strategies presented.
Penetration pricing
In a
penetration pricing
strategy, a product is offered at a low price in order to gain broad
market acceptance quickly. These strategies are used primarily to introduce new products
into a market, particularly price-responsive products that must sell in large volume to reduce
per-unit costs. Penetration pricing can quickly cut into the sales of established competitors,
even in cases where brand loyalty may be a factor. This strategy is also used in situations
when a competitive product is expected to follow quickly, with the logic that the fi rm in
the market fi rst may be able to stake an initial claim on customer loyalty. After a new
product has gained customer acceptance, the price may be gradually increased to a more
profi table level.
Skimming the market
A
skimming the market
strategy is virtually the opposite of penetration pricing. Skimming
involves introducing a product at a high price and making excellent profi ts on the sales
that are made initially. Then, as this relatively limited market becomes saturated, the price
is gradually lowered, bringing the price into a range affordable to more customers. The
appeal of this strategy is it affords the opportunity to maximize profi ts on new products as
quickly as possible. Skimming the market works best with products that are new, unique,
fairly expensive, hard to duplicate quickly, and sold by fi rms that are well known and
respected in the industry.
Discount pricing
Discount pricing
offers customers a reduction from the published or list price for some
specifi ed reason. Volume discounts are common among agribusinesses. The purpose
of a volume discount is to encourage larger purchases, which reduce per unit costs and
promote more sales. Volume discounts can be on a per order basis, but they more com-
monly accumulate throughout the season or year, and may take the form of a rebate at
the end of the season. This kind of discount is frequently associated with customer loyalty
programs.
