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Running head: PRICING
Pricing plays an integral role in the marketing mix. Price acts as a source of income and
means of generating profits. Pricing enables an organization to finance costs of production,
distribution, and promotion of a company's product.
From the perspective of a consumer price is merely the cost an individual incurs to
acquire a good or service. Alternatively, for a seller price acts as a source of revenue (Lamb, Hair
& McDaniel, 2014). The cost of a product must incorporate concepts of demand and supply and
also reflect actual and perceived value of the good by the consumer.
Pricing concepts include; cost-based pricing and competition based pricing. Cost based
pricing sums up the value of a product and a fixed or percentage of the aggregate cost to obtain
the retail price of a product. Cost based pricing has three categories namely; cost-plus pricing,
margin cost pricing and target return pricing.
Cost-plus pricing, also known as markup pricing is the summation between average cost
and profit margins of a company. In margin cost pricing, the price of a product is the sum of
variable cost plus the profit margin. For target return pricing, a manufacturer rationally decides
the minimum rate of return he expects to earn.
Competition based pricing is an approach that reflects how an organization expects
customers to interpret its products relative to offers from other competitors. Competition based
pricing has three categories, that is; penetration pricing, entry deterring pricing and going rate
Penetration pricing is a strategy where a new entrant decides to charge a relatively lower
price than other competitors to attract more customers. In entry deterring pricing, a company
lowers the cost of their product to the point where other potential entrants perceive the market as
unattractive. For going rate pricing market players follow the prevailing market price to refrain
from indulging in separate competitive pricing.
Impact of Pricing on the Marketplace