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Understanding Pricing Strategies: A Comprehensive Financial Analysis for Entrepreneurs

This detailed analysis explores the financial aspects of pricing strategies crucial for entrepreneurs. It delves into how product pricing is influenced by customer value, cost structures, and various strategies such as cost-plus, mark-up, and break-even analysis. The document outlines different pricing methodologies including penetration pricing, premium pricing, economy pricing, and price skimming, alongside practical examples. Understanding these strategies helps entrepreneurs make informed decisions to enhance market competitiveness and achieve profitability.

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Understanding Pricing Strategies: A Comprehensive Financial Analysis for Entrepreneurs

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  1. Feasibility Analysis: Part 4A Financial Analysis: Estimate Price Paper #3 Entrepreneurship & Innovation

  2. Factors affect price

  3. The product price is determined by the value created. for the customer.

  4. Think about distribution channel

  5. Cost-based strategies • Based on achieving a given margin over and above costs of manufacturing, marketing and distribution. • Cost-Plus: Price = full cost + mark-up (as a % of full cost) • Mark-Up: Price = direct cost + mark-up (as a % of direct cost). This technique is preferred to Cost-Plus for products with a relevant percentage of direct costs on total costs.

  6. Break-Even Analysis: Price = variable costs + fixed costs/quantity.

  7. Pricing strategies Low High Quality Penetration Economy e.g. Store Brand spaghetti Low Price Skimming e.g. New film or album Premium e.g. LVMH High

  8. Pricing strategies • Premium pricing • Uses a high price, but gives a good product/service exchange e.g. Concorde, The Ritz Hotel • Penetration pricing • offers low price to gain market share - then increases price • e.g. France Telecom - to attract new corporate clients (or Telewest cable) • Economy pricing • placed at ‘no frills’, low price • e.g. Soups, spaghetti, beans - ‘economy’ brands

  9. Price skimming • where prices are high - usually during introduction • e.g new albums or films on release • ultimately prices will reduce to the ‘parity’ • Product line pricing • rationale of a product range • e.g. MARS 32p, Four-pack 99p, Bite-size £1.29

  10. Optional product-pricing • e.g. optional extras - BMW famously under-equipped • Captive product pricing • products that complement others • e.g Gillette razors (low price) and blades (high price) • Product-bundle pricing • sellers combine several products at the same price • e.g software, books, CDs.

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