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November 14, 2014 / cbkingston

Pricing and Revenue Streams

Pricing Strategy

A business can choose between two pricing tactics when launching a new product:

  • Penetration pricing means setting a relatively low price to boost sales. It is often used when a new product is launched, or if the firm’s main objective is growth.
  • Price skimming means setting a relatively high price to boost profits. It is often used by well-known businesses launching new, high quality, premium products.
  • Customers. Price affects sales. Lowering the price of a product increases customer demand. However, too low a price may lead customers to think you are selling a low quality ‘budget product’.
  • Competitors. A business takes into account the price charged by rival organisations, particularly in competitive markets. Competitive pricing occurs when a firm decides its own price based on that charged by rivals. Setting a price above that charged by the market leader can only work if your product has better features and/or appearance.
  • Costs. A business can make a profit only if the price charged eventually covers the costs of making an item. One way to try to ensure a profit is to use cost plus pricing. For example, adding a 50% mark up to a sandwich that costs £2 to make means setting the price at £3. The drawback of cost plus pricing is that it may not be competitive.

There are times when businesses are willing to set price below unit cost. They use this loss leader strategy to gain sales and market share.

The above information is sourced from here.

Revenue Streams (7 types):

  1. Asset Sale………………physical products…………………………………….(cars, food)
  2. Usage Fee………………ability to use a service………………………………(minute-based cell phone plans)
  3. Subscription Fee……continuous access to service………………………(membership fees)
  4. Lending, Renting, Leasing..exclusive, limited-time right to a product……..(rental cars)
  5. Licensing……………….permission to use protected IP……………………(commercial use of music, labels)
  6. Brokerage Fees………intermediary services………………………………..(commissions on financial transactions)
  7. Advertising…………….right/space to advertise another product……..(billboards, product placement)

For more information on pricing and revenue, visit here.

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