'Penetration Pricing' 1.

Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers toswitch to the new product because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic so a lower price than rival products is a competitive weapon. 2. A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors. The reasoning behind this marketing strategy is that customers will buy and become aware of the new product due to its lower price in the marketplace relative to rivals.

Types of pricing
[edit]Cost-plus pricing Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. This appears in two forms, full cost pricing which takes into consideration both variable and fixed costs and adds a percentage as markup. The other is direct cost pricing which is variable costs plus a percentage as markup. The latter is only used in periods of high competition as this method usually leads to a loss in the long run. [edit]Creaming or skimming In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity - this can be attributed to: their need for the product outweighing their need to economise; a greater understanding of the product's value; or simply having a higher disposable income.

This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.[2] [edit]Limit pricing A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time. In this strategy price of the product become limit according to budget. . [edit]Loss leader A loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole. [edit]Market-oriented pricing Setting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance if the competitors are pricing their products at a lower price, then it's up to them to either price their goods at an above price or below, depending on what the company wants to achieve . [edit]Penetration pricing Penetration pricing includes setting the price low with the goals of attracting customers and gaining market share. The price will be raised later once this market share is gained.[3] [edit]Price discrimination Price discrimination is the practice of setting a different price for the same product in different segments to the market. For example, this can be for different classes, such as ages, or for different opening times. [edit]Premium pricing

Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction. [edit]Predatory pricing Predatory pricing, also known as aggressive pricing (also known as "undercutting"), intended to drive out competitors from a market. It is illegal in some countries. [edit]Contribution margin-based pricing Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on ones assumptions regarding the relationship between the products price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e. to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).. [edit]Psychological pricing Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.00. [edit]Dynamic pricing A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customers willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.[4] [edit]Price leadership An observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers. [edit]Target pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.

Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product. [edit]Absorption pricing Method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-plus pricing [edit]High-low pricing Method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.[5] [edit]Premium decoy pricing Method of pricing where an organization artificially sets one product price high, in order to boost sales of a lower priced product. [edit]Marginal-cost pricing In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all. [edit]Value-based pricing Pricing a product based on the value the product has for the customer and not on its costs of production or any other factor. This pricing strategy is frequently used where the value to the customer is many times the cost of producing the item or service. For instance, the cost of producing a software CD is about the same independent of the software on it, but the prices vary with the perceived value the customers are expected to have. The perceived value will depend on the alternatives open to the customer. In business these alternatives are using competitors software, using a manual work around, or not doing an activity. In order to employ value-based pricing you have to know your customer's business, his business costs, and his perceived alternatives. [edit]Pay what you want

Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity. Giving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. While most uses of pay what you want have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use. [edit]Freemium Freemium is a business model that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium". It has become a highly popular model, with notable success. [edit]Odd pricing In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the buyers/consumers no gap for bargaining as the prices seem to be less and yet in an actual sense are too high, and takes advantage of human psychology. A good example of this can be noticed in most supermarkets where instead of pricing at $10, it would be written as $9.99. This pricing policy is common in economies using the free market policy.

Components of pricing
Part of the process of pricing your product is including the costs of producing that product. Those costs include the direct and indirect costs associated with producing your product. Direct Costs Direct costs are costs that can be easily traced to a particular object (also called a cost object), such as a product, the raw materials used to manufacture a product, or the labor associated with the work to produce the product. If your company produces a widget and a production manager is hired to oversee production of that widget, then the production manager's salary is a direct cost. If you own a carpet cleaning business, which is a service organization, and you hire workers just to clean carpets, their wages are direct costs. Direct costs are often, but not always, variable costs. Variable costs increase as more units of the product are manufactured. As a result, raw materials are variable and direct costs. But, if there is a supervisor overseeing the manufacturing of this particular product, their salary is probably the same regardless of how much of the product is manufactured, so it is a fixed cost.

Direct Materials and Direct Labor The most common direct costs are direct materials and direct labor. Direct materials are the materials that can be specifically identified with the product. If you are a furniture maker, your direct materials would be the wood that goes into making your furniture along with the nails, varnish, and other products that you apply specifically to making the furniture. But, you wouldn't count the gasoline that the loggers use to drive the trucks to get to the forest to cut down the trees as direct materials. A method of tracking the direct cost of materials has to be chosen, generally LIFO or FIFO. Direct materials are all the materials required to produce a product such as raw materials. Direct materials costs are assignable to that particular product, such as the cost of each raw material. Indirect Costs Indirect costs are those which affect the entire company, not just one product. They are costs like advertising, depreciation, general supplies for your firm, accounting services, etc. They are services, and costs, for your entire firm, not just one product. Indirect costs are usually called overhead. Overhead is the ongoing cost of operating a business that can't be associated with just one product or service. Indirect costs can be fixed or variable costs. Often, they are fixed costs with an example being the rent you pay on your building. Sometimes, they are variable. An example would be your electricity or water bill which can change monthly. Indirect Materials and Indirect Labor Materials such as tools, cleaning supplies, and office supplies make production of a company's products possible but can't be assigned to just one product. These are classified as indirect materials or the overhead portion of the material your company uses. Indirect materials costs are usually variable because materials are based on the level of production. Labor costs that make production of a product or products possible but can't be assigned to one particular product are classified as indirect costs. An example of an indirect labor cost would be the salary of a manager as that manager would manage the entire operation and not just one product line. The next issue is whether indirect labor costs are fixed or variable costs. In this case, if the salary is a monthly or annual salary and does not change based on production, it is a fixed cost. If it is based on production, it is a variable cost. It is important for a business owner to correctly classify direct and indirect costs. One reason is because overhead, your indirect costs, are tax-deductible items. Some of the overhead expenses will be in be included in cost of goods sold, business deductions, inventory, and other categories.

Gross profit
Unless you are in a sales industry that pays you only on the number of sales you close or based solely on your sales revenue, you should know everything there is to know about gross profit. The brief definition

is that gross profit is the difference between what something was sold for and the cost of that which was sold. For example,a widget that costs $1.00 to manufacture, ship, package and process and sells for $1.50, the gross profit in the deal would be $.50. Unfortunately for sales professionals, their cost is seldom the actual cost of the product. Sales companies usually "pack" the cost of their products. This means that while the total cost of a widget may be $1.00, the "cost basis" to the sales professionals will probably be closer to $1.20. Using the example above, if you sold a widget for $1.50 and your cost basis is $1.20, your gross profit is now only $.30. The company's profit will still be $.50 but they need only pay you a percentage of the $.30. True cost of goods or services are often static while sales cost is a dynamic number, since the company has some built in "wiggle room" in the pricing. Also Known As: Points. Margin. Profit.

Direct marketing
Direct marketing is a channel-agnostic form of advertising that allows businesses and nonprofits organizations to communicate straight to the customer, with advertising techniques that can include Cell Phone Text messaging, email, interactive consumer websites, online display ads, fliers, catalog distribution, promotional letters, and outdoor advertising. Direct marketing messages emphasize a focus on the customer, data, and accountability. Characteristics that distinguish direct marketing are: 1. Marketing messages are addressed directly to the customer and/or customers. Direct marketing relies on being able to address the members of a target market. Addressability comes in a variety of forms including email addresses, mobile phone numbers, Web browser cookies, fax numbers and postal addresses. 2. Direct marketing seeks to drive a specific "call to action." For example, an advertisement may ask the prospect to call a free phone number or click on a link to a website. 3. Direct marketing emphasizes trackable, measurable responses from customers regardless of medium. Direct marketing is practiced by businesses of all sizes from the smallest start-up to the leaders on the Fortune 500. A well-executed direct advertising campaign can prove a positive return on investment by showing how many potential customers responded to a clear call-to-action. General advertising eschews calls-for-action in favor of messages that try to build prospects emotional awareness or engagement with a brand. Even well-designed general advertisements rarely can prove their impact on the organizations bottom line.

Intermediated Market
A situation in which one or more financial institutions stand between counterparties in a transaction. For example, in the sale of a house, a bank usually intermediates the market by providing a mortgage to the homebuyer. In some non-traditional transactions, a bankmay buy a product (e.g. corn) and immediately re-sell the corn for a profit to a third party. Most transactions requiring a loan to one of the parties are de facto intermediated markets. See also: Murabaha.

Intermediation
Definition Brokeragefunction (see broker) which brings together seekers and providers of goods, information, money, etc. Need for intermediation occurs due to the imperfect nature of markets and everyday situations where the complete ('perfect') knowledge about providers and seekers (and about what they seek) is not available to everyone. Definition of 'Cash Conversion Cycle - CCC' A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Also known as "cash cycle." Calculated as:

Where: DIO represents days inventory outstanding DSO represents days sales outstanding DPO represents days payable outstanding 'Cash Conversion Cycle - CCC' Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how

quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line. Replenishment Cycle The replenishment cycle occurs at the retailer/distributor interface and includes all processes involved in replenishing retailer inventory. It is initiated when a retailer places an order to replenish inventories to meet future demand. A replenishment cycle may be triggered at a market that is running out of stock of detergent or at a mail order firm that is low on stock of a particular shirt. The replenishment cycle is similar to the customer order cycle except that the retailer is now the customer. The objective of the replenishment cycle is to replenish inventories at the retailer at minimum cost while providing high product availability. The processes involved in the replenishment cycle include: Retail order trigger Retail order entry Retail order fulfillment Retail order receiving Retail Order Trigger. As the retailer fills customer demand, inventory is depleted and must be replenished to meet future demand. A key activity the retailer performs during the replenishment cycle is to devise a replenishment or ordering policy that triggers an order from the previous stage. The objective when setting replenishment order triggers is to maximize profitability by ensuring economies of scale and balancing product availability and the cost of holding inventory. The outcome of the retail order trigger process is the generation of a replenishment order that is ready to be passed on to the distributor or manufacturer Retail Order Entry. This process is similar to customer order entry at the retailer. The only difference is that the retailer is now the customer placing the order that is conveyed to the distributor. This may be done electronically or by some other medium. Inventory or production is then allocated to the retail order. The objective of the retail order entry process is that an order be entered accurately and conveyed quickly to all supply chain processes affected by the order. Retail Order Receiving. Once the replenishment order arrives at a retailer, the retailer must receive it physically and update all inventory records. This process involves product flow from the distributor to the retailer as well as information updates at the retailer and the flow of funds from the retailer to the distributor. The objective of the retail order receiving process is to update inventories and displays quickly and accurately at the lowest possible cost. E-commerce I. Definition Electronic commerce, commonly known as e-commerce, consists of the buying and selling of products

or services over electronic systems such as the Internet and other computer networks. The World Trade Organization defines e-commerce as, "e-commerce is the production, distribution, marketing, sales or delivery of goods and services by electronic means." The Organization for Economic Co-operation and Development (OECD) defines e-commerce as commercial transactions, involving both organizations and individuals, that are based upon the processing and transmission of digitized data, including text, sound and visuals images and that are carried out over open networks (like, the Internet) or closed networks (like, AOL or Mintel) that have gateway onto an open network. E-commerce may thus be defined as those commercial transactions carried out using electronic means, in which goods or services are delivered either electronically or in their intangible or tangible form. Kinds of E-commerce E-commerce is basically of two kinds: Indirect e-commerce (electronic ordering of goods both intangible and tangible); and Direct e-commerce (exchange of goods online or using electronic means) Indirect e-commerce involves ordering of goods. Delivery of such goods cannot be done online. Direct E-Commerce - refers to conducting financial transactions online. It may include providing online ordering and payment for publications or research services, where payment is usually made online, while delivery of the products or services is done offline. 2. Indirect E-Commerce - refers to using the web to make money without collecting actual payments on your web site. For example, online promotion leading people to visit your library or use its services would be considered indirect e-commerce. 3. Digital E-Commerce - refers to activities taking place exclusively on the Internet. Payment and delivery of products and services both take place in an electronic medium. An example would be content like text, images, video, or services like consulting and research that are purchased (e.g., via a credit card) and delivered (e.g., via e-mail) online by your library.