Target return on investment (ROI) pricing

Pricing strategy is the policy a firm adopts to determine the price that yields its target rate of return on investment. Price is an important factor in the success or failure of a business. It helps establish and maintain a firm’s image, competitive edge, and profits.

In industries that require a high capital investment such as automobile manufacturers and telecommunications, electricity, and gas service providers, target return on investment pricing is adopted as a safeguard to recuperate the costs of setting up complex infrastructure. It is a method wherein the firm determines the price in such a way that it ultimately helps organizations in achieving the ultimate goal or return on the capital employed.

The formula used to calculate the price includes a percentage return on investment that varies with different volumes of production in a given period. The price is set to such a degree that the ultimate goal of achieving corporate profit objective is met if sales continue to run at a given rate.
Target return on investment (ROI) pricing

What does it mean with Skimming Pricing Strategy?

Pricing is the main step in marketing planning that generates revenue. Besides other factors, such as product quality and performance, brand image, distribution channels, and promotion plans, price plays a main role in encouraging customers to buy products. By manipulating the price, the product provider can directly

communicate with the consumers and balance the average profit per unit and the sales, so that the goals in targeted indices (profit, market share, etc.) can be achieved.

In practice, penetration and skimming are two main pricing strategies that are commonly used. Penetration refers to using low price to “penetrate” the market and promote large sales shortly after the product launching.

The objective of price skimming involves charging a high price in the introductory stage for a short time where a new, innovative, or much-improved product is launched onto the market in order to grab the high profits from the market. The objective is to skim off consumers who are willing to pay more to have the product sooner. Prices are lowered later when demand from the early customers falls or competitors introduce the same product at a lower price.

Market skimming is a very important pricing strategy for the companies making innovative and technology-based products. Market skimming pricing can be best practiced when the company is highly reputable, providing great quality and innovative products and the customers give a great value to the introduced technology and readily adopt it.

Price skimming is used by many companies, especially in the automobile, mobile phone, TV, laptop, and other luxury industries. The examples in practice are also typical and well known, such as the skim pricing adopted for iPhone series, and the penetration pricing strategy used by Sony for its PS3.

A company should use skimming strategy, when the demand of the new products is unsure, the company has spent much on the research and development for making that product, and when it wants to position its products strategically among the competitor’s similar products or when its product is so much innovative that the market is expected to mature very slowly. The high prices of the new markets will also help the company to segment the market. Price skimming is not a viable long-term pricing strategy, as competitors eventually launch rival products and put pricing pressure on the first company.
What does it mean with Skimming Pricing Strategy?

Pricing strategy

In today’s marketplace, competitive pricing is important for attracting and retaining customers. Consequently, a well planned pricing policy pays a critical role in market-oriented strategic planning.

It is based on demand for the product and the cost of producing it. Some special considerations can also influence the process. Pricing strategy involves the systematic manipulation or planning or pricing decisions and policies over a period of time in the context of achieving the broader objectives contained in corporate and marketing plans.

Companies must consider different pricing strategies when selecting prices. ‘Pricing to penetrate’ is a pricing strategy that uses a low profit margin to penetrate the market. It is designed to grab market share quickly.

Market share strategy – use to take share points away from competition.

While ‘skimming the cream’, on the other hand, is a strategy that uses high pricing to obtain high profits.

High option pricing strategy used when a product line is declining and competition is minimal or when the product line is new and there is little competition. This allows maximization of profits and relates to skimming strategy.
Pricing strategy