Saturday, June 20, 2009


(1).Special orders
A special order is a one-off revenue earning opportunity. These may arise in the following situations.
  • When a business has a regular source of income but also has some spare capacity allowing it to take on extra work if demanded. For example a brewery might have a capacity of 500,000 barrels per month but only be producing and selling 300,000 barrels per month. It could therefore consider special orders to use up some of its spare capacity.
  • When a business has no regular source of income and relies exclusively on its ability to respond to demand. A building firm is a typical example as are many types of subcontractors. In the service sector consultants often work on this basis.
The reason for marking the distinction is that in the case of (a), a from would normally attempt to cover its longer-term running costs in its prices for its regular product. Pricing for special orders need therefore take no account of unavoidable fixed costs. This is clearly not the case for a firm in (b)’s position, where special orders are the only source of income for the foreseeable future.
The basic approach in both situations is to determine the price at which the firm would break even if it undertook the work, that is, the minimum price that it could afford to charge. It would have to cover the incremental costs of producing and selling the item and the opportunity costs of the resources consumed.

New products
A new strategy will depend largely on whether a company’s product or service is the first of its kind on the market.

  • If the product is the first of its kind, there will be no competition yet, and the company, for a time at least , will be a monopolist. Monopolists have more influence over price and are able to set a price at which they think they can maximize their profits. A monopolist’s price is likely to be higher, and his profits bigger, than those of a company operating in a competitive market.
  • If the new product being launched by a company is following a competitor’s product onto the market, the pricing strategy will be constrained by what the competitor is already doing. The new product could be given a higher price if its quality is better, it could be given a price which matches the competition. Undercutting the competitor’s price might result in a price war and a fall of the general price level in the market.

(2).Market penetration pricing.
Market penetration pricing is a policy of low prices when the product is first launched in order to obtain sufficient penetration into the market.
A penetration policy may be appropriate in the following circumstances.

  • If the firm wishes to discourage new entrants in to the market.
  • If the firm wishes to shorten the initial period of the product’s life cycle in order to enter the growth and maturity stages as quickly as possible.
  • If there are significant economies of scale to be achieved from a high volume of output, so that quick penetration into the market is desirable in order to gain unit cost reductions.
  • If demand is highly elastic and so would respond well to low prices.

Penetration prices are prices which aim to secure a substantial share in a substantial total market. a firm might therefore deliberately build excess production capacity and set its prices very low. As demand builds up the spare capacity will be used up gradually and unit costs will fall; the firm might even reduce prices further as unit costs fall. In this way, early losses will enable the firm to dominate the market and have the lowest costs.

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