PRODUCTION MANAGEMENT (Past Q & A)

PRODUCTION MANAGEMENT

Topic: Past Questions and Answers   

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Question:

Explain the reasoning that underlines each of the following:

a.      Odd number pricing

b.      Pricing below the market price

c.       Pricing lining

SOLUTION:

ODD NUMBER PRICING: Most of the products we buy at the retail level are priced at odd values. For example, N5.98 rather than N6.00, N6.89 rather than N7.00 and so on.  It is no accident that these odd value prices are used rather than their even valued price.  This strategy is based on an assumed psychological force which causes consumers to perceive a slightly lower odd number price as significantly less than its even number counterpart.

PRICING BELOW AN ESTABLISHED MARKET PRICE: It is sometimes preferable for a firm to set price below the current market price for its product group.  Two particular cases of this type are most important. Consider first, the case in which a firm wants to expand its product mix to utilize excess capacity and in which the new product must compete with established brands already on the market. 

Setting the price on its new entry somewhere below the prevailing price of competitors will provide a wedge to help it become established in the market. The rationale for setting price below the market price is clear.  With an elastic demand, a lower price will result in greater total revenue.  This method of pricing is often referred to as “Penetration Pricing” because it provides a mechanism whereby a new product can penetrate an existing market.

 
Penetration Pricing may also bring consumers into the market that may even surprise the firms involved.  If a new product is innovative in some respects, a penetration pricing policy may be helpful in getting innovator and early adopter groups to try the product.  Once the product has gained acceptance in the market place, the firm may try to reduce or eliminate the price differential.

Once more, this can be related to the concept of price elasticity.  This acceptance of the product by consumers implies a growing inelasticity of demand.  The case of setting price below the current market price assumes that the product is essentially the same quality as those already on the market and is sold with the same type of service and warranty and is available through comparable channels. 

PRICE LINING:  This pricing strategy is particularly common in furniture, appliance and department stores.  A particular class of product will be offered in more than one line based on quality or design characteristics.

In all likelihood, at least, three lines will be offered to the prospective consumer, like the: 

Ø  Basic model

Ø  Basic model with added quality and design features

Ø  A top line model with all features 

Price lining has been quite widely used in a variety of situations.  A single manufacturer may produce their product in different lines to appeal to various income groups.