Parokonnyi A.A., Volkova V.V., Mudrenko A.A.

Oles Honchar Dnipropetrovsk National University, Ukraine

THE PRINCIPLES OF CHOOSING AN ENTERPRISE PRICING STRATEGY

One of the most important features of market economy, alongside with the freedom of an entrepreneurial activity and competition, is market pricing, in other words a price formation is based on the interaction between supply and demand. The issue of pricing is very important, because prices have a large influence on the movement of material flows, the distribution of the mass of commodities and the level of enterprises’ profitably.

There are plenty of approaches to a price determination as an economic category, it is caused by its inconsistency. For example, on the one hand, a price is a certain amount of money, for which a seller agrees to sell and a buyer is willing to buy one unit of a commodity. On the other hand, a price is money terms of commodities value. As far as we know, any price includes certain elements: product costs, profit of an enterprise, excise tax (if a product is excised), value-added tax, various delivery and trade allowance. The product cost is the most meaningful element in price make-up for an enterprise which produces goods, because first of all it determines the profitability of any commodity. Apart from product costs, an enterprise is very interested in a profit, because it is an important characteristic of a commercial organization successful activity and one of the enterprise’s purposes.

Thus, the issue of pricing is extremely important for an enterprise. The pricing process consists of choosing pricing policy and strategy by an enterprise. Let’s clarify the difference between these two concepts. The pricing policy is a broader concept, it is the combination of the activities and strategies, which the enterprise uses to set the price for products sold to achieve their long-term purposes, such as the enterprise’s further existence, the quality leadership and others. The price strategy is one of the elements of price policy, and it is oriented to the achievement of enterprise’s short-term purposes, like the temporal profit maximization, the maximization of sales, “market skimming”, etc.

Let us consider the types of the pricing strategies and the specific of their using. The most simple and logical pricing strategy is the cost-plus. According to this strategy a price is determined as the sum of average costs, costs per product unit, and the profit margin which is built into the price of a product unit. This pricing strategy is the most popular and is used by many enterprises in various sectors of the economy. However, this pricing strategy has some drawbacks. It doesn’t take into account the influence of the external environment (demand, competition) and the total profit is strictly dependent on the volume of products sold.

Another type of the pricing strategy based on the cost is the target price strategy. In accordance with this strategy it doesn’t matter how prices or sales change, but the profit margin should be constant. Then the price is calculated by the formula:

 , (1)

where  is a variable cost per product unit;

 is fixed costs of production on these commodity for specified time (a quarter, a year);

Ppro is the total amount of a profit that the enterprise wishes to receive for the same time period;

N is sales of production in quantity terms.

This strategy is mainly used by corporations or enterprises, which serially produce cheap commodities.

The next type of the pricing strategy is a strategy of high prices. The purpose of this strategy is to receive an excess profit by “market skimming” from consumers for whom this commodity is of great value and who are ready to pay for it more than the market price is. As the rule, companies use the pricing strategy of high prices for new products which don’t have any analogs; for commodities which are oriented to rich consumers, as well as for goods that have no long-term prospect for mass marketing.

Similar in meaning to the strategy of high prices is the strategy of average prices and the strategy of low prices. The strategy of average prices consists in setting prices at an average price level in the market. This pricing strategy is used for any stage of a product lifecycle and it considers receiving a profit as a long term prospective. Many companies prefer to afford this strategy in the oligopoly market, because it helps to avoid “price war”. The purpose of the low prices strategy is also to receive long-term profits. It is used for the market penetration, to increase a company’s market share, to load the production capacity.

The strategy of reduced prices is used at the end of goods lifecycle, it applies different discounts in order to increase sales. This strategy is actively used in all spheres of economic activities.

The essence of the strategy of “following the leader” implies taking into account the industry or market leader pricing, meanwhile a producer price may differ from the price of a leadership company, but within certain limits which depend on a quality and technology product advantage. This price strategy is used more often in industries, which actively use scientific progress, for example in the instrument-making industry and the engineering industry.

There are many other widely-used pricing strategies. An enterprise takes decisions as for using a certain pricing strategy based on purposes it wishes to achieve. Often an enterprise uses several pricing strategies simultaneously to achieve goals. When a company chooses a pricing strategy, it must obey the rules of the market, in which it manufactures and sells its products. Besides, factors related to the conditions and the influence of the enterprise external environment play a key role.

Literature:

1. Есипов В. Е. Цены и ценообразование: учебник для вузов. – 3-е изд. / В. Е. Есипов. – СПб.: Питер, 2000. – С. 208-294.

2. Покропивный С. Ф. Экономика предприятия: учебник / С. Ф. Покропивный. – К.: КНЭУ, 2003. – С. 486-496.