Multiple Pricing, Anchor Pricing

Multiple Pricing

A price multiple is any ratio that uses the share price of a company in conjunction with some specific per-share financial metric for a snapshot on valuation. The share price is typically divided by a chosen per-share metric to form a ratio. Price multiples enable investors to evaluate the market value of a company’s stock in relation to a fundamental metric, such as earnings, cash flow, or book value.

As the name suggests, multiple pricing refers to the practice of offering more than one price for the same product. The supplier charges different prices based on:

• Type of customer
• Ordered Quantity
• Delivery time
• Payment terms etc.

Advantages:

• It helps the customers or buyers to get a better deal and reduces the per-unit price of the product.
• Multiple unit pricing helps in faster liquidation of the products. The stocks are consumed faster, which helps to get more sale per unit of time for the organization.
• It helps new products to establish themselves by providing affordable prices to the customers and providing lucrative prices. This makes the product more economic ergo attractive to the customers.

Disadvantages:

• Dealing with multiple unit pricing is cumbersome in case of record keeping. Multiple unit pricing is difficult to maintain in accounting books.
• Multiple unit pricing reduces the profit margin of the products for the companies. Not only the companies, but it also reduces the profit margins of middlemen like retailers and distributors.

Anchor Pricing

Anchor Pricing is the concept of making a product that was first offered seem cheaper when it put alongside another product. An example of this would be initially offering a customer a product that costs Rs. 300 but then showing and comparing a more expensive alternative, say Rs. 450 to that customer. That first product then acts as an anchor as customers will use that first product as a reference point for selecting a product to purchase. Customers will perceive the price of two products relative to one another, and the customer uses the first product offered as a comparison point for other products as well.

Advantages:

Avoiding risks

Customers enjoy taking risks every now and then, but they are wary when it comes to leaving the pack and walking towards extremes. This is something that is seen when choosing between three different products of different sizes. Customers tend to pick the middle product because it is not the smallest/doesn’t have the least amount of features, and it isn’t the most expensive.

Decisions, decisions, decisions

Customers tend to be very indecisive when it comes to choosing what product to buy when they have many different products to choose from. This can become a problem because customers can walk away if they are unable to decide what product is best for them. Firms can avoid this problem by sticking a ‘most popular’ or ‘customer favourite’ label on the product.

Price perception

The price of a product is relative, it is essentially never cheap or expensive for that matter. Because the price of a product is a relative concept, customers tend to compare one product or service to another. A customer might be on the market for a new computer monitor. That same customer might look at a 32 inch monitor that costs Rs. 20,000 and feel as though it is a little bit too expensive. What retailers will do in this situation is offer another monitor that is 35 inches but costs Rs. 20,000 more. The customer will usually think that the 32 inch monitor is a much better deal and will purchase that monitor. The key point that should be mentioned is that the retailer intended for that to happen, using that Rs. 40,000 monitor as an anchor so that the customer will think that they are getting a bargain when they purchase the Rs. 20,000 monitor.