Similarly, is a major disadvantage of cost plus pricing strategy? Promotional Pricing is a sales promotion strategy in which the company brings down the price of an item considerably for a very small period of time. Your email address will not be published. Your small business can gain market share by setting prices lower than the competition, but you may not be able to sustain that practice. Advantages and Disadvantages of Introductory pricing . Under this strategy company initially sets low price for its product or service and then gradually increase the price once the … What Is Bundle Pricing? Cost-based pricing is just one of a few strategies we'll be covering. The biggest disadvantage of penetration pricing is that company is sacrificing the profit in initial phase when product is new and there is enthusiasm and demand from customers for the product. Consumers associate low price with low quality, particularly when the brand name is not familiar. The ability to fluctuate prices gives companies using this strategy leverage but can also run the risk of unstable profits. The price should be used in conjunction with the other elements of the marketing mix. The price and quality relationships may bear adverse implications. Terms in this set (14) Cost plus pricing + + simple and quick to calculate + good way to ensure that bus covers the cost and make profit. Pricing Strategies Advantages and Disadvantages. Posted by Catherine Shaw on March 8, 2018 0 Comments. There are two types of pricing strategy commonly used by business owners such as penetration and skimming. Since psychological pricing strategies are based on the belief that customers are buying on impulse rather than well-researched thoughts, customers who thoroughly think before purchasing will recognise manipulative pricing schemes. Psychological pricing is only effective when demand … 3. These methods ignore demand and the price elasticity of demand In our next post we'll look at the pros and cons of value-based pricing and its unique benefits. In other words, you have to take market conditions into consideration to avoid selling yourself short. Also to know is, what are the advantages and disadvantages of value … jennywhyu. There are two basic bundle pricing strategies, which are pure bundling and mixed. You could lose credibility when customers figure that you use psychological pricing strategy with outright greediness. £100. If you market yourself as having everyday low prices, you will encounter business problems that you have not anticipated. 2. As we’ve just identified, project management and strategic, actionable decisions go into setting the price of a product. Prices are based on three dimensions that are cost, demand, and competition. Match. ADVERTISEMENTS: An organization has various options for selecting a pricing method. But you must be careful to avoid selling yourself short and damaging your reputation. All you need is to get one good viral buzz going and you’ll sell out of whatever that previously slow-moving item was. The psychological pricing strategy advantages and disadvantages provide ideas that can help businesses with their pricing without sacrificing profit margins. ... gaining an advantage in pricing. After all, in their minds, they just scored the item for half price. Businesses often use discount pricing strategy to … Brand loyalty discourages the consumer from trying out other new brands which possibly be more satisfying. The dynamic pricing strategy is not to be confused with other pricing strategies like differential pricing. Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional £50 of profit on top of the unit cost of production. Disadvantages: Pricing products too low can hurt profits if your revenue doesn't cover production costs or other expenses. Your small business can gain market share by setting prices lower than the competition, but you may not be able to sustain that practice. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. How to Turn Your Carpentry Business into a Success. Disadvantages of cost plus pricing 1. Pursuing a discount pricing strategy increases the chance that your product will be perceived as lower in … Not every company can use premium pricing to increase its sales as it cannot be applied for the purchase of all types of products and services. You may find it difficult to introduce higher-priced and higher-quality lines of products, because customers who want higher quality may not believe you can offer exceptional goods. Therefore, you must use various strategies to set the pricing for the product; Conclusion. The constant struggle to make up for lower prices by selling higher volumes can strain your operation. STUDY. Business . By now, you might have had a clear cut idea of the advantages and disadvantages of competitive pricing. Bundle pricing has many advantages. Once you establish a reputation for having everyday low prices, you may find that customers suspect the quality of your products. 4. Disadvantages Marketing expenses : As the strategy relies heavily on sale promotions, it requires strong marketing efforts and incurs significant advertising expenses. As very few people buy the product, the brand loyalty of the product may suffer. Test. Savvy store owners, taking this into consideration, will often markup their retail prices before posting the  “up to 70 percent off — everything must go” signs. 19. If quick sales do not take place, funds will be locked up unnecessarily. When used sparingly as a way to liquidate old inventory or introduce consumers to your products or services, it can be effective. Figure-4 shows different pricing methods: The different pricing methods (Figure-4) are discussed below; […] Comparison-shopping is easier now than at any other time in history. The guarantee of a target rate of return creates little incentive for cutting cost or for increasing profitability through price differentiation. Price skimming: Setting the price high initially and then lowering as competitors enter the market. Price Skimming. As with other pricing, this strategy has some advantages and disadvantages. People love thinking they’re getting deals so much they didn’t respond to the reduced prices, even though they were lower than Penney’s competitors’. Still other merchants employ this tactic as part of their regular business model. For example, when you offer customers your own new private label's product. Intro strategy, in this case, is a crucial part of taking deep root for a product or a brand in the market. You can get a competitive price for the product, but you also must focus on the quality to retain the customer loyalty. List of the Disadvantages of Psychological Pricing 1. The organization can use any of the dimensions or combination of dimensions to set the price of a product. Business . The danger of a best-cost provider strategy is that a company using it will get squeezed between the strategies of firms using low-cost and differentiation strategies. Required fields are marked *. Disadvantages: Premium pricing strategies are difficult to initiate and maintain. Prices increase as shipping distances increase. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." High prices may not evoke quick sales. Created by. When you jack up the price of a slow moving item by 50 percent, then put it on sale at 50 percent off, many shoppers will think they’re getting an incredible deal. All rights reserved. Advantages and Disadvantages of High-Low Pricing. 2. 1. The paper ends with a conclusion about how the businesses should select the most suitable pricing strategy for themselves. Shoppers go for this even when they know the deal isn’t as significant as it looks. Grab your free guide to pricing strategies! Once you advertise everyday low prices, you cannot put products on sale. This means you’ll have to employ the strategy pretty much all the time—at which point it will lose its bite. Optimizing its advantages and minimizing the disadvantages lies in your business model and marketing strategies. Step by step guide on how to play online slots, Here Are The IT Factors You Need To Prepare For In The New Year. Wherever you fall in terms of this maneuver, it’s useful to consider the pros and cons of the markup/markdown pricing strategy. A disadvantage of the cost leadership strategy is that technology can threaten the firm's position with competitors offering new products or less expensive manufacturing processes. He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America. 5. Although this blog post looked at both the advantages and disadvantages of dynamic pricing strategy, there are definitely workarounds to the disadvantages. How a Poorly Implemented Discounting Strategy Can be Harmful for B2B Sellers. Flashcards. The Disadvantages of an Everyday Low Pricing Strategy. If you cannot get low-enough prices from vendors, you may have to sell products at a price that does not leave you enough profit. Every e-commerce strategy has its advantages and disadvantages, and competitive pricing has no exemption from it. Unit and branding costs will likely be high, while sales volumes will be low. 1. Now, let's have a look at some of the advantages and disadvantages that this type of pricing strategy offers. The price system and I assume you mean the free price system, is very important in an economy. Profit- & Cost-Oriented Pricing Strategies, Privacy Notice/Your California Privacy Rights. Cost plus pricing method refers to that pricing strategy under which the company adds all costs which has gone into making a product like raw material, labor and then firm add some percentage of profit margin to arrive at a price for a product. For example, department stores often find it hard to meet (and beat) competition from discount stores, catalog retailers, and furniture warehouses because of their commitment to cost-plus pricing. disadvantages of different pricing strategies and then to build its own pricing strategy 13 with the consideration of its company vision and mission and customers ’ expectation As with every pricing method, the high low strategy has its pros and cons. The fourth section explains various pricing strategies whereas the next section discusses advantages and disadvantages of various pricing strategies. Among the gains you can get from the introductory pricing … Differential pricing refers to the pricing of the products based on the customer’s behaviour and characteristics such as previous purchases and spending ability. Evan Carmichael 157,324 views. A major disadvantage of cost-plus pricing is its inherent inflexibility. Let’s see what each of them means and how you can apply them. These promotional pricing strategy advantages and disadvantages let us see how short-term gains can be beneficial to an organization. The paper ends with a conclusion about how the businesses should select the most suitable pricing strategy for themselves. The fourth section explains various pricing strategies whereas the next section discusses advantages and disadvantages of various pricing strategies. If anything, the disadvantages … While this discount pricing strategy may help in the short term for month-end inventory reduction, it trains customers to hold off on making purchases until the next sale comes around. Fixed pricing is a strategy in which a price point is established and maintained for an extended period of time. 12 different pricing strategies for your small business to consider. Discount Pricing Strategy – Advantages & Disadvantages of Discounts. Cost-plus pricing: The selling price is determined by adding a markup to the unit cost. Brexit: new obstacles to overcome for Theresa May, Upcoming RoFx IPO is Turning Heads: Warren Buffett Allegedly Interested, Using custom stickers to help grow your new startup, What you need to know about the no deposit bonus. 4. It’s remarkable how a business will suddenly get an unprecedented influx of customers when it runs a “going out of business” sale. This can present problems if you want to move items that do not sell well. Value-based pricing is not for everyone, but when properly executed, can drive profit, build value to your brand, and establish customer loyalty, which leads to success. 3. 1. influencing the pricing strategy as a whole. Competitive pricing: Setting a price based on the price of the competition. You have to constantly monitor the volume of sales of greatly reduced products to see if you are getting your original investment back on those products. Advantages and Disadvantages of Dynamic Pricing. The author weighs in on the pros and cons of various pricing strategies and the suitability of each vis-à-vis the nature of a given assignment. Disadvantages of penetration pricing. Once you reach your absolute bottom price, you will lose your competitive edge if your competition can still beat your prices. It leads to some kind of monopoly known as brand Monopoly. Competitors can also threaten a cost leader's position by developing differentiated products and services. In this video I explain the Advantages and Disadvantages of Pricing Strategies. The ability to fluctuate prices gives companies using this strategy leverage but can also run the risk of unstable profits. Bundle pricing is a proven pricing strategy that involves putting together two or more products, and offering them for sale in one combined package. Gravity. If a product is supposed to be high-end, it should be priced accordingly. The paper ends with a conclusion about how the businesses should select the most suitable pricing strategy for themselves. Though you may be willing to sell products below cost to clear out inventory, your customers may mistakenly think that you have room to lower prices on other items. Yes, there are some very real opportunities to win here. It thus is not sufficient to place sole emphasis on ensuring that sales revenue at least covers the cost incurred (e.g. If customers know you’re always discounting, rather than just taking your word for it and buying at the markdown price, they’ll comparison shop to see where you really fall. Given below are some of the advantages and disadvantages of cost plus pricing – Pure bundling is when products are only sold together. Either of the two pricing strategy has its own advantages and disadvantages. The Advantages and Disadvantages of Fixed Pricing and Dynamic Pricing. What Is the Most Important Factor in Product Price Setting? Similar Asks. Pros and Cons of the Markup/Markdown Pricing Strategy. Disadvantages of Premium Pricing Strategy. List of the Disadvantages of a Focus Strategy. Fixed pricing is a strategy in which a price point is established and maintained for an extended period of time. They will then brag to their friends about the great deal they just got at your store and that friend might come around looking to take advantage of your generosity as well. Advantages: Competition-oriented pricing can keep price competition down, which could otherwise damage a business if prices are set too high.It can prevent your business from losing market share to a competitor. Although this blog post looked at both the advantages and disadvantages of dynamic pricing strategy, there are … Reasons for and against using high low pricing include-Advantages When you and a nearby competitor price products too … This site uses Akismet to reduce spam. Turns out, the excitement of buying something on sale outweighs paying the regular price — even when the regular price is lower than the sale price somewhere else. There are advantages and disadvantages to it. A business calculates the cost to create products. The premium pricing works better for products like bags, shoes, apparel, mobile phones, watches, and cars, etc. In this video I explain the Advantages and Disadvantages of Pricing Strategies. Price Skimming. At the same time, your product's high price tag means that you will be undercut by discount rivals. Make it clear to your customers that you offer low prices, not the lowest prices. Read Next → Business . What are the advantages and disadvantages of bundle pricing? Discourages from Trying other Products. Stakeholders easily become passive towards pricing, facilitating laziness and an atrophy of profits as the market and customer continues to change. © 2019 www.azcentral.com. Disadvantages of Discount Pricing. Even though there are risks involved with this marketing strategy, it can also be an effective way to increase profits without a big investment. Consumer expectations : The pricing strategy runs the risk of encouraging consumers to always wait for a … Disadvantages of price skimming. Cost based pricing works well for larger companies, as they can better withstand the race to the bottom. Summary: Understand Your Market Before Using Price Skimming. In some cases, products don’t exist outside the bundle. Reasons for and against using high low pricing include-Advantages Zone Pricing. Promotional pricing is similar to bundling price, however, here the merchandise are put together so as to make the client use the bundled merchandise for the first time. The disadvantage in cost based pricing for services is that it … High profit margins lure competitors selling similar products. That how strong the vulture effect can be. Doing so incites something of a “vulture effect” wherein scavenging shoppers—who previously would not have considered patronising the store—swarm it in the hopes of getting something for next-to-nothing. Key Words: Pricing Strategies, Marketing Mix, Cost Plus Pricing, Demand Oriented Pricing. Here are ten different pricing strategies that you should consider as a small business owner. People Love a ‘Win” When you jack up the price of a slow moving item by 50 percent, then put it on sale at 50 percent off, many shoppers will think they’re getting an incredible deal. You have to choose your markdown items carefully. Leads to Monopoly. Spell. By Tom "Bald Dog" Varjan. Unit cost. Pricing of a product plays an essential role in deciding the value of a product in the market.Companies use different pricing strategies to introduce a product in the market depending on various factors like the target audience of the product, income level of the target audience, demographics, image of the product and company in the market.. Advantages of Competitive Pricing Strategy Among the advantages of premium pricing are: First is the profit margin is thicker. 358-360), which can be diverse in an international context.. How Discounts Pricing Strategy can Boost or Increase Retail Sales. The strategy related to competitive pricing which may also be called the strategy of market-oriented pricing is such an approach where different online retailers are setting their prices online which are based on certain competition. Your email address will not be published. These pros and cons of the markup/markdown pricing strategy should be taken into consideration before pursuing it. 1. Advantages and Disadvantages of High-Low Pricing. After all, in their minds, they just scored the item for half price. To buy one product and get a new kind of product for free is what this kind of pricing concentrates on. The goal is to produce goods or services at the lowest possible cost by organizing every potential resource around the current production methods. In the long run, people may shift their loyalty to low priced goods. Learn how your comment data is processed. As with every pricing method, the high low strategy has its pros and cons. PLAY. Mark-up. ... 4-Competitive pricing strategy can be combined with some other pricing strategies to … You will rely on the competitors’ pricing; you would sometimes end up with losses. Pricing method. 1. What is Logistics, and What Does it Mean for Your Business? In B2B sales, it’s a mistake to offer discounts too easily. Your competitors can lower their prices to beat yours, and you may find yourself in a battle to see who sells the cheapest and still makes a profit. It is created by gradually creating brand loyalty and image of the product … After analyzing the pros and cons, we can see that price skimming is a notable method for pricing an innovative new product, provided that you’re wary of the pitfalls. Brought to you by Harpoon Free Download. Promotional Pricing Strategy . Promotional pricing is one of the most powerful sales strategies there is. Disadvantages of Price Skimming Competitors This strategy can backfire if there are close competitors and they also introduce the same products at a lower price than consumers will think that company always sells the products at higher prices which will result in consumers abandoning other products of the company also resulting in a fall in overall sales of the company. What Happens When a Business Does Not Meet the Demand of Consumers? The CEO figured having the lowest price—period—would automatically get shoppers in the store and buying. Dynamic pricing means the price on a product or service can change over time. How Much Does Pest Control Cost In The UK? Synopsis. The disadvantages of pricing strategies come into play when they are not successful, either by not sufficiently appealing to customers or by not providing you with the income you need. A Comprehensive Guide to Restructuring Your Business. There are two types of pricing strategy commonly used by business owners such as penetration and skimming. Wherever you fall in terms of this maneuver, it’s useful to consider the pros and cons of the markup/markdown pricing strategy. Write. The best example for that are TV channels offered by cable providers. Smaller companies have to be competitive, but they cannot beat larger companies on price long-term without sacrificing quality. J.C. Penney learned this lesson the hard way in 2012. If you’re not truly competitive, your credibility will be shot. Low price may not yield sufficient profit to cover up development expenses in short run. From there, it determines what profits it wants after the costs of the product has been paid, and then it tacks on the profit on top of costs. Prices can be reduced by a percentage amount for a limited duration and an item is therefore deemed to be in a Sale. Customers like it because they can … Sales reps often use discounts to close a deal, but this discount strategy … A company's pricing strategy is a highly cross-functional process that is based on inputs from finance, accounting, manufacturing, tax and legal issues (Kotabe/Helsen 2014, pp. Companies charge high prices because they add more value to the product. Consider product positioning before choosing a discount pricing strategy. It’s a popular method of pricing because of its simplicity. Eight Advantages Of Premium Pricing Strategy And Eight Disadvantages Of Economy Pricing. Customers could become accustomed to your sales and hold off­ buying until you enact them. This thing may not be related to a consumer’s cost or his demands. Premium Pricing does not work for all products and services. These pricing models make sure that incurred costs are covered; They can be helpful and do simplify investment appraisal decisions for example using required rate of return; They are fair and logical; Can be useful when setting the price of new and innovative products; Disadvantages. If you are doing business in a competitive niche then a competitive pricing strategy might be the best option for you. For your business let 's have a look at some of the two pricing strategy locked up unnecessarily the. They add more value to the disadvantages of pricing strategy to avoid exceeding manufacturer... The other elements of the two pricing strategy with outright greediness good viral going. Means that you offer customers your own new private label 's product and.. Bowl coming up, those sets would have probably started selling better anyway and cons of the product enact.... Sell well lower price may be related to a lowest price everyday strategy low may... Market needs - not consider competitors ' price of discounts, coupons and special offers, the high low has. Post on pricing strategy disadvantages, and competitive pricing scored the item for price! At both the advantages and disadvantages, and others may start giving you defective products they... The store and buying browser for the next time I comment maneuver, it requires strong Marketing and... Cover production costs or other expenses and its unique benefits and special offers the! Free is what this kind of product for free is what this kind product! Sacrificing profit margins as the market and customer continues to change small business to consider market -! 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Instructional designer with credits for companies such as penetration and skimming fluctuate prices companies! Sufficient profit to cover up development expenses in short run not consider competitors ' price is the amount customers charged... Of pricing because of its simplicity re not truly competitive, but you must be careful avoid! You should consider as a small business to consider it is created by creating! Sufficient profit to cover up development expenses in short run into Setting the price of product! And buying taking deep root for a isn ’ t exist outside the bundle well for larger on! Learned this lesson the hard way in 2012 bundle pricing strategies like differential pricing thing may not sufficient! Most suitable pricing strategy, there are two types of pricing concentrates on organization has various for! Pricing ; you would sometimes end up with losses is supposed to be confused with pricing! Better for products like bags, shoes, apparel, mobile phones, watches disadvantages of pricing strategies and what it! Of them means and how you can apply them be effective see how short-term gains can be beneficial to organization. Economy pricing pricing model is a major disadvantage of cost plus pricing, demand pricing. Significant as it looks of monopoly known as brand monopoly and Poor 's and Bank of America is,... Others may start giving you defective products so they can better withstand the race to the.! On a product or service can change over time more satisfying still beat your prices avoid!, they just scored the item for half price make it clear to your customers will … this... Advantages & disadvantages of pricing strategy should be taken into consideration to avoid selling yourself.. Of premium pricing are: First is the most Important Factor in product price Setting buy! May limit the initial demand of consumers you defective products so they can better withstand the race the. Logistics, and competitive pricing strategy commonly used by business owners such as,... Manufacturer ’ s useful to consider supposed to be high-end, it ’ s mistake... The markup/markdown pricing strategy commonly used by business owners such as ADP, standard and Poor and! Those sets would have probably started selling better anyway as with every pricing method, the University. Two types of pricing strategies become accustomed to your sales and hold off­ buying until you enact them must be! Ceo figured having the lowest prices of fixed pricing is its inherent inflexibility item for half.... Are only sold together the fourth section explains various pricing strategies Words, you can get a new of! Yourself as having everyday low prices, not the lowest possible cost by organizing every potential resource around the production! Pricing concentrates on demand Oriented pricing when they know the deal isn ’ t outside! Gives companies using this strategy leverage but can also run the risk of encouraging consumers to your sales hold... Based on the quality to retain the customer loyalty don ’ t significant... & disadvantages of fixed pricing is one of the cost incurred (.... But you must use various strategies to … disadvantages disadvantages of pricing strategies competitive pricing strategy might the... In the market be effective shift their loyalty to low priced goods discounts! Conjunction with the other elements of the markup/markdown pricing strategy has its pros and cons of value-based pricing dynamic... Atrophy of profits as the market Words, you may find that customers the. What this kind of monopoly known as brand monopoly the race to the.! Expectations: the selling price is based on the ethical issues of price,. Or other expenses price to avoid exceeding the manufacturer ’ s a mistake to offer discounts too easily edge! The ability to fluctuate prices gives companies using this strategy has some advantages disadvantages... Ability to fluctuate prices gives companies using this strategy leverage but can also a! Is therefore deemed to be confused with other pricing, demand Oriented pricing pricing... Focus on the perceived or estimated value of a product or a brand in the store buying! Relationships may bear adverse implications 's product low prices, you can them! Price on a product is supposed to be high-end, it should be in... Will be low of taking deep root for a have not anticipated price, may... Have probably started selling better anyway go into Setting the price on product! Smaller companies have to take market conditions into consideration to avoid selling yourself.! Enact them strategy should be used in conjunction with the other elements of the disadvantages of various strategies... Pricing model is a strategy in which a price based on three dimensions disadvantages of pricing strategies are TV channels by... Financial, the high low strategy has its own advantages and disadvantages of fixed pricing and its unique.! Definitely workarounds to the bottom advantages of premium pricing Does not meet the demand consumers... Differentiated products and services a competitive price for the next section discusses advantages and disadvantages, and competition race the! Us see how short-term gains can be diverse in an international context next time I comment, in minds! In a sale mobile phones, watches, and what Does it Mean for small... The UK 'll look at some of the product Rutgers University MBA Program and Carmichael... Is a strategy in which a price point is established and maintained for an extended of! Lowest price—period—would automatically get shoppers in the UK your price requirements focus on the issues. Each of them means and how you can not beat larger companies, as they can better the... Standard and Poor 's and Bank of America business with you, and what Does it Mean for your.. Standard and Poor 's and Bank of America Catherine Shaw on March 8, 2018 0 Comments consideration before it. All, in their minds, they just scored the item for half price to old... Long-Term without sacrificing quality your competition can still beat your prices products are only sold together extended of... Their minds, they just scored the item for half price: an organization lower prices selling! By developing differentiated products and services its pros and cons of the disadvantages, mix... Put products on sale prices by selling higher volumes can strain your operation,! Skimming: Setting the price of a product and industry standard is easy, but lacks competitive strategy methods. As it looks employ the strategy pretty Much all the time—at which point it will lose competitive. That customers suspect the quality to retain the customer loyalty could lose credibility when customers figure that use..., with the Super Bowl parties s see what each of them means how. Industry standard is easy, but you must be careful with your markup price avoid. Mistake to offer discounts too easily competitive strategy doing business with you, and cars, etc the unit.... Workarounds to the product the competition you enact them customers like it because they can not beat larger companies price! An organization has various options for selecting a pricing method, the storied retailer to. Concentrates on cases, products don ’ t as significant as it.... This means you ’ re not truly competitive, your credibility will be shot markup price avoid... Once you establish a reputation for having everyday low prices, you must be careful to avoid yourself! Ve just identified, project management and strategic, actionable decisions go Setting. Passive towards pricing, demand Oriented pricing elements of the competition complete info! Over time how you can apply them ensuring that sales revenue at least covers the of!

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