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Pricing Strategies
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Introduction
• We need to set price when we
have a new product, or when we
enter a new market with an
existing product
• How?
– Need to decide what position you
want your product to be in.
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New Product Pricing strategies
Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products –
chocolate bars, food stuffs, household
goods, etc.
• Suitable for products with long
anticipated life cycles
• May be useful if launching into a new
market
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Market Skimming
Plasma screens: Currently at
high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images,
available from Education Image Gallery
• High price, Low volumes
• Skim the profit from the
market
• Suitable for products that
have short life cycles or
which will face
competition at some
point in the future (e.g.
after a patent runs out)
• Examples include:
Playstation, digital
technology, new DVDs,
etc.
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Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Product
Mix
Pricing
Strategies
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Captive-Product Pricing
Pricing Products That Must Be Used
With The Main Product
i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Production of Meat, Petroleum products , Chemicals , Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
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Price Adjustment Strategies
• Discount and Allowance pricing- Cash discounts : price reduction to buyers who pay
their bills promptly
- Trade Discounts: offered to Trade Channel members
who perform certain functions such as selling, storing ,
record keeping
- Seasonal Discount : Price reduction to buyers who buy
Merchandise or services out of season.
- Trade-in- Allowance – price reduction from list price
given for turning in an old item when buying a new one.
- Promotional Allowance- Price reductions to reward
Dealers for participating in advertising and sales support
program
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Segmented Pricing
• Customer segment pricing – Low fares for
students and senior citizens
• Product-form pricing – Price varies
disproportionately with Quantity
• Location pricing – Theatres vary seat prices
because of Audience preferences
• Time pricing – Resorts giving seasonal and
weekend discounts, Weekend vs Weekdays
(Revenue Management , Yield Management)
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Psychological Pricing
• Used to play on consumer perceptions
• Classic example – Rs 99.99 instead of Rs100!
• Sales house in EDM (IInd Floor) says
All prices under 495/Reference prices – Prices that buyers carry in
their mind and refer to when looking at a
given product .
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Promotional pricing
• Temporarily pricing products
below the list price and
sometimes even cost to create
buyer excitement and urgency.
e.g rebates , “Shoppers Festival”
Adverse Effects : Consumers
become “Deal prone” , erodes
Brand Value , Marketers addicted
to promotional pricing , Lead to
Industry price wars,
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Geographical pricing
• F-O-B Pricing (Free on board)- each customer pays the
Transport cost.
• Uniform Delivered pricing- (Opposite of F-O-B) company
charges same price plus freight to all customers, regardless of
their location.
• Zone pricing – Company sets two or more zones . All
customers within a given zone pay a single Total price. E.g
Mumbai and Ahmadabad in west zone
• Basing Point Pricing – selects a city as basing point and
charge all customers the freight cost from that city to the
customer location , regardless of the city from which the
goods are a actually shipped . E.g sugar , cement , Steel and
Automobile companies use this pricing
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Dynamic pricing
• Adjusting prices continuously to
meet the characteristics and
behaviors of specific customers. E.g
ebay or priceline
• Amazon.com mine their database to
gauge specific shoppers desire,
measure his or her means,
instantaneously tailor products to fit
that shoppers behavior, and price
products accordingly
• Dell uses Dynamic pricing to achieve
real time between Demand and
Supply.
It benefits the customers but
Marketers need to be careful
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International pricing
• What prices to charge to different countries ?
e.g Samsung might introduce a new product into
mature Market in highly developed countries
with goal of quickly gaining mass market
share will use penetration pricing.
In contrast it might enter less developed
market by targeting smaller, less price
sensitive segments, in this case Skimming
pricing makes sense.
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Price Changes
• Initiating price cuts
• Initiating price Increaserising crude prices
Buyer Reaction to price
changes
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Information Needed for Price
Change
• Customers’ ability & willingness to buy; customer lifestyle;
benefits sought; characteristics of the product .
• Need to know everything about the competitors
– How would competitors react to our price change?
– In obtaining competitors’ information, remember the value of
the information
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