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Pricing strategies
• Pricing strategies for products or services encompass three
main ways to improve profits. These are that the business
owner can cut costs or sell more, or find more profit with a
better pricing strategy. When costs are already at their lowest
and sales are hard to find, adopting a better pricing strategy is
a key option to stay viable.
• Merely raising prices is not always the answer, especially in a
poor economy. Too many businesses have been lost because
they priced themselves out of the marketplace. On the other
hand, too many business and sales staff leave "money on the
table". One strategy does not fit all, so adopting a pricing
strategy is a learning curve when studying the needs and
behaviors of customers and clients
Pricing Strategies
Penetration Pricing
• Penetration pricing is designed to achieve salebased objectives. It is the strategy of entering
the market with a low initial price so that a
greater share of the market can be captured.
• The penetration strategy is resorted to when
demand seems to be elastic over the entire
demand curve.
• High price elasticity of demand is probably the
most important reason for adopting the
penetration strategy.
• The penetration strategy is also used to
discourage competitors from entering the
market.
Among situations suggesting a strategy of
penetration pricing are:
• Preparations, to which the consumer/payer reacts very
susceptibly to the price (high price elasticity).
• Achieving the fast growth sales volume.
• Achieving the high market share and, thus, a strong
market position by the time of the competitors' entry.
• Utilization of experience curves ("learning curves") and
the magnitude advantages in production ("economies of
scale"). Low introductory prices reduce risk of a flop.
• Hindering potential competitors to enter the market.
Market Skimming
Skimming pricing
• Skimming pricing is the strategy of
establishing a high initial price for a
product to "skim the cream" off the upper
end of the demand curve. It is aimed at
achieving profit-based objectives. It is
usually accompanied by heavy promotion
expenditures.
Skimming pricing
• A skimming strategy may be
recommended when the nature of the
demand is uncertain, when a company
has expended large sums of money on
research and development of a new
product, when the competition is expected
to develop and market a similar product in
the near future, or when the product is so
innovative that the market is expected to
mature very slowly.
Other situations, in which skimming pricing may
be considered are:
• Preparations, to which the consumer does not react
very susceptibly to the price (low price elasticity).
• Achieving short-term profits.
• Quick amortization of research and development.
• Making profits in the early phases of the products' life
cycle (reducing the risk that new, better preparations
contribute to loss of profit).
• Avoiding the necessity of price increases.
• Margin for price reductions.
• High prices signalize high quality.
• The decision on how high a
skimming price should be will
depend on two factors:
• (1) chances of competitors
entering the market, and
• (2) the price elasticity at the
upper layer of the demand
curve.
• If competitors are expected to
bring out their own brands
quickly, it may be safe to price
rather high.
Value Pricing
Value Pricing
• Price set in
accordance with
customer perceptions
about the value of the
product/service
• Examples include
status
products/exclusive
products
Companies may be able to set prices according to
perceived value.
Loss Leader
Loss Leader
• Goods/services deliberately sold below cost to
encourage sales elsewhere
• Typical in supermarkets, e.g. at Christmas, selling bottles
of gin at £3 in the hope that people will be attracted to
the store and buy other things
• Purchases of other items more than covers ‘loss’ on item
sold
• e.g. ‘Free’ mobile phone when taking on contract
package
Psychological Pricing
Psychological Pricing
• Used to play on consumer perceptions
• Classic example - £9.99 instead of £10.99!
• Links with value pricing – high value goods
priced according to what consumers
THINK should be the price
Going Rate (Price Leadership)
Going Rate (Price Leadership)
• In case of price leader, rivals have difficulty in
competing on price – too high and they lose market
share, too low and the price leader would match price
and force smaller rival out of market
• May follow pricing leads of rivals especially where
those rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing
may be applicable – banks, petrol, supermarkets,
electrical goods – find very similar prices in all
outlets
Tender Pricing
Tender Pricing
• Many contracts awarded on a tender basis
• Firm (or firms) submit their price for carrying
out the work
• Purchaser then chooses which represents
best value
• Mostly done in secret
Price Discrimination
Price Discrimination
• Charging a different price for
the same good/service in
different markets
• Requires each market to be
impenetrable
• Requires different price
elasticity of demand in each
market
Prices for rail travel differ for the same journey at
different times of the day
Destroyer Pricing/Predatory
Pricing
Destroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally smaller and
weaker) out of business or prevent new entrants
• Anti-competitive and illegal if it can be proved
Absorption/Full Cost Pricing
Absorption/Full Cost Pricing
• Full Cost Pricing – attempting to set price
to cover both fixed and variable costs
• Absorption Cost Pricing – Price set to
‘absorb’ some of the fixed costs of
production
Marginal Cost Pricing
Marginal Cost Pricing
• Marginal cost – the cost of producing ONE extra or ONE fewer item
of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be relatively
high
• Allows variable pricing structure – e.g. on a flight from London to
New York – providing the cost of the extra passenger is covered, the
price could be varied a good deal to attract customers and fill the
aircraft
Marginal Cost Pricing
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) =
£15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the
seat than not fill it at all!
*All figures are estimates only
Contribution Pricing
Contribution Pricing
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such
circumstances
Target Pricing
Target Pricing
• Setting price to ‘target’ a specified profit
level
• Estimates of the cost and potential
revenue at different prices, and thus the
break-even have to be made, to determine
the mark-up
• Mark-up = Profit/Cost x 100
Cost-Plus Pricing
Cost-Plus Pricing
• Cost-plus pricing is where prices are determined
by adding a predetermined profit to costs. It is
the simplest form of cost-based pricing. In
general, the steps for computing cost-pricing are
to estimate the number of units to be produced,
calculate fixed and variable costs, and add a
predetermined profit to costs.
The formula for cost-plus pricing is as follows:
• P = Total fixed costs + Total variable costs +
Projected profit
• Although the cost-plus method is easy to
compute, it has several shortcomings. Profit is
not expressed as a percent of sales, but as a
percent of cost, and price is not tied to
demand.
• Adjustments for rising costs are poorly
conceived, and there are no plans for using the
excess capacity. There is little incentive for the
firm to improve efficiency to hold down costs,
and marginal costs are rarely analyzed.
Influence of Elasticity
Influence of Elasticity
• Any pricing decision must be mindful of the impact of
price elasticity
• The degree of price elasticity impacts on the level of
sales and hence revenue
• Elasticity focuses on proportionate (percentage) changes
• PED = % Change in Quantity demanded/% Change in
Price
Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > % change in price
• e.g. A 4% rise in price would lead to sales falling by
something more than 4%
• Revenue would fall
• A 9% fall in price would lead to a rise in sales of
something more than 9%
• Revenue would rise
• In competition-based pricing, the firm uses
competitors' prices rather than demand or cost
considerations as its primary guideposts.
• With this approach, the company may not
respond to changes in demand or costs unless
they have an effect on competitors' prices.
• A company may set prices below the market, at
the market, or above the market, depending on
its customers, image, the overall marketing mix,
the consumer loyalty and other factors.
• The competition-based pricing is popular
for several reasons. It is simple, with no
calculations of demand curves, the price
elasticity, or costs per unit. The ongoing
market price level is assumed to be fair for
both consumers and companies
Price Quotations
• List prices: Established prices
normally quoted to potential buyers
• Market price: Price that an
intermediary or final consumer pays for
a product after subtracting any
discounts, rebates, or allowances from
the list price
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Discounts and Allowances
• Quantity discount: The more you buy, the
cheaper it becomes-- cumulative and noncumulative.
• Trade discounts: Reductions from list for
functions performed-- storage, promotion.
• Cash discount: A deduction granted to
buyers for paying their bills within a specified
period of time, (after first deducting trade and
quantity discounts from the base price)
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• Reductions from List Price
– Cash discount: price reduction offered to a
consumer, industrial user, or marketing
intermediary in return for prompt payment of
a bill
• 2/10 net 30, a common cash discount notation,
allows consumers to subtract 2 percent from the
amount due if payment is made within 10 days
19-45
Calculating a Cash Discount
3/10, NET 30
Percentage to be
deducted if bill is
paid within specified
time
Number of days from
date of invoice in
Number of days from
which bill must be
date of invoice after
paid to receive cash which bill is overdue
discount
1/7, NET 30
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• Trade Discounts: payment to a
channel
member
or
buyer
for
performing marketing functions; also
known as a functional discount
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• Quantity discount: price reduction
granted for a large-volume purchase
– Justified on the grounds that large orders
reduce selling expenses, storage, and
transportation costs
– Cumulative quantity discounts reduce prices
in amounts determined by purchases over
stated time periods
– Non-cumulative quantity discounts provide
one-time reductions in the list price
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• Allowances
– Trade-in: credit allowance given for a used
item when a new item is purchased
– Promotional allowance: advertising or
promotional funds provided by a manufacturer
to other channel members in an attempt to
integrate the promotional strategy within the
channel
• Rebates: refund for a portion of the
purchase price, usually granted by the
product’s manufacturer
19-49
Break-even analysis
• One way to use the market demand in price
determination, and still consider costs, is to
conduct the break-even analysis and determine
break-even points.
• A break-even point is that quantity of output, at
which the sales revenue equals the total costs,
assuming ascertain selling price. Thus, there is a
different break-even point for each different
selling price.
• Sales of quantities above the break-even output
result in a profit on each additional unit. The
further the sales are above the break-even point,
the higher the total and unit profits. Sales below
the break-even point result in a loss to the seller.
Break-even analysis
Break-even point
Sales volume
THANK YOU FOR ATTENTION!
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