PRICING STRATEGIES Winning pricing tactics Gain the edge on - tough competition, industry over capacity and diminishing margins. Outdated or conventional pricing methods - can be a real drain on your profit plan.
TYPES OF PRICING STRATEGIES
Product Line Pricing
DIFFERENTIAL PRICING ... whereby the same brand is sold at different prices to consumers
COMPETITIVE PRICING ...whereby prices are set to exploit competitive position
PRODUCT LINE PRICING ... whereby related brands are sold at prices that exploit mutual dependencies
DIFFERENTIAL PRICING STRATEGIES
Second Market Discounting
SECOND MARKET DISCOUNTING
e.g., OEM parts facing competition from generic and lower priced parts.
Options - either maintain price and lose market share, or drop price and lose margin.
A relevant strategy might be to enter the generic market segment with an unbranded market and arrest the loss of sales to that segment without either foregoing margin or position in the branded segment.
SECOND MARKET DISCOUNTING
SECOND MARKET DISCOUNTING Community Involvement Advertising Promotions Discounts Quality Claims
Temporary markdowns and periodic discounting of off-season fashion goods, off-season travel fares, matinee tickets and happy hour drinks.
The manner of discounting is predictable over time and not necessarily unknown to consumers.
If demand is not exactly known, a strategy of pricing high and systematically discounting with time is likely to ensure that the firm covers its costs and makes a reasonable profit.
The manner of discounting is crucial.
It should be “random” to uninformed consumers and infrequent, so that these consumers do not get lucky too often.
Maximize the number of informed consumers at the low price.
Maximize the number of uninformed at the high price rather than the low price.
COMPETITIVE PRICING STRATEGIES
Experience Curve Pricing
Used to introduce new products
Used by a new competitor in the marketplace
Essentials for this strategy are
- price sensitivity on the part of consumers, and
- threat of competitive entry
EXPERIENCE CURVE PRICING D C B A Market Price Current Price YEARS DOLLARS Industry Costs 2 4 6 8 1 2 3 4 5
EXPERIENCE CURVE PRICING
Experience effects are strong
The firm has more experience than competitors
The consumers are price sensitive
PRICE SIGNALING Consumers may use price to infer quality It is most common for new or amateur consumers in a market, who do not know the quality of competitive brands but find quality important. Purchase of a high priced wine by the casual buyer
PRICE SIGNALING Consumers may use price to infer quality E&J Gallo Dom Perignon
Information about price more easily available than information about quality.
Consumers must want high quality enough to risk buying the higher priced product even without a certainty of high quality.
Essential requirements (contd.):
Thus, uninformed consumers who infer quality from price find it worthwhile to do so on average.
PRICE SIGNALING Pitfalls: Price Signaling used to fix prices Examples - Airlines, Energy
A high priced model next to a much higher priced version of the same product, so that the former seem more attractive to risk averse uninformed consumers.
GEOGRAPHIC PRICING Market segments separated by transportation costs -No discrimination between competing buyers in the same region (zone pricing) -The firm’s strategy should not appear to be predatory -In choosing the basing point, the firm should not attempt to fix prices among competitors
PRODUCT LINE PRICING STRATEGIES
PRICE BUNDLING Heterogeneity of demand for non-substitute perishable products Demand for films from two movie houses, Astro & Classic Maximum Price ($’000) paid by Film Classic Astro Romancing the Stone 12 18 Places in the Heart 25 10 What is the best pricing strategy?
Basic and specialty breads
Front and rear auditorium seating
Deluxe and basic hotel rooms.
Premium versions of autos differ from the basic only by features and options, whose production costs generally are not high enough to justify the higher mark up.
A firm brings out an identical version of its current product with a different name and a higher price.
The intention is to signal quality.
Differences between brands are not real but only in the images or positions adopted.
e.g., alternative brands of cosmetics, soaps, wines and dresses that differ only in brand names.
THREE RELATED STRATEGIES
e.g., razors and blades, cameras and films, autos and spare parts, and computers and software packages. [durable goods & accessories]
If the premium on the accessories is too high, marginal producers of the accessories may enter the market and drive down the prices.
In case of services, it is known as Two-Part Pricing.
Service price is broken into two parts
variable usage fee
e.g., pricing by telephone & car rental companies
LOSS LEADERSHIP PRICING
In retailing, it is known as Loss Leadership.
It involves dropping the price on a well-known brand to generate store traffic
The drop should compensate consumers for:
the transaction cost involved in making the extra trip
switching from their normal place of purchase
foregoing the cheaper basket of prices they pay at the alternative store