http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to ...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Market Skimming
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Market Skimming
• High price, Low volumes
• Skim the profit from the
market...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Value Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Value Pricing
• Price set in
accordance with
customer
perceptions about
the...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
• Goods/services deliberately sold below
cost to encourage sale...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
• Used to play on consumer
perceptions
• Classic exam...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Going Rate (Price Leadership)
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Going Rate (Price Leadership)
• In case of price leader, rivals have diffic...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Tender Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Tender Pricing
• Many contracts awarded on a tender basis
• Firm (or firms)...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Price Discrimination
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Price Discrimination
• Charging a different
price for the same
good/service...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Destroyer Pricing/Predatory Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Destroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free
gi...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Absorption/Full Cost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Absorption/Full Cost Pricing
• Full Cost Pricing – attempting to
set price ...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Marginal Cost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Marginal Cost Pricing
• Marginal cost – the cost of producing ONE
extra or ...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Marginal Cost Pricing
• Example:
Aircraft flying from Bristol to Edinburgh ...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Contribution Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Contribution Pricing
• Contribution = Selling Price – Variable
(direct cost...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
• Setting price to ‘target’ a specified
profit level
• Estim...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Cost-Plus Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Cost-Plus Pricing
• Calculation of the average cost
(AC) plus a mark up
• A...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Influence of Elasticity
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Influence of Elasticity
• Any pricing decision must be mindful of
the impac...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
...
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > ...
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Pricing Strategies

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Pricing Strategies

  1. 1. http://www.bized.ac.uk Copyright 2006 – Biz/ed Pricing Strategies
  2. 2. http://www.bized.ac.uk Copyright 2006 – Biz/ed Pricing Strategies
  3. 3. http://www.bized.ac.uk Copyright 2006 – Biz/ed Penetration Pricing
  4. 4. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  5. 5. http://www.bized.ac.uk Copyright 2006 – Biz/ed Market Skimming
  6. 6. http://www.bized.ac.uk Copyright 2006 – Biz/ed Market Skimming • 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, jewellery, digital technology, new DVDs, etc. Many are predicting a firesale in laptops as supply exceeds demand. Copyright: iStock.com
  7. 7. http://www.bized.ac.uk Copyright 2006 – Biz/ed Value Pricing
  8. 8. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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. Copyright: iStock.com
  9. 9. http://www.bized.ac.uk Copyright 2006 – Biz/ed Loss Leader
  10. 10. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  11. 11. http://www.bized.ac.uk Copyright 2006 – Biz/ed Psychological Pricing
  12. 12. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  13. 13. http://www.bized.ac.uk Copyright 2006 – Biz/ed Going Rate (Price Leadership)
  14. 14. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  15. 15. http://www.bized.ac.uk Copyright 2006 – Biz/ed Tender Pricing
  16. 16. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  17. 17. http://www.bized.ac.uk Copyright 2006 – Biz/ed Price Discrimination
  18. 18. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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 Copyright: iStock.com
  19. 19. http://www.bized.ac.uk Copyright 2006 – Biz/ed Destroyer Pricing/Predatory Pricing
  20. 20. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  21. 21. http://www.bized.ac.uk Copyright 2006 – Biz/ed Absorption/Full Cost Pricing
  22. 22. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  23. 23. http://www.bized.ac.uk Copyright 2006 – Biz/ed Marginal Cost Pricing
  24. 24. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  25. 25. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  26. 26. http://www.bized.ac.uk Copyright 2006 – Biz/ed Contribution Pricing
  27. 27. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  28. 28. http://www.bized.ac.uk Copyright 2006 – Biz/ed Target Pricing
  29. 29. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  30. 30. http://www.bized.ac.uk Copyright 2006 – Biz/ed Cost-Plus Pricing
  31. 31. http://www.bized.ac.uk Copyright 2006 – Biz/ed Cost-Plus Pricing • Calculation of the average cost (AC) plus a mark up • AC = Total Cost/Output
  32. 32. http://www.bized.ac.uk Copyright 2006 – Biz/ed Influence of Elasticity
  33. 33. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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
  34. 34. http://www.bized.ac.uk Copyright 2006 – Biz/ed Influence of Elasticity • Price Inelastic: • % change in Q < % change in P • e.g. a 5% increase in price would be met by a fall in sales of something less than 5% • Revenue would rise • A 7% reduction in price would lead to a rise in sales of something less than 7% • Revenue would fall
  35. 35. http://www.bized.ac.uk Copyright 2006 – Biz/ed 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

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