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Pricing strategy

Pricing strategy



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Pricing Pricing Presentation Transcript

  • Pricing objectives
    • Profit
      • Target returns
      • Maximising profits
    • Sales
      • Volume
      • Share
    • Competitive reaction
  • Estimating demand
    • Past statistics
    • Surveys
    • Price experimentation
  • Elasticity of demand
    • Search – compare before buy
    • Experience – compare after buy
    • Credence – difficult to compare
  • Costs
    • Fixed and variable costs
    • B-E analysis (volumes & capacity utilisation)
    • Marginal analysis
  • Market skimming
    • Usually for high tech and low availability goods
    • New product has distinctive features strongly desired by consumers
    • Demand is inelastic
    • Protection to product in form of patents etc
  • Market penetration
    • A large market exists for the product
    • Demand is elastic
    • Economies of scale possible
    • Fierce competitive scenario
  • Discounts
    • Quantity
    • Trade discounts
    • Cash
    • Functional
    • Seasonal
    • Allowance
  • Pricing strategies
    • Price lining
    • Odd pricing
    • Leader pricing
    • High-low
    • Everyday low pricing
  • Product line pricing
    • Determine low price
    • Determine high price
    • Set price differentials for intermediate products
  • PLP principles
    • Noticeable differences should correspond to perceived value differences
    • Highest and lowest should be priced to mould consumer perception
    • Price differences should get wider as price increases.
  • Price Bundling
    • Package rates, etc
    • In mixed bundling, products can be bought individually or as a package
    • Products must be in growth stage
    • Captures different WTP to maximise revenues
    • Demand elastic
    • Objectives?
  • Differential pricing
    • Geographical
    • Segment pricing
    • Product form
    • Image / channel
    • Seasonal
    • Eg
    • WTP customer 1 = Rs.5
    • WTP customer 2 = Rs.3
    • Cost of making 2 units = Rs.7
  • Advance Selling
    • Improves profits by selling in advance when the customer has uncertainty
    • Advance selling is generally more profitable than spot selling as long as customers are uncertain about their future consumption states
    • Customer uncertainty is high in most service markets
  • Enabling technology
    • Internet
    • Electronic tickets
      • Physical
      • Paperless
    • Smartcards
  • Benefits of technology
    • Less arbitrage
    • Hides value and validity
    • Records identity
    • Lower transaction cost
    • Managing customer information
    • Cost of reaching customer
  • Benefits of technology
    • More complex product packages
    • More information about buyers
    • Information on demand
  • Yield Management
    • Yield management is a method to help the firm sell the right inventory unit to the right customer at the right time
    • It guides the allocation of undifferentiated units of limited capacity
  • Conditions for yield management
    • Binding capacity constraints
    • Low marginal cost of serving additional customers
    • Inverse relationship between customer price sensitivity and customer booking time
  • Restrictions
    • Book a certain length ahead of time
    • Stay for a minimum time
    • Use service in a particular period
    • Have a higher change or cancellation penalty
    • Non-refundable reservation
    • The firm should try to balance the restriction and the benefit
    • Customers accept yield management in some industries like airlines because they are used to it, not because they think it fair
  • Acceptable practices
    • Information of different pricing options to be made available
    • A substantial discount to be given for cancellation restrictions
    • Reasonable restrictions imposed in exchange for discounted rate
    • Different prices for products perceived to be different
  • Unacceptable practices
    • Offering insufficient benefits in exchange for restrictions
    • Offering severe restrictions on discounts
    • Not informing customers of change in reference prices, etc
  • Some examples
    • 486SX was the 486DX with the coprocessor disabled
    • FedEx offers morning and afternoon delivery. Afternoon packages are not sent out in the morning even if they have arrived in time
    • IBM laser printer E series prints 5 ppm. Chips were introduced in the high cost printer to slow it down from 10 to 5 ppm.
  • How to increase prices
    • Increase reference price
    • Attach additional services
    • Package deals
    • Attach restrictions to lower prices
  • Perceived Fairness
    • Customers feel that raising prices to maintain profits is fair
    • Customers feel that raising prices to increase profits is unfair
    • If costs decrease, customers believe that it is fair for the company to maintain prices
    • Not so, if a macro-economic factor has lead to cost decrease