2. LEARNING OBJECTIVES
List and explain the goals of pricing.
Understand pricing strategies such as bundling,
skimming, and revenue management.
Explain the concept of price promotions.
List the various types of price promotions and
discounts.
Enumerate the ways to evaluate which price
promotions work.
3. Introduction
It is the approach taken by a firm to set the price for
the product or services it sells.
A company may be guided by a pricing objective it sets
for itself
5. Bundling
A strategy when a firm sells distinct goods together for
a packaged price.
When firm sells distinct products together as a bundle
at a packaged price, lower than what consumers
would have paid if they had bought them individually.
6. Illustration of Bundling
Single price strategy: minimum of the willingness to pay
among the two consumers:
Price of ESPN = $8 (will result in both buying ESPN)
Price of TBS = $1.5 (will result in both buying TBS)
Revenue from ESPN = $8 × 2 = $16
Revenue from TBS = $1.5 × 2 = $3
Total revenue = $19 (without bundling)
7. Bundling: Suppose a firm decides to offer a bundle of
two channels, ESPN and TBS, at $10.
Bundle price = $10 (will result in both customers buying
a bundle)
Total revenue = $10 × 2 = $20
We must consider that the maximum bundling price
must be the smaller one of the willingness to pay
among the two customers
9. Skimming
A pricing technique where firms set high initial prices for
newly launched products in order to maximize their
profits.
The aspects of the product such as novelty and originality
induce a sense of urgency in some customers toward
buying it.
Price skimming is useful to recover huge investments
made for research and development
10. Illustration of Price Skimming
X smartwatch manufacturing firm, it has recently
developed technology, it plans to bring to the market
Lowering the price would attract more customers
though only marginally as only Q2 – Q1 customers are
available to buy
this pricing method generates an overall revenue of X+
Y + Z cumulatively with prices P1 and P2.
11. Appropriate Usage of Skimming
Revenue management
Itis a pricing strategy that helps to predict the needs of
a consumer in order to augment inventory and price
availability.
It is essential for firms to understand which type of
products the skimming policy could be applied to.
New technology-based products are initially sold at a
higher price to recover research and development
costs
12. To sum up, for skimming pricing strategy to work:
Competitors may not be able to imitate thefeatures easily
price-inelastic consumers who are willing to buy the
product at premium prices
work with products with unique features that will justify
initial premium pricing
13. Revenue Management
sell a product at a lower price today in order to sell it
at a higher price tomorrow.
The main challenge is to determine the demand of the
product over time.
there are time dimensions to each sale
Both revenue management in airlines and markdown
pricing in fashion make use of prices to cater to
different consumer segments while still achieving
better revenue.
14. Promotions
Refers to setting price lower than actual list price for a
short term to attract price-sensitive customers and
boost sales by selling to them
Some promotional offers come in the form of loyalty
or cashback points
increasing loyalty-oriented (encouraging repeat
purchase) promotions are popular with retailers
15. Measuring Promotional Lifts
simple approach to lift measurement is not quite
correct as there could be several other factors
For this formula to be useful, the non-promotional
and promotional timeframes must be reasonably
short
17. Discounting
This refers to lower prices to consumers than the list
prices, and can manifest in several ways such as
discount coupons, cashbacks, or quality discounts or
seasonal sales and so on.
Types of Discounting
Functional (trade) discounting
Quantity discounting
Cash discounting
Seasonal discounting
Geographical discounts
18. Price Elasticity of a Brand
Price elasticity measures change in demand due to a
unit change in price.
Percent change interpretation that how many %
change will be achieved in volume (quantity) for 1%
change in price.
19. Linear vs Non-linear Pricing
Linear pricing, also known as uniform pricing, is a
pricing strategy in economics and business where a
single price is charged for a product or service,
regardless of the varying factors such as quantity
purchased or consumed.
20. Key characteristics of linear
pricing:
Constant Price: Example, if a company charges $10 for a
product, every customer buying that product pays $10 per
unit.
Predictability: Customers can easily predict the total cost
of their purchases since the price per unit remains
consistent. This can make budgeting and financial
planning more straightforward.
Potential for Cross-Subsidization: Linear pricing can allow
for cross-subsidization, where profits from some
customers subsidize the costs of serving others. For
example, a business may charge a uniform price for a
product, even if it costs more to produce, and use profits
21. Key characteristics of linear
pricing:
Cost-Plus Pricing
Lack of Customer Segmentation: Linear pricing does
not take into account customer segmentation or
differences in customer preferences. It treats all
customers the same, offering the same price to
everyone.
Price Elasticity: Linear pricing does not take into
account price elasticity, which is the responsiveness
of demand to changes in price.
22. Non-linear Pricing
Nonlinear pricing, also known as dynamic pricing or
differentiated pricing, is a pricing strategy in marketing
analytics where the price of a product or service is not
fixed and can vary based on multiple factors, including
customer segmentation, demand fluctuations, market
conditions, and individual customer characteristics.
23. Non-linear Pricing
These approaches allow businesses to optimize pricing
strategies based on customer segments, competitive
conditions, and real-time demand fluctuations, ultimately
leading to increased profitability.
Includes Demand-based pricing, Value-based pricing,
Time-Based Pricing and Personalized pricing.
24. Non-linear Pricing
Demand-Based Pricing: Considers the principle of
price elasticity, that measures how sensitive customer
demand is to changes in price. Prices may be
adjusted in real-time based on demand fluctuations,
enabling businesses to capture more revenue during
peak demand periods and maintain competitiveness
during slow periods.
Value-Based Pricing: Consider the perceived value
of the product or service to the customer. Products or
services with premium features or perceived higher
value can be priced high.
25. Non-linear Pricing
Time-Based Pricing: Prices can vary based on the
time of day, day of the week, or season. This approach
is common in industries like hospitality and airlines,
where prices often fluctuate based on demand
patterns.
Personalization: Data-driven decision enable
businesses to personalize pricing for individual
customers. Factors such as past purchase history,
browsing behavior, and demographics can be used to
determine the optimal price for each customer.
