Pricing strategy & psychological pricing


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Pricing strategy & psychological pricing

  2. 2. PRICING• Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. It is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers
  3. 3. Pricing Method Markup pricingPerceived value Target returnpricing pricing METHOD Value pricing Auction pricing
  4. 4. Pricing ObjectivesA goal that guides a business in setting the cost of a product or service topotential consumers.It should reflect a companys marketing, financial, strategic and productgoals, as well as consumer price expectations and the levels of available stockand production resources.Five major objective through pricingSurvivalMaximum current profitMaximum market shareMaximum market skimmingProduct quality leadershipOther objectives
  5. 5. Sequence of steps for developing the pricing for a new productDevelop marketing strategy : perform marketinganalysis, segmentation, targeting and positioning.Make marketing mix decision: define the product, distribution andpromotional tactics.Estimate the demand curve: estimate how quantity demanded varies withprice.Calculate Cost: include fixed and variable costs associated with the product.Understand environmental factors: evaluate likely competitoractions, understand legal constraints, etc.
  6. 6. Set pricing objectives: like profit maximization, revenue maximization orprice stabilisation.Determine pricing: using information collected in the above steps, select apricing method, develop the pricing structure and define discounts.
  7. 7. Pricing approaches and strategiesThere are three main approaches a business takes to setting price:Cost-based pricing: price is determined by adding a profit element on top of the cost of making the product.Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay.Competitor-based pricing: where competitor prices are the main influence on the price set
  8. 8. Pricing Strategies Premium PricingUse a high price where there is a unique brand. This approach is used where asubstantial competitive advantage exists and the marketer is safe in theknowledge that they can charge a relatively higher price. Such high prices arecharged for luxuries such as Savoy Hotel rooms, and first class air travel. Penetration PricingThe price charged for products and services is set artificially low in order togain market share. Once this is achieved, the price is increased. e.g. France Telecom and Sky TV
  9. 9. Economy PricingThe costs of marketing and promoting a product are kept to a minimum.Budget airlines are famous for keeping their overheads as low as possible andthen giving the consumer a relatively lower price to fill an aircraft. Price SkimmingIn most skimming, goods are sold at higher prices so that fewer sales areneeded to break even. Selling a product at a high price, sacrificing high sales to gain a high profit istherefore "skimming" the market.Skimming is usually employed to reimburse the cost of investment of theoriginal research into the product. e.g.- Electronic markets
  10. 10. . Product Line Pricing Where there is a range of products or services the pricing reflects the benefits of parts of the range. e.g.- car washes; a basic wash could be $2, a wash and wax $4 and the whole package for $6 Optional Product Pricing Companies will attempt to increase the amount customers spend once they start to buy. Optional extras increase the overall price of the product or service. e.g.- airlines will charge for optional extras.
  11. 11. Predatory pricing Prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Value Pricing This approach is used where external factors such as recession or increased competition force companies to provide value products and services to retain sales. e.g. value meals at McDonalds and other fast-food restaurants.•
  12. 12. Product Bundle Pricing Sellers combine several products in the same package. This also serves to move old stock. Blu-ray and videogames are often sold using the bundle approach oncethey reach the end of their product life cycle. Geographical PricingGeographical pricing sees variations in price in different parts of the world.e.g. – rarity value, or where shipping costs increase price. More tax on certain types of product which makes them more or lessexpensive.
  13. 13. Cost-plus (or “mark-up”) pricing It is used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be.( e.g. Assume a manufacturer costs & sales expectation:-variable cost per unit- $10, fixed cost- $ 300000 expected unit sales 50000.Unit cost= vc + fc/unit sale = $10+$300000/50000=$16 if manufacturer want to earn a 20% markup onsale, Markup price= unit cost/(1- desired return on sale)=$16/1-0.2=$20,profit=$4) Promotional PricingPricing to promote a product is a very common application. e.g.- BOGOF (Buy One Get One Free), money off vouchers and discounts. Sales are extravaganzas of promotional pricing.
  14. 14. PSYCHOLOGICAL PRICING“A pricing strategy that specializes in inflicting psychological effects onconsumers.” It is a marketing strategy based on utilizing particular pricing techniques to form a psychological impact on consumers.Popular techniques that raise sales : Odd Pricing Prestige Pricing The opposite of odd pricing, e.g. pricing at $10 rather than $9.99. BOGOF
  15. 15. The Aspects of Psychological Pricing1.Order of Information Processing2. Knowledge of The Base• Scenario one: Shirt A costs $30 Shirt B costs $60• Scenario two: Pilot-less Remote Car System A costs $50,000 Pilot-less Remote Car System B costs $80,0003. Image Associations Great Perfume ABC and Hugo Boss
  16. 16. Advantages Overall Improvement Raising profits, growing customer base, increasing sales andconversions, attracting potential businesses. Emotional-Based PricingFocuses on the weakness of how human beings tend to look at prices in anon-rational perspective, plus the fact that we are all humans here, thestrategies will be effective against everyone. Employee Control.Odd-even pricing which derived from a real life incident:- insupermarkets, most products were priced at a clean and simple price such as$50.00,
  17. 17. Disadvantages Calculation Complication Transaction mistakes Rational Decision-Making. Everyone pays much attention into the true cost of a price especially with a “.99″ ending, some people still do value their efforts into calculating individual prices carefully, therefore psychological pricing may not work on everybody as it is dependent on different types of audiences. More is Less The opposite effect of the “less is more” principle, since playing numbers with the mind isn’t the latest invention, it has been around for years, the key is, you can see almost everyone in the world doing it, so what’s the point when everyone is offering a few cents discount?