pricing_strategies.pptx

Luiz Afonso dos Santos Senna - PhD
Pricing Strategies and Tactics
Raghunandan Helwade

Pricing Strategies
 Profit maximizing rule:
 Set production at level where MR = MC
 Non - Maximizing pricing rules
 there are a variety of these

Two part pricing
 Charge P = MC
 charge a fixed fee to extract some of the “con
sumer surplus”
 Examples:
 country clubs
 health clubs
 electricity providers

Declining block pricing
 Charging different prices according to how m
uch is purchased
 Attempt to extract consumer surplus and tran
sfer value to company

Auction pricing models
 Standard auction model
 multiple bidders compete with each other
 start at some low price, then successive bids rais
e price until someone “wins”
 Dutch auction model
 start at a high price, lower it until someone bids
 ex: dutch flower auctions
 How to extract consumer surplus?

Pricing and the Internet
 Traditional pricing paradigm?
 Access to demand data…...
 Measurement of demand elasticities?
 Ability to conduct pricing “experiments”
 Ability to spot market changes - and mo
ve quickly (perhaps)
 Access to bigger customer base
 Will prices be lower online?

Pricing Strategy
 How does a company decide what price to
charge for its products and services?
 What is “the price” anyway? doesn’t price
vary across situations and over time?
 Some firms have to decide what to charge
different customers and in different situatio
ns
 They must decide whether discounts are t
o be offered, to whom, when, and for what
reason

Why is Pricing Important?
In a company with average economics*,
 1% increase in volume = 3.3% increase in pro
fit
 1% increase in price = 11.1% increase in profi
t
 Improvements in price typically have 3-4 time
s the effect on profit as proportionate increas
es in volume.
*Based on average of 2,463 companies

Price vs. Nonprice Competition
 In price competition, a seller regularly offers
products priced as low as possible and acco
mpanied by a minimum of services
 In non price competition, a seller has stabl
e prices and stresses other aspects of marke
ting
 With value pricing, firms strive for more benef
its at lower costs to consumer
 With relationship pricing, customers have inc
entives to be loyal-- get price incentive if you
do more business with one firm

Nonprice Competition
 Some firms feel price is the main competitive
tool, that customers always want low prices
 Other firms are looking for ways to add value
, thereby being able to avoid low prices
 Sometimes prices have to be changed in resp
onse to competitive actions
 Many firms would prefer to engage in non pri
ce competition by building brand equity and
relationships with customers

SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance
The Process: An Illustration

Steps for Determining Prices
 Establish Pricing
Objectives
 Increase sales
volume?
 Prestigious image?
 Increase market
share?

Study Costs
 Can you make a pr
ofit?
 Can you reduce cos
ts without affecting
quality or image?

Estimate Demand
 What do customers expec
t to pay?
 Prices usually are directly
related to demand.

Study Competition

Decide on a Prici
ng Strategy
 Price higher than the c
ompetition because yo
ur product is superior
 Price lower, then raise
it once your product is
accepted

Set Price
 Monitor and evaluate its effectiveness
as conditions in the market change

Pricing Technology
 Smart Pricing – decisions are based on an enor
mous amount of data that Web-based pricing tec
hnology crunches into timely, usable information.
 Communicating Prices to Customers – electronic
gadgets that provide real-time pricing information
such as electronic shelves, digital price labels

Pricing Technology
 RFID Technology – wireless technology that i
nvolves tiny chips imbedded in products. The
chip has an antenna, a battery, and a memor
y chip filled with a description of the item
 Toll technology

Marketing Strategy Over the Product Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE
Marketing strategy Market development Increase market Defend market Maintain efficiency in
emphasis share share exploiting product
Pricing High price, unique Lower price Price at or below Set price to remain
strategy product / cover over time competition profitable or reduce
production costs to liquidate
Promotion Mount sales Appeal to Emphasize Reinforce loyal
Strategy promotion for mass market brand differences, customers; reduce
product awareness benefits & loyalty promotion costs
Place strategy Distribute through Build intensive Enlarge Be selective in
selective outlets network of distribution distribution, trim
outlets network unprofitable outlets

Other Pricing Strategies
Price-Based
Optimization
Skimming
Penetration

Price Adjustment Strategies
Discount Pricing
Bundling
Dynamic Pricing

Pricing Strategies

Penetration Pricing

Penetration Pricing
 Price set to ‘penetrate the market’
 ‘Low’ price to secure high volumes
 Typical in mass market products – chocolate bars, fo
od stuffs, household goods, etc.
 Suitable for products with long anticipated life cycles
 May be useful if launching into a new market

Market Skimming

Market Skimming
 High price, Low volumes
 Skim the profit from the market
 Suitable for products that have sho
rt life cycles or which will face com
petition at some point in the futur
e (e.g. after a patent runs out)
 Examples include: Playstation, jew
ellery, digital technology, new DVD
s, etc.

Market Skimming
Many are predicting a firesale in laptop
s as supply exceeds demand
Plasma screens: Currently at
high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images,
available from Education Image Gallery

Value Pricing

Value Pricing
 Price set in accordance with cu
stomer perceptions about the v
alue of the product / service
 Examples include status produc
ts/exclusive products
Companies may be able to set prices ac
cording to perceived value.
Title: BMW At The Frankfurt Auto Show. Copyright: Gett
y Images, available from Education Image Gallery

Loss Leader

Loss Leader
 Goods/services deliberately sold below cost to encou
rage sales elsewhere
 Typical in supermarkets, e.g. at Christmas, selling bot
tles of gin at £3 in the hope that people will be attract
ed to the store and buy other things
 Purchases of other items more than covers ‘loss’ on it
em sold
 e.g. ‘Free’ mobile phone when taking on contract pac
kage

Psychological Pricing

 Used to play on consumer perceptions
 Classic example - $9.99 instead of $10.00!
 Odd-even: $5.95, $.79, $699 OR $12, $50
 Multiple Unit-3 for !1.00 better than $.34 each

Odd-Even Pricing
 Odd numbers convey a bargain imag
e -- $.79, $9.99, $699
 Even numbers convey a quality imag
e -- $10, $50, $100

 Prestige Pricing – sets a higher than averag
e price to suggest status

Multiple-Unit Pricing – 3 for $.99
Suggests a bargain and helps incre
ase sales volume.
Better than selling the same items
at $.33 each.

Everyday Low Prices (EDLP)
– set on a consistent basis

Going Rate (Price Leadership)

Going Rate (Price Leadership)
 In case of price leader, rivals have difficulty in competing on pric
e – too high and they lose market share, too low and the price le
ader would match price and force smaller rival out of market
 May follow pricing leads of rivals especially where those rivals h
ave a clear dominance of market shar
 Where competition is limited, ‘going rate’ pricing may be applica
ble – banks, petrol, supermarkets, electrical goods – find very si
milar prices in all outlets

Tender Pricing

Tender Pricing
 Many contracts awarded on a t
ender basis
 Firm (or firms) submit their pric
e for carrying out the work
 Purchaser then chooses which r
epresents best value
 Most government contracts
A European consortium led by Airbus re
cently won a contract to supply refuellin
g services to the RAF – priced at £13 bil
lion!

Price Discrimination

 Charging a different price for th
e same good/service in differen
t markets
 Requires each market to be im
penetrable
 Requires different price elastici
ty of demand in each market
 Air/rail
 First class
 Business class
 Economy class
Prices for rail travel differ for the same j
ourney at different times of the day

 Selling the same good to different people at di
fferent prices
 Conditions necessary:
 Identifiable customer groups with differing price
elasticities
 Maintain separation of groups--prevent resale.

Types of Price Discrimination
 First degree
Identify and charge each customer
what they are willing to pay
Limit: D = MR, no consumer surpl
us.
 Second degree
Quantity discounts. Volume purchas
es are given lower prices. Need to
measure goods and services bought
by consumers.

Types of Price Discrimination
 Third degree
Segment markets in some way. Charge
all in the segment the same prices.
Treat each segment as a separate mark
et– then do MR=MC in each
Are coupons as a price discrimination m
echanism?

Discounts and Allowances
Cash Discounts – offered to buyer
s to encourage them to pay their bill
s quickly.
 2/10, net 30
Quantity Discounts – offered for p
lacing large orders
Trade Discounts – the way manuf
acturers quote prices to wholesaler
s and retailers.

Promotional Pricing -- Used with sales
promotion
 Loss Leader Pricing – offering very popul
ar items for sale at below-cost prices
 Special-Event
 Back-to-school specials
 Dollar days
 Anniversary sales
 Rebates and Coupons

Seasonal Discount – offered o
utside the customary buying se
ason

Allowances – go directly to the buy
er. Customers are offered a price r
eduction if they sell back an old mo
del of the product they are purchasi
ng

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory Pricing
 Deliberate price cutting or offer
of ‘free gifts/products’ to force
rivals (normally smaller and we
aker) out of business or preven
t new entrants
 Anti-competitive and illegal if it
can be proved
 Typical of oligopoly with collusi
on
Microsoft – have been accused of predatory pri
cing strategies in offering ‘free’ software as pa
rt of their operating system – Internet Explore
r and Windows Media Player - forcing competit
ors like Netscape and Real Player out of the m
arket

Unfair Trade Practice Acts
Laws that prohibit wholesaler
s and retailers from selling bel
ow cost

Price Fixing
An agreement between two or
more firms on the
price they will charge
for a product (usually in oligopolistic
markets)

The Robinson-Patman Act of 1936 (USA):
 Prohibits any firm from selling to two or mor
e different buyers at different prices if the re
sult would lessen competition

59
Robinson-Patman Act Defenses
Seller Defenses
Cost
Market
Conditions
Competition

Predatory Pricing
The practice of charging a ver
y low price for a product with t
he intent of driving competitor
s out of business or out of a m
arket.

Absorption/Full Cost Pricing

Absorption/Full Cost Pricing
 Full Cost Pricing – attempting to set price to
cover both fixed and variable costs
 Absorption Cost Pricing – Price set to ‘abso
rb’ some of the fixed costs of production

Marginal Cost Pricing

 Marginal cost – the cost of producing ONE extra or ONE fewer it
em of production
 MC pricing – allows flexibility
 Particularly relevant in transport where fixed costs may be relati
vely 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 f
ill the aircraft

 Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including n
ormal 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 £1
2.50 and fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

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 circumst
ances

Target Pricing

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 hav
e to be made, to determine the mark-up
 Mark-up = Profit/Cost x 100
 This strategy is used by many clothes retailer
s where they can add upto 60% mark-up on t
he basic cost of the clothes. So even with a 5
0% sales offer they still make a profit!

Cost-Plus Pricing

Cost-Plus Pricing
 Calculation of the average cost (AC) plus a m
ark up
 AC = Total Cost/Output

72
Select a Pricing Method
 Mark-up Pricing - “Cost Plus”
 Target Return Pricing
 Perceived Value Pricing

Device Pricing vs. Whole Product Pricing
 Value of any product to its market is strongly infl
uenced by prices of competitive products
 Competitive “devices” are analyzed, but “produc
ts” are priced
 Product “features” have different values:
 Customer service
 Warranties
 Distribution channels (e.g., convenience)
 The “sum” of the features makes up the “produc
t”

Determining Perceived Value
 What value is placed on the end result?
 The cost of alternative solutions to the custome
r.
 A function of:
 Prices of comparable (though not identical) prod
ucts
 The “value” (+/-) of the product’s differences vs. t
he competitive offering
 The value of the “Whole Product”

Economic Value Analysis
 Identify the cost of the competitive product o
r process (i.e., the reference value)
 Identify all the factors that differentiate the p
roduct.
 Determine the value to the customer of thes
e differentiating factors (i.e., the differentiati
on value)
 Sum the reference value and the differentiat
ion value to determine the total economic va
lue.

76
Select a Pricing Method
 Mark-up Pricing - “Cost Plus”
 Target Return Pricing
 Perceived Value Pricing
 Value Pricing
 Going Rate Pricing (market price)
 Reference Pricing (comparison w/substitutes)
 Sealed-Bid Pricing

Select the Final Price
 Desired/Required Distributor Margins
 Psychological pricing
 Influence of other marketing mix elements
 Company pricing policies
 Impact of price on others

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