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PPT on pricing strategies

ITC Limited
ITC Limited
ITC LimitedMBA Summer Intern at ITC Limited

PPT on pricing strategies

1 of 17
Pricing Strategies
Pricing Strategies
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
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: digital technology, new
  DVDs, etc.
Value Pricing
 Price set in accordance with customer
  perceptions about the value of the
  product/service
 Examples include status products/exclusive
  products
Loss Leader
 Goods/services deliberately sold below cost to
  encourage sales elsewhere
 Typical in supermarkets, e.g. at Diwali, selling
  sweets at low cost 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
Ad

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PPT on pricing strategies

  • 3. 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
  • 4. 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: digital technology, new DVDs, etc.
  • 5. Value Pricing  Price set in accordance with customer perceptions about the value of the product/service  Examples include status products/exclusive products
  • 6. Loss Leader  Goods/services deliberately sold below cost to encourage sales elsewhere  Typical in supermarkets, e.g. at Diwali, selling sweets at low cost 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
  • 7. Psychological Pricing  Used to play on consumer perceptions  Classic example – Rs.999 instead of Rs.1000!  Links with value pricing – high value goods priced according to what consumers THINK should be the price
  • 8. 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
  • 9. 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
  • 10. 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  Example: Prices for rail travel differ for the same journey at different times of the day
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. Marginal Cost Pricing  Example: Aircraft flying from India to New York – Total Cost (including normal profit) = Rs.15,000 of which Rs.13,000 is fixed cost* Number of seats = 160, average price = Rs.93.75 MC of each passenger = Rs.2000/160 = Rs.12.50 If flight not full, better to offer passengers chance of flying at Rs.12.50 and fill the seat than not fill it at all! *All figures are estimates only
  • 15. 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
  • 16. 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
  • 17. Cost-Plus Pricing  Calculation of the average cost (AC) plus a mark up  AC = Total Cost/Output