Short presentation on different pricing strategies. Formulas for break even and margin calculation. Pros and cons of different pricing strategies.

1. Choosing the right
pricing strategy
Peter Ramsden
Paramount Learning Ltd

2. Outline
 Importance of Price
 Factors affecting Price
 Pricing Strategies
 Price demand curves

3. What must I consider before
setting price?
1. Know how much it costs to
make and deliver product or
service. Direct and Indirect
costs. Fixed and Variable costs.
2. Know your breakeven point
3. Research current prices in the
market.
4. Consider your market
positioning and competitive
advantage as this is likely to
impact directly on your choice of
pricing strategy.

4. Importance of Price
 Choosing the right
pricing strategy
strengthens the chance
of achieving turnover
and profit in line with
company objectives.

5. Importance of Price
 Getting it wrong can be
painful!

6. Importance of Price
 First impressions
 Often price creates a first impression of the quality of the
product/service and other value based judgements come
later.
 Pricing low can signify cheap and cheerful, pricing high can
indicate quality?
£5600
£65

8. Price Elasticity of Demand
 Elastic Demand –
 Products are considered to exist in a market that exhibits elastic demand when a certain percentage
change in price results in a larger and opposite percentage change in demand.
 For example, if the price of a product increases by 10%, the demand for the product is likely to
decline by greater than 10%.
 Inelastic Demand –
 Products are considered to exist in an inelastic market when a certain percentage change in price
results in a smaller and opposite percentage change in demand.
 For example, if the price of a product increases by 10%, the demand for the product is likely to
decline by less than 10%.
 Elasticity of demand (PED) = % change in demand of good X / % change in price of good
X
 If the PED is greater than one, the good is price elastic. Demand is responsive to a change in price.
If for example a 15% fall in price leads to a 30% increase in quantity demanded, the price elasticity =
2.
 If the PED is less than one, the good is inelastic. Demand is not very responsive to changes in
price. If for example a 20% increase in price leads to a 5% fall in quantity demanded, the price
elasticity = 0.25

10.  Prices usually start high and decline as the product reaches
maturity
 Difficult to start prices low and subsequently increase prices later

11. The Elements of Cost
1. Direct Materials (Used in the
manufacture of
2. Direct Labour the good or
service)
3. Direct Expenses
Prime or Product Cost
1. Production Overhead
Production Cost
1. Research and Development
Cost
2. Marketing and Distribution
3. General Administration
Total Cost

12. Break Even Analysis
SALES2
SALES1
£
VARIABLE
COSTS
FIXED
COSTS
TIME

13. Break Even Formulas
 Profit= Sales – Expenditure
 Sales - variable costs = Contribution margin
 Contribution margin - Fixed Costs = Profit
 Break even = Fixed Costs/Contribution per
unit.
 (Fixed cost + Required Profit)/Contribution
per unit = units required to make profit.

14. Break Even Calcs
 Break even = Fixed Costs
Contribution per unit
 Item sold for £3000 with a variable cost of
£1500 = Contribution of £1500
 Fixed costs of £100,000 means that 66.6
units need to be sold at £3000 before the
business breaks even.

15. Pricing Strategies
 Market pricing  Competitive Pricing
 Cost pricing  Below market
 Mark up  Parity or Price Matching
 Margin generation  Bundle
 Breakeven  Skimming
 Loss leader  Markdowns
 Psychological pricing  Temporary
 Prestige  Permanent
 Odd even pricing  Payment and delivery
 Demand terms

16. Market Pricing
 Set prices at or around
the middle of the
market
 Fight on other added
value areas such as
delivery, customer
service etc

17. Cost Plus Pricing
 Cost Plus Pricing
 Cost of materials
 Cost of labour
 Add an amount for profit
 Does not take into account
general overhead costs
 Beware of making loss due
to hidden overhead

18. Loss Leader
 Pricing
a product below cost to attract
customers to higher margin products

19. Psychological Pricing
 Prestige pricing  Odd Even Pricing

20. Demand Pricing
 Price varies based on some demand criteria
 As your output increases/decreases your
prices change.
 Can confuse customers

21. Competitive Pricing
 Matching or beating the
market price

22. Bundle Pricing
 Discounts offered to entice client to accept a
bundle rather than one part only.
 Example
 Product X £3,500
 Product Y £4,500
 Product Z £7,500
 Total £15,500
 Bundle Price £14,500
 Discount of £1,000 or 6.5%

23. Skimming Pricing
 Client insensitive to price.
 Works well in an inelastic
market.
 Client needs product.
 Little or no substitutes
available.
 Innovators, early adopters.
 Skim the cream off the top.

24. Markdowns
 Temporary
 Finite life- Offer closes 31/10/08
 Can be used to test the market
 Permanent
 Often used to get rid of old stock or perishables
approaching end of shelf life
 Fire sale and soiled goods
 Seasonal
 Fashions, clothing gardening etc

25. Payment and Delivery Terms
 Considered part of the pricing mix.
 Cost for payment terms borne by supplier of
purchaser depending on terms agreed.
 Do not forget to take into account credit terms
and risk when pricing.

26. Pricing Decisions
 Understand how much it costs to produce or procure
a product/service.
 Ensure that general overhead has been taken into
account when setting pricing.
 Research the typical market price for your product
and service and pitch accordingly.
 Understand your position in the market.
 High end value, cheap and cheerful or somewhere in
between.
 Set your price level, and review on going.