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Course: MBA-1
Subject: ME
Unit:2.4
Pricing Strategies
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, food 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 short life cycles or
which will face
competition at some
point in the future (e.g.
after a patent runs out)
• Examples include:
Playstation, jewellery,
digital technology, new
DVDs, etc.
Many are predicting a firesale in
laptops as supply exceeds
demand.
Copyright: iStock.com
Value Pricing
Value Pricing
• Price set in
accordance with
customer
perceptions about
the value of the
product/service
• Examples include
status
products/exclusive
products
Companies may be able to set prices
according to perceived value.
Copyright: iStock.com
Loss Leader
Loss Leader
• Goods/services deliberately sold below
cost to encourage sales elsewhere
• Typical in supermarkets, e.g. at
Christmas, selling bottles of gin at £3 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
Psychological Pricing
Psychological Pricing
• Used to play on consumer
perceptions
• Classic example - £9.99 instead of
£10.99!
• Links with value pricing – high
value goods priced according to
what consumers THINK should be
the price
Going Rate (Price Leadership)
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
Tender Pricing
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
Price Discrimination
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
Prices for rail travel differ for the same
journey at different times of the day
Copyright: iStock.com
Destroyer Pricing/Predatory Pricing
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
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 ‘absorb’ some of the fixed costs
of production
Marginal Cost Pricing
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
• 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 fill the aircraft
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 circumstances
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 have to be
made, to determine the price
Cost-Plus Pricing
Cost-Plus Pricing
• Calculation of the average cost
(AC)
• AC = Total Cost/Output
Influence of Elasticity
Influence of Elasticity
• Any pricing decision must be mindful of
the impact of price elasticity
• The degree of price elasticity impacts
on the level of sales and hence revenue
• Elasticity focuses on proportionate
(percentage) changes
• PED = % Change in Quantity
demanded/% Change in Price
• Source:
• Manquee book managerial
economics.
• www.Slideshare.com
• www.Wikipedia.com
• www.Google.com

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Mba 1 me u 2.4 pricing stratagy

  • 4. 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
  • 6. 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: Playstation, jewellery, digital technology, new DVDs, etc. Many are predicting a firesale in laptops as supply exceeds demand. Copyright: iStock.com
  • 8. Value Pricing • Price set in accordance with customer perceptions about the value of the product/service • Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Copyright: iStock.com
  • 10. Loss Leader • Goods/services deliberately sold below cost to encourage sales elsewhere • Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 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
  • 12. Psychological Pricing • Used to play on consumer perceptions • Classic example - £9.99 instead of £10.99! • Links with value pricing – high value goods priced according to what consumers THINK should be the price
  • 13. Going Rate (Price Leadership)
  • 14. 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
  • 16. 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
  • 18. 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 Prices for rail travel differ for the same journey at different times of the day Copyright: iStock.com
  • 20. 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
  • 22. 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
  • 24. 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 • 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 fill the aircraft
  • 26. 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
  • 28. 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 price
  • 30. Cost-Plus Pricing • Calculation of the average cost (AC) • AC = Total Cost/Output
  • 32. Influence of Elasticity • Any pricing decision must be mindful of the impact of price elasticity • The degree of price elasticity impacts on the level of sales and hence revenue • Elasticity focuses on proportionate (percentage) changes • PED = % Change in Quantity demanded/% Change in Price
  • 33. • Source: • Manquee book managerial economics. • www.Slideshare.com • www.Wikipedia.com • www.Google.com