This document discusses various pricing strategies used by companies, including setting initial prices for new products. It describes strategies such as price skimming, which involves setting a high initial price for new products to extract maximum revenue from customers willing to pay more, and market penetration pricing, which uses a low initial price to quickly gain a large market share. The document also outlines other strategies such as discount pricing, segmented pricing based on customer or location differences, psychological pricing to influence perceptions, and dynamic pricing that changes based on demand fluctuations.

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ABDUL WALI KHAN UNIVERSITY
MARDAN

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Subject: Principle of marketing
Lecture:20,21,22
Discipline : B.com 4th
Department Institute of Business Studies and
Leadership
By Nazish Noreen

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What is price?
Setting price
Price adjustment strategies
New product pricing strategies
Developing pricing strategies

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Developing pricing strategies
Price: pricing is the method of determining the value a
producer will get in the exchange of goods and
services. Simply, pricing method is used to set the
price of producer’s offerings relevant to both the
producer and the customer. Every business operates
with the primary objective of earning profits, and the
same can be realized through the Pricing methods
adopted by the firms.

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Price adjustment strategies:
Companies must adjust their basic prices to account
for differences in customers and situations.
There are seven price adjustment strategies:
Discount and allowance pricing, segmented pricing,
psychological pricing, promotional pricing,
geographical pricing, dynamic pricing and
international pricing. Let’s examine the most
important price adjustment strategies!

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Discount and Allowance Pricing
The first one of the price adjustment strategies is
applied in a large share of businesses. Most
companies adjust their basic price to reward customers
for certain responses, such as the early payment of
bills, volume purchases and off-season buying.
Discount and allowance pricing can take many forms:

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Segmented Pricing:
Often, companies adjust their basic prices to allow for
differences in customers, products and locations. In
short: adjusting prices to account for different
segments. In segmented pricing, the company thus
sells a product or service at different prices in different
segments, even though the price-difference is not
based on differences in costs.
Several different forms of segmented pricing exist.
Under customer-segment pricing, different customers
pay different prices for the same product or service

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Psychological Pricing:
Another one of the price adjustment strategies is
psychological pricing. It refers to pricing that
considers the psychology of prices, not simply the
economics. Indeed, the price says something about
the product.
However, this does not work forever. When
consumers can judge the quality of a product by
examining it or by calling on past experience with it,
price is less used to judge quality. But when they
cannot judge quality, price becomes an important
signal.

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Promotional Pricing:
Promotion pricing calls for temporarily pricing products below the
list price, and sometimes even below cost, to increase short-run
sales. Thus, companies try to create buying excitement and
urgency. Promotional pricing could take the form of discounts
from normal prices to increase sales and reduce inventories.
Geographical Pricing:
The next one of the price adjustment strategies is geographical
pricing. In geographical pricing, the company sets prices for
customers located in different parts of the country or world.
Should the company risk losing the business of more-distant
customers by charging them higher prices to cover the additional
shipping costs? Or should the same prices be charged
regardless of location?

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There are five geographical pricing strategies:
FOB-origin pricing: goods are placed free on board a carrier, the customer
thus pays the freight from the factory to the destination. Price differences are the
consequence.
Uniform-delivered pricing: the company charges the same price plus freight to
all customers, regardless of their location. Thus, there are no geographical price
differences.
Zone pricing: the company sets up two or more zones. All customer within a
zone pay the same total price, the more distant the zone, the higher the price.
Base-point pricing: the seller designates some city as a base point and
charges all customers the freight cost from that city to the customer. This can
level the geographical price differences if a central base-point is selected.
Freight-absorption pricing: the seller absorbs all or part of the freight charges
to get the desired business. Price differences

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Dynamic Pricing:
Dynamic pricing refers to adjusting prices continually
to meet the characteristics and needs of individual
customers and situations. If you look back in history,
prices were normally set by negotiation between
buyers and sellers. Thus, prices were adjusted to the
specific customer or situation. Exactly at that point,
dynamic pricing starts. Instead of using fixed prices,
prices are adjusted on a day-by-day or even hour-by-
hour basis, taking many variables into account, such
as current demand, inventories and costs.

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International Pricing:
The last one of the major price adjustment strategies
is international pricing. Companies that market their
products internationally must decide what prices to
charge in the different countries in which they
operate. The price that a company should charge in a
country can depend on many factors, involving
economic conditions, competitive situations, laws and
regulations, and the development of the wholesaling
and retailing system

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Pricing strategies for new products
Pricing strategies tend to change as a product goes
through its product life cycle. One stage is particularly
challenging: the introductory stage. This is called New
Product Pricing. When companies bring out a new
product, they face the challenge of setting prices for
the very first time. Two new product pricing strategies
are available: Price-Skimming and Market-
Penetration Pricing. Let’s learn more about these two
new product pricing strategies.

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Price-Skimming
The first new product pricing strategies is called
price-skimming. It is also referred to as market-
skimming pricing. Price-skimming (or market-
skimming) calls for setting a high price for a new
product to skim maximum revenues layer by layer
from those segments willing to pay the high price.
This means that the company lowers the price
stepwise to skim maximum profit from each segment.
As a result of this new product pricing strategy, the
company makes fewer but more profitable sales.

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Market-Penetration Pricing
The opposite new product pricing strategy of price
skimming is market-penetration pricing. Instead of
setting a high initial price to skim off each segment,
market-penetration pricing refers to setting a low
price for a new product to penetrate the market
quickly and deeply. Thereby, a large number of
buyers and a large market share are won, but at the
expense of profitability. The high sales volume leads
to falling costs, which allows companies to cut their
prices even further.