pricing strategies (final)

8/6/2019 Pricing Strategies (Final)

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PRICING STRATEGIES & TYPESPRICING STRATEGIES & TYPES

OF PRICING STRATEGIESOF PRICING STRATEGIES


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What Is Pricing Strategy?What Is Pricing Strategy?

Pricing strategy refers to the methods by

which a business calculates how much itwill charge for a product or service. It isbased not only on the cost of theproduct, but also on profit margin and a

holistic view of the market and futureviability.


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What Is Pricing Strategy?What Is Pricing Strategy?

PRICE

PRODUCT/

SERVICE

CALCULATES

METHODS


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OBJECTIVES OF PRICINGOBJECTIVES OF PRICING Current profit maximization:- seeks to maximize current profit, taking into account revenue

and costs. Current profit maximization may not be the best objective if it results in lower long-term

profits.

Current revenue maximization:- seeks to maximize current revenue with no regard to profit

margins. The underlying objective often is to maximize long-term profits by increasing market share

and lowering costs.

Maximize quantity:

-seeks to maximize the number of units sold or the number of customersserved in order to decrease long-term costs as predicted by the experience curve.

Maximize profit margin:- attempts to maximize the unit profit margin, recognizing that

quantities will be low.

Quality leadership:- use price to signal high quality in an attempt to position the product as thequality leader.

Partial cost recovery:- an organization that has other revenue sources may seek only partial

cost recovery.

Survival:- in situations such as market decline and overcapacity, the goal may be to select a price

that will cover costs and permit the firm to remain in the market. In this case, survival may take a

priority over profits, so this objective is considered temporary.

Status quo:- the firm may seek price stabil ization in order to avoid price wars and maintain amoderate but stable level of profit.


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TYPES PRICING STRATEGIESTYPES PRICING STRATEGIES


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Penetration PricingPenetration Pricing


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Penetration PricingPenetration 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


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Market SkimmingMarket Skimming


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Market SkimmingMarket Skimming

High price, Low volumes.

Skim the profit from themarket.

Suitable for products that haveshort life cycles or which willface competition at some pointin the future (e.g. after a patentruns out).

Examples include: Play station,jewellery, digital technology,new DVDs, etc.

Many are predicting a fire sale in laptops

as supply exceeds demand.


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Value PricingValue Pricing


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Value PricingValue Pricing

Price set in accordancewith customerperceptions about thevalue of theproduct/service.

Examples include statusproducts/exclusiveproducts

Companies may be able to set prices according to

perceived value.


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Loss LeaderLoss Leader


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Loss LeaderLoss Leader

Goods/services deliberately sold below cost toencourage sales elsewhere.

Typical in supermarkets, e.g. at Christmas, sellingbottles of gin at 3 in the hope that people will beattracted to the store and buy other things.

Purchases of other items more than covers losson item sold.

e.g. Free mobile phone when taking on contract

package.


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Psychological PricingPsychological Pricing


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Psychological PricingPsychological Pricing

Used to play on consumer perceptions.

Classic example - 9.99 instead of 10.99!

Links with value pricing high value goodspriced according to what consumers THINK

should be the price.


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Going Rate (Price Leadership)Going Rate (Price Leadership)


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Tender PricingTender Pricing


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Tender PricingTender 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.


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Price DiscriminationPrice Discrimination


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Price DiscriminationPrice Discrimination

Charging a different pricefor the same good/servicein different markets.

Requires each market tobe impenetrable.

Requires different priceelasticity of demand in

each marketPrices for rail travel differ for the same journey atdifferent times of the day


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Destroyer Pricing/Predatory PricingDestroyer Pricing/Predatory Pricing


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Destroyer/Predatory PricingDestroyer/Predatory Pricing

Deliberate price cutting or offer of freegifts/products to force rivals (normally smallerand weaker) out of business or prevent newentrants.

Anti-competitive and illegal if it can be proved


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Absorption/Full Cost PricingAbsorption/Full Cost Pricing


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Absorption/Full Cost PricingAbsorption/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.


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Marginal Cost PricingMarginal Cost Pricing


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Marginal cost the cost of producing ONE extra or ONEfewer item of production.

MC pricing allows flexibility.

Particularly relevant in transport where fixed costs may berelatively high.

Allows variable pricing structure e.g. on a flight fromLondon to New York providing the cost of the extrapassenger is covered, the price could be varied a gooddeal to attract customers and fill the aircraft.


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Example:

Aircraft flying from Bristol to Edinburgh Total Cost (including normal 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 12.50 and fill the

seat than not fill it at all!

*All figures are estimates only


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Contribution PricingContribution Pricing


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Contribution PricingContribution Pricing

Contribution = Selling Price Variable (direct

costs)

Prices set to ensure coverage of variable costs anda contribution to the fixed costs.

Similar in principle to marginal cost pricing.

Break-even analysis might be useful in suchcircumstances


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Target PricingTarget Pricing


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Target PricingTarget 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


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CostCost--Plus PricingPlus Pricing


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CostCost--Plus PricingPlus Pricing

Calculation of the average cost (AC) plus a

mark up.

AC = Total Cost/Output


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Influence of ElasticityInfluence of Elasticity


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Any pricing decision must be mindful of theimpact of price elasticity.

The degree of price elasticity impacts on the levelof sales and hence revenue.

Elasticity focuses on proportionate (percentage)

changes.

PED = % Change in Quantity demanded/%Change in Price


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Price Inelastic:

% change in Q < % change in P

e.g. a 5%

increase in price would be met by a fall insales of something less than 5%.

Revenue would rise.

A 7%

reduction in price would lead to a rise in salesof something less than 7%.

Revenue would fall


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Price Elastic:

% change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by

something more than 4%

Revenue would fall.

A 9% fall in price would lead to a rise in sales ofsomething more than 9%.

Revenue would rise


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THANK YOUTHANK YOU

PRESENTED BY:PRESENTED BY:

2222 SNEHA INDULKARSNEHA INDULKAR2323 SUNITKUMAR NAIRSUNITKUMAR NAIR

pricing strategies (final)

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