Pricing Strategies

Mrs. Jayashree Vispute

Penetration PricingPrice set to ‘penetrate the market’‘Low’ price to secure high volumesTypical 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

Results in a Larger Market Share

Market SkimmingHigh price, Low volumesSkim the profit from the marketSuitable 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)

Results in Fewer, More Profitable Sales.

Eg. Playstation, jewellery, digital technology, new DVDs, etc.

Value PricingPrice 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.

Loss LeaderGoods/services deliberately sold below

cost to encourage sales elsewhereTypical in supermarkets, e.g. at Diwali,

selling scented soap at Rs. 13 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

Psychological PricingUsed to play on consumer perceptionsClassic example – Rs.999 instead of Rs.1000!Links with value pricing – high value goods

priced according to what consumers THINK should be the price

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, supermarket products, electrical goods – find very similar prices in all outlets

Tender PricingMany contracts awarded on a tender basisFirm (or firms) submit their price for carrying

out the workPurchaser then chooses which represents best

valueMostly done in secret

Price DiscriminationCharging 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

Destroyer/Predatory PricingDeliberate 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

Contribution PricingContribution = Selling Price – Variable

(direct costs)Prices set to ensure coverage of variable

costs and a ‘contribution’ to the fixed costsSimilar in principle to marginal cost

pricingBreak-even analysis might be useful in

such circumstances

Market SkimmingMarket Skimming Market PenetrationMarket Penetration

>Setting a High Price for a New Product to Maximize Revenues from the Target Market.

>Results in Fewer, More Profitable Sales.

> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.

>Results in a Larger Market Share.

New Product Pricing Strategies

Pricing strategiesPremium pricing

Uses a high price, but gives a good product/service exchange e.g. Concorde, The Ritz Hotel

Penetration pricing offers low price to gain market share - then

increases price e.g. France Telecom - to attract new corporate

clients (or Telewest cable)

Economy pricing placed at ‘no frills’, low price e.g. Soups, spaghetti, beans - ‘economy’ brands

Price skimming where prices are high - usually during introduction e.g new albums or films on release ultimately prices will reduce to the ‘parity’

Psychological pricing to get a customer to respond on an emotional,

rather than rational basis .e.g 99 not 100 ‘price point perspective

Product line pricing rationale of a product range e.g. DairyMilk 20, three-pack 60, chotu-size 2

Pricing variations ‘off-peak’ pricing, early booking discounts,etc e.g offering a ‘cash back’ incentive for expensive

goods

Optional product-pricing e.g. optional extras - BMW famously under-

equippedCaptive product pricing

products that complement others e.g Gillette razors (low price) and blades (high

price)Product-bundle pricing

sellers combine several products at the same price

e.g software, books, CDs.Promotional pricing

BOGOF e.g. toothpaste, soups, etc

Geographical pricing different prices for customers in different parts

of the world e.g.Include shipping costs, or place on PLC

Value pricing usually during difficult economic conditions e.g. Value menus at McDonalds