PRICING

By:- Mithilesh Trivedi

Price•Price is the amount of money charged for a good or

service • The only marketing mix element that produces

revenue

• The sum of all the values that consumers exchange for the benefits of having or using the product or service

Factors to Consider when Setting Prices

General Pricing Approaches

1. Cost-Based Pricing

2. Value-Based Pricing

3. Competition-Based Pricing

Cost-Based Pricing Adding a standard markup to the cost of

the product

Produc

t

Cost

Price

Value

Customers

Value-Based Pricing

Setting price based on buyer’s perceptions of value rather than on the seller’s cost

Produc

t

Value

Price

Cost

Customers

Competition-Based Pricing

Setting prices based on the prices that competitors charge for similar product

Pricing Strategies

Penetration Pricing

Price 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

Market Skimming Pricing

• 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.

Loss Leader Pricing

• 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

• Used to play on consumer perceptions

• Classic example - $9.99 instead of $10.00!

• Odd-even: $5.95, $.79, $699 OR $12, $50

• Multiple Unit-3 for !1.00 better than $.34 each

Going Rate (Price Leadership)

• In case of price leader, rivals have difficulty in competing on price

• 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

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• Air/rail• First class• Business class• Economy class

Product Line Pricing

Optional- Product Pricing

Captive- Product Pricing

By-Product Pricing

Product Bundle Pricing

Product Mix Pricing Strategies

Product Line Pricing Setting the price steps between various product line based on cost difference

between the products, customers evaluations of different features and competitors’ prices

Optional- Product Pricing The pricing of optional or accessory products along with a main product

Captive- Product Pricing Setting a price for products that must be used along with a main product, such

as blades for a razor and film for a camera

By-Product Pricing Setting a price for by-product in order to make the main product’s

price more competitive

Product Bundle Pricing

Combining several products and offering the bundle at a reduced price

Strategy DescriptionDiscount and Allowance Pricing

Reducing prices to reward customer responses such as paying early or promoting the product

Segmented Pricing Adjusting prices to allow for differences in customers, products, or locations

Psychological Pricing Adjusting prices for Psychological effect

Promotional Pricing Temporarily reducing prices to increase short-run sales

Geographical Pricing Adjusting prices to account for the geographic location of customers

International Pricing Adjusting prices for international markets

Price Adjustment Strategies

Price Changes

•Price cuts•Price increases

Initiating Pricing Changes

Price increases

•Product is “hot”•Company greed

Price cuts

•New models will be available•Models are not selling well•Quality issues

Price cuts occur due to:

• Excess capacity• Increased market share

Price increase from:

• Cost inflation• Increased demand• Lack of supply

Price Changes

Public Policy and PricingPrice fixing: Sellers must set prices without talking to competitors

Predatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business

Pricing Across Channel Levels

Retail (resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products

Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers• Scanner fraud failure of the seller to enter current or sale prices

into the computer system• Price confusion results when firms employ pricing methods that

make it difficult for consumers to understand what price they are really paying