Pricing Strategies

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 Outline
 Introduction
 Pricing strategies and process
 Reactions to price changes
 Impact on discounting
 Price wars
 Yield management
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 Introduction
 We need to set price when we have a
new product, or when we enter a new
market with an existing product
 How?
 Need to decide what position you want
your product to be in (see quality-price
relationship—next slide)

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 Price-Quality Strategies
 Philip Kotler identified 9 price-quality
strategies
High Price Low Price
High Quality High Super
Premium
Value Value

Over Mid Good

Charging Value Value

False
Rip-off Economy
Economy
Low Quality 4
 Pricing Process
1. Set Pricing Objectives (see next slide)
2. Analyze demand
3. Draw conclusions from competitive
intelligence
4. Select pricing strategy appropriate to
the political, social, legal and
economical environment
5. Determine specific prices
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Possible Pricing Objectives
 Profit objectives e.g.
 Targeted profit return
 Volume objectives e.g.
 Dollar or unit sales growth
 Market share growth
 Other objectives e.g.
 Match competitors’ price
 Non-price competition
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 Demand Analysis

 Measure the impact of price change on

total revenue
 Predicts unit sales volume and total
revenue for various price levels
 Different customers have different price
sensitivities and needs

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Impact of Cost on Pricing
Strategy
 Fixed and variable costs
 Full-Cost Pricing
Markup pricing, break-even pricing and
rate-of-return pricing
 Variable-cost pricing
 3 types of relationships
 Ratio of fixed costs to variable costs
 Economies of scales
 Cost structure 8
Discussion: Impact of Ethics on
Pricing
 How should you price if your product is
a life-saving drug?
 What are the ethical considerations?
 Customers have no choice
 Need to pay for the research
 When cheaper options doesn’t work
 Competition decides
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 Information Needed for
Price Change
 Customers’ ability & willingness to buy;
customer lifestyle; benefits sought;
characteristics of the product e.g.
 When the kopi tiams, local coffee shops in
Singapore tried to raise the price of a cup of
coffee by 10 cents in March 1994, the grass-
root reaction was stormy
 When Starbucks Coffee and Spinelli’s raised
their prices in the beginning of 1998 by a
hefty 20%, nobody raised an eyelit 10
 Information Needed for
Price Change (cont’d)
 Need to know everything about the
competitors
 How would competitors react to our price
change? (see following slide)
 In obtaining competitors’ information,
remember the value of the information

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 New-Product Pricing
Strategies
1. Skimming pricing
 Charging a high price initially and reducing
the price over time
 Commonly used when introducing new &
innovative products in the ASPAC region
2. Penetration pricing
 Charging a low price when entering the
market to capture market share
 Used when competitors are closing in with
similar or better products 12
 New-Product Pricing
Strategies (cont’d)
3. Intermediate pricing
 Pricing somewhere in between the
skimming strategy and the penetration
strategy

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Pricing Strategies for Established
Products
Three strategic alternatives:
 Maintain the price if you are the leader e.g.
 In 1999, Shell in Singapore maintained its price when
other petrol companies engaged in a price war until
towards the end of the engagement
 Reduce the price e.g.
 SIA regularly reduce its airfare in anticipation of the
developing market situations
 Increase the price
 during inflation, or if demand is expected to increase
or if you wish to harvest e.g. in Indonesia 14
Price-Flexibility Strategy
 One-price policy—setting one fixed
price for all markets
 Flexible-price policy—setting different
prices in different markets based on:
 Geographic Location,
 Time of delivery, or
 The complexity of the product
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How much flexibility in price?

 Depends on the Demand-Cost gap and

the influence of competition, social,
legal and ethical considerations
 Example: Life-saving drugs

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 Product-Line Pricing
 When pricing products in different
lines, must take cross-elasticities of
demand across the set of products
into consideration
 The idea is to maximize the profits of
the entire organization rather than
that of a single product or a single line
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 Leasing Strategy
 Leasing is more common for
industrial goods e.g.
 Singapore Airlines sold many of their
aircraft and lease them back for their
operations
 There is a growing trend toward
leasing consumer goods as well
 e.g. Leasing of office equipment
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Reactions to Price Change
 Customers are more sensitive to
price changes if the products cost a
lot and/or are bought frequently
 Competitors may see each of your
price change as a fresh challenge and
react according to its self-interest at
the time. Need to estimate each
close competitor’s likely reaction
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 Responding to Competitors’
Price Change
 If competitors lower price for
homogenous products
 Try augmenting the product
 If it doesn’t work or if it is not likely to
work, then meet the price cut head-on

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Responding to Competitors’
Price Change (cont’d)
 If competitors raise price
 In a homogeneous market, follow if you
think the whole market is likely to follow
 In a non-homogeneous market, evaluate
The reason for the competitor price
change
If the price increase is temporary
The effect on your market share & profit
The likely response(s) from the other
competitors 21
When a Market Leader is
Being Attacked on Price

Options available:
 Maintain price
 Raise perceived quality
 Match competitors’ price
 Increase price and improve quality

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Impact of Discounting on
Brand Equity

 Why discount?
 Problems emerging with discounts
 The value equation (V=Q/P)

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 Price War
Price wars are frequent in industries where
 Cost differentiation opportunities exists
 Capital is intensive and products are
homogeneous
Examples: Airfares, ISP, Petrol, & Loans
e.g.
 The Home Loan price war in Singapore in
Sept 2000 involving OUB, UOB, DBS among
others
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 Yield Management
 What is it?
 Yield management goals
 Industries that benefited from yield
management
 Common variables

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