Pricing Strategies

Price-Exchange value of goods and services

Price- source of revenue which the firm seeks to maximize i.e The price can be
set to maximize profitability for each unit sold or from the market overall.

A pricing strategy takes into account segments, ability to pay, market conditions,
competitor actions, trade margins and input costs, amongst others. It is targeted
at the defined customers and against competitors.

i.e Price strategy is the plan taken by the firm in fixing the price

Formulating pricing policy and setting the price of the product is one of the
important aspect of managerial decision making.

Eg: high price leads low qty

External factors Internal factors

Elasticity of supply and demand The cost components
Goodwill of the company Type of product
Extend of competition Management policy in
pricing
Trend of market Type of market structure
Purchasing power of the buyer
Government policy towards pricing

Pricing methods
Cost based pricing-
Total cost plus profit determines the price
Demand based pricing-
What consumer will pay determines the price
Competition based pricing-
firm position relative to competition determines the price
Other pricing-
Product line/tender pricing/differentiated/affordability
 Cost based pricing
Fundamental element of pricing

Markup Pricing.

Markup pricing or cost-plus pricing is a pricing strategy where the price of a

product or service is calculated by adding together the cost of the products and a
percentage of it as a markup. The markup or margin is decided by the company
usually fixed at the required rate of return.

Marginal-cost pricing

The practice of setting the price of a product to equal the extra cost of producing
an extra unit of output. By this policy, a producer charges, for each product unit
sold, only the addition to total cost resulting from materials and direct labour

 Demand based pricing

Pricing based on the demand and elasticity of the product

If inelastic reduction in price is non-profitable and vice-versa
If elastic it would be better in price reduction rather than increase

Skimming pricing strategy

Is pricing strategy in which a seller sets a relatively high initial price for a product or
service at first, then lowers the price over time.
 Penetration pricing strategy

is the practice of offering a low price for a new product or service during its initial
offering in order to lure customers away from competitors.

 Competition based Pricing Strategy

 Premium pricing
 Discount pricing
 Parity pricing or going rate

 Other Pricing Strategy

 Product line pricing
the cost difference between products in the line, customer evaluation of their features,
and competitors’ prices.
 Tender Pricing
 Affordability based pricing
 Differentiated pricing

 Risk and Uncertainty

Basis for Comparison Risk Uncertainty

The probability of winning or Uncertainty implies a situation
Meaning losing something worthy is known where the future events are not
as risk. known.
Ascertainment It can be measured It cannot be measured.
Outcome Chances of outcomes are known. The outcome is unknown.
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not assigned