INTRODUCTION TO PRICING STRATEGY

WHAT IS PRICE ?

 The amount of money expected, required, or given in payment for something.

 The quantity of one thing that is exchanged or demanded in barter or sale for another

WHAT IS PRICING STRATEGY?

 A business can use a variety of pricing strategies when selling a product or service. The Price can
be set to maximize profitability for each unit sold or from the market overall.
 Businesses may benefit from lowering or raising prices, depending on the needs and behaviors
of customers and clients in the particular market. Finding the right pricing strategy is an
important element in running a successful business.

PRICING STRATEGY OBJECTIVES

• Long Run Profits
• Short Run Profits
• Increase Sales Volume
• Company Growth
• Match Competitors Price
• Create Interest & Excitement about the Product
• Discourage Competitors From cutting Price
• Social, Ethical & Ideological Objectives
• Discourage New Entrants
• Survival

DECISIONS IN PRICING STRATEGY

• Fixed & Variable Cost
• Competition
• Company Objectives
• Proposed Positioning Strategies
• Target Group & Willingness to Pay
• External Market Demand
• Internal Factors; Product Cost & Objectives of Company

FACTORS AFFECT PRICING/ PRICING DECISION

 Organizational and marketing objectives
 Pricing Objectives
 Cost
 Other Marketing mix variables
 Channel member expectations
 Customer interpretation and response
 Competition
 Legal and Regulatory issues
PRICING STRATEGIES
• Marketing Skimming
• Value Pricing
• Loss Leader
• Psychological Pricing
• Going Rate (Price Leadership)
• Tender Pricing
• Price Discrimination
• Penetration Pricing
• Cost Plus Pricing
• Target Pricing
• Marginal Cost Pricing
• Absorption Cost Pricing
• Influence of Elasticity
• Destroyer Pricing

MARKET SKIMMING PRICING

• High Price low volume
• Skim the Profit from the Market
• Suitable for the products that have short life cycle or Which will face competition at some point
in future.
• Examples; Play Station, Digital Technology & DVD etc.
VALUE PRICING
• Based on consumer Perception.
• Price charged according to the Customers Perception.
• Price set by the company as per the perceived value.
• Example; Status Products/ Exclusive Products.
LOSS LEADER PRICING
• Goods/services deliberately sold below cost to encourage sales elsewhere
• Typical in supermarkets, e.g. at Christmas, selling of Noche Buena Package, Discount Item 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 PRICING
• Used to play on consumer perceptions
• Classic example – P1000 instead of P999!
• Links with value pricing – high value goods priced according to what consumers THINK should
be the price
GOING RATE PRICING
• 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,
supermarkets, electrical goods – find very similar prices in all outlets
TENDER 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
PRICE DISCRIMINATION PRICING
• 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
• Prices for rail travel differ for the same journey at different times of the day
PENETRATION 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
COST PLUS PRICING
• Cost-plus pricing is a pricing strategy that is used to maximize the rates of return of companies.
• Cost-plus pricing is also known as mark-up pricing where cost + mark-up = selling price.
• In practice, most firms use either value- based pricing or cost-plus pricing.
CONTRIBUTION PRICING
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such circumstances
TARGET 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
MARGINAL COST PRICING
• Marginal cost – the cost of producing ONE extra or ONE fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be relatively high
• Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost
of the extra passenger is covered, the price could be varied a good deal to attract customers
and fill the aircraft
ABSORPTION 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

DESTROYER PRICING
• Deliberate 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

REMEMBER THIS CONCLUSION!

ANALYSIS OF

PRICING STRUCTURE

What is Price Structure?

A pricing structure is an approach in products and services pricing which defines various prices,
discounts, offers consistent with the organization goals and strategy. Price structure can affect how
company grows and is perceived by the customers. It directly affects not only the bottom line but also
makes the brand image and perception.

TYPES OF PRICING STRUCTURES

• Penetration pricing

• Price skimming

• Competition Pricing

• Bundle Pricing

• Psychological Pricing

• Premium Pricing

• Economy Pricing
  PENETRATION PRICING

It prioritizes market share over profits for a given time period. The goal is to generate demand,
rapidly build a customer base. Penetration pricing is when businesses introduce a low price for their new
product or service.

• PRICE SKIMMING

Skimming involves setting high prices when a product is introduced and then gradually lowering
the price as more competitors enter the market.

• PREMIUM PRICING

Premium pricing is for business that create high quality products and market them to high-
income individuals. The key with this pricing strategy is developing a product that is high quality and that
customers will consider to be high value.

• BUNDLE PRICING

It is combining several products or services into a single comprehensive package for an all-
inclusive reduced price.

• ECONOMY PRICING

is a method of pricing in which a low price is assigned to a product with decreased production
cost without compromising the quality.

• COMPETITION PRICING

is a pricing strategy in which a company sets the price for its products after observing the
competition.

• PSYCHOLOGICAL PRICING

is a pricing strategy that utilizes specific techniques to form a psychological or subconscious

impact on consumers.

INDUSTRIES AND FIRMS THAT USE PRICING STRUCTURES EFFECTIVELY

MOBILE INDUSTRIES USING PREMIUM PRICING

Google launched a new series called Pixel mobile phones with the best of industries
configuration. In the case of the Android Operating system, it has arguably created one of the best
product. It is one of the competitors as a premium product and it follows a premium pricing strategy. As
a standalone, it follows premium pricing structure but if compared with apple , it follows competitor
based pricing structure.

WALMART USING PENETRATION PRICING

Walmart follows a penetration pricing structure wherein it prices its products at the cheapest
possible price and tries to offer the best it can. While the profits per product are low, the sales are
targeted towards the volume of people which brings in volume profits.
E-COMMORCE USING PHYCHOLOGICAL PRICING

E-commerce giants like Amazon have always used psychological pricing. The products are
bought at bulk and prices are presented as discounted. Although the prices are discounted, they cover
the cost plus profit of the company. During a special sale, the prices may be further reduced but the
profits are never compromised upon.

PRICE AND VALUE COMMUNICATION

• The role of value and price communications is to convey the value proposition in a compelling
manner to accomplish three goals

Value Communication

• Value communication is important when your product or service creates value that is not
obvious to potential buyers. Less experienced customers will not fully appreciate your value and
may need to be informed or relieved of risk to try the product.

STRATEGIES OF COMMUNICATION FOR HIGH AND LOW PRODUCT

Communication is key in any comprehensive price management setup. Price and Value Communication
is how you communicate with the customers, and communication and training is what makes the
difference between convinced sales people, who deliver value conviction to the customers, and sales
people who are indifferent and not able to defend the company's prices.

 UNDERSTAND WHAT THE CUSTOMER VALUE

 IDENTIFY PREMIUM CUSTOMER SEGMENT WILLING TO PAY A HIGHER PRICE

 ADJUST COMMUNICATION TO WHAT RSONATES WITH CUSTOMER

 INSTILL CONVICTION INTO CUSTOMER FACING STAFF

 IMPLEMENT PRICE INCREASE SUCCESFULLY

 CONTINIOUS FEEDBACK ON VALUE DRIVER COMMUNICATION

 Adapting the Message for Purchase Context

 Value-based messages must also be adjusted to the purchase context. A buyer will go through
four basic stages

Adapting the Message for buying context

The first step in developing a value message is determining which drivers motivate a customer to make a
purchase. The goal is to help the customer recognize the linkages between a product’s differentiated
features and what is important to them. There are generally two types of goods:

• search goods

• experience goods

An effective pricing strategy depends on more than just value. Buyers are also influenced by how that
value is presented and communicated through the price. Most customers lack the time or the incentive
to fully inform themselves about their alternatives. If you want them to recognize your value, you have
to make the process easier for them by supplying them with information about your offer and what you
think it should mean to them. When communicating prices, you should actively minimize customers’
adverse feelings about paying it. By controlling price progressions, reference prices, and perceptions of
fairness, you can reduce negative reactions without reducing your margins.

Analyzing & Setting Pricing Policy Description

Generally, pricing policy refers to how a company sets the prices of its products and services based on
costs, value, demand, and competition. ... In addition, effective pricing strategy involves considering
customers, costs, competition, and different market segments.

Tips for Announcing a Price Increase to Your Customers

 Contact them directly.

 Let customers know well in advance.

  Remind them that higher prices mean better quality.

 Explain the reasoning behind the price increase.

 Ensure the entire organization is aware of the price increase before announcing it to customers.

 Allow customers to reach out with further questions or concerns.

Strategic Versus Tactical Pricing Decision

Pricing tactics take into account the market, shifts in demand, competition, and are more temporary,
say over an introductory promo period or a particular quarter while Pricing strategies are set at a higher
organization or brand level, aimed at the lifecycle of the product.

7 Key Factors to Building a Good Pricing Strategy

 Market research

 Value

 Cost of goods

 Additional overhead

 Labor

 Distribution

 Economies of scale