Price Management Strategies:

Price management strategies consist of four elements :

1.Discounts and Allowances
2.Psychological Pricing
3.Discriminatory Pricing
4.Product- mix Pricing
Detailed Descriptions of these four elements are as follows :
1. Discounts and Allowances :
Discount is a straight reduction in price on purchases during a stated period of
time or of larger quantities .The many forms of discounts include-
I. Cash Discount :
A price reduction to buyers who pay their bills promptly. A typical example
is 2/10,net 30, which means that although payment is due within 30 days
the buyer can deduct 2% of the bill if is paid within 10 days .
II. Quantity Discount :
A price reduction to buyers who buy large volumes.
III. Functional Discount :
A seller offers a functional discount to trade-channel members who
perform certain functions such as selling, storing and record keeping.
IV. Seasonal Discount:
A seasonal discount is a price reduction to buyers who buy merchandise or
services out of season.
Allowances are another type of reduction from the list price. A promotional
money paid by manufacturers to retailers in return for an agreement to feature
the manufacturers’ products in some way. For example,
I. Trade-in-allowance:
 A price reduction given for turning in an old item ,when buying a new one
i.e. automobile industry.
II. Promotional allowance :
A payment that rewards dealers for participating in advertising and sales
support program.

2. Psychological Pricing :

Pricing that considers the psychology of prices and not simply the
economics; the price is used to say something about the product. For
example , consumers usually perceive higher-prices products as having
higher quality . When they can judge the quality of a products by examining
it , they use less price to judge quality. But when they cannot judge
quality ,price becomes an important quality signal.
Another aspect of psychological pricing is reference pricing- prices that
buyers carry in their minds and refer to when they look at a given product.
The reference price must be formed by noting current prices, remembering
past prices or assessing the buying situation . Sellers can influence or use
these consumers’ reference prices when setting price.
For example , department stores will display women’s apparel in separate
departments differentiated by price ; dresses found in the more expensive
departments are assumed to be of better quality.

3.Discriminatory Pricing :

Price discrimination involves charging a different price to different groups

for the same good. For example –student discounts ,off peak fares cheaper
than peak fares. Price discrimination is practiced based on the seller’s belief
that customers in certain groups can be asked to pay more or less based on
certain demographics or on how they value the product or service in
question.
Conditions necessary for price discrimination-
1.The firm must operate in Imperfect competition ;it must be a price maker
with a downwardly sloping demand curve.
2.The firm must be able to separate markets and prevent resale e.g.
stopping an adults using a child’s ticket. Prevent business travelers from
buying discount tickets.
 3.Different consumer groups must have elasticities of demand e.g. students
with low income will be more price elastic and sensitive to price .
4.It must be relatively cheap to separate markets and implement price
discrimination.

Advantages of Price Discrimination :

 The firm is able to increase revenue.
 Increased revenues can be used for research and development
which benefit consumers.
 Some consumers will benefit from lower fares.
 Airlines can use price discrimination to encourage people to travel
at unpopular times. This helps avoid overcrowding and helps to
spread out demand .
Disadvantages of Price Discrimination :
 Some consumers will end up paying higher prices e.g. people who have to
travel at busy times.
 Price discrimination enables a transfer of money from consumers to firms.
 There will be more administration costs in separating the markets.

3. Product – mix Pricing Strategies :

The five product mix pricing situations are summarized below :

1) Product Line Pricing :

Product line pricing refers to the practice of reviewing and setting
prices for multiple products that company offers in coordination with
one another.
(https://www.slideshare.net/ASIFUDDINMOHAMMED/product-line-
pricing)
Companies usually develop product lines rather than single products
. For example , Rossingnol offers seven different collections of alpine
skis of all designs and sizes , at prices that range from $ 150 to more
than $1100 for a pair from its Radical racing collection.
 2) Optional Product Pricing :
Optional product pricing is the pricing of optional or accessory
products along with a main product. In many cases, one can buy
optional or accessory products along with the main product.
For instance, when someone orders a new car, he may choose to
order a navigation system or an advanced Entertainment system.
However, for the company, pricing these options is not easy. They
must decide carefully which items to include in the base price and
which to offer as options.
(https://marketing-insider.eu/product-mix-pricing-strategies/)

3) Captive Product Pricing :

Companies that make captive products must be used along with a main
product are using captive product pricing. Examples are razor blade
cartridges , video games ,,printer cartridges, single service coffee pods and
e-books. Producers of the main products (razors, video game consoles,
printers , single-cup coffee brewing systems and tablet computers )often
price them low and set high markups on the supplies .

4) By –Product Pricing :
Producing Products and services often generates by-products .If the by-
products have no value and if getting rid of them costly , This will affect the
pricing of the main product. Using by – product pricing , the company seeks
a market for these by – products to help offset the costs of disposing of
them and help make the price of the main product more competitive.

5) Product Bundle pricing :

Using product bundle pricing ,sellers often combine several products and
offer the bundle at a reduced price .For example, fast-food restaurants
bundle a burger, fries and a soft drink at a combo price. Price bundling can
promise the sales of products consumers might not otherwise buy , but the
combined price must be low enough to get them to buy the bundle.
Reference : Principles of Marketing ,Philip Kotler ,Gary Armstrong
What is EDLP?
EDLP, which stands for Every Day Low Prices, is a pricing strategy in which firms
promise consumers consistently low prices on products without having to wait for
sales events. In such a pricing strategy, a firm sets a low price and maintains it
over a long time-horizon (given that product costs remain unchanged).

Rationale Behind Everyday Low Pricing:

In several marketing studies, consumers have indicated that they are more
content with consistently low prices instead of wild price swings. This is why the
EDLP strategy works effectively:

1. Simplified decision making

2. Consumers do not have to worry about products going on sale in the following
weeks.

2. Reduced consumer search costs

3. Consumers can spend less time comparing prices among different stores and
searching for the best deal. EDLP promises consumers consistency in their prices.

How Does It Work?

In the everyday low pricing strategy, the stores set their products at a reasonable
price and maintain the same price for a longer period. It helps by simplifying the
consumers’ decision-making as the consumer need not have to think about when
the sale will be coming; instead, they can buy their products at a fair price
anytime they want. In addition, this helps the store focus on their products
instead of on their marketing of the products that require a substantial amount of
funds and time to provide significant advantages in the market.

How Walmart keeps its prices so low?

Walmart is known for its low prices.

Walmart is the world's largest retailer, operating stores in all 50 states, Puerto
Rico, and in 27 countries, serving up to 100 million customers weekly.

Walmart is known for its low prices, which it has codified in its Every Day Low
Price guarantee.

Here are seven ways Walmart manages to keep its prices so low even while
recently raising the wages it pays its workers.

Walmart stores are known for their massive size and their vast selection, but if
there is one thing that defines the company, it is low prices.

Walmart is unabashedly proud of its low-cost merchandise, stating on its website

that "Every Day Low Price (EDLP) is the cornerstone of our strategy, and our price
focus has never been stronger."

While also long associated with low wages, the retailer has been working to
better compensate its employees.
According to retail expert Bob Phibbs, the Retail Doctor, "[Walmart] made huge
strides in the last two years by increasing their average wages, their training
opportunities, and promotion opportunities within the organization.

That was welcome news to employees, more than a million of which are in the
US. A robust Walmart is also good news for America generally: experts estimate
that Walmart accounts for 2% of the US economy.

So how does Walmart manage to keep its prices so low even as it offers better
compensation to employees?

1.Competition

If Walmart didn't keep its prices low enough to compete with e-commerce giants
like Amazon, then it could soon enough go the way of Borders bookshops, Sam
Goody's record stores, and other once-ubiquitous retailers that saw their market
share fade and then collapse as online sales grew ever larger.

While Amazon offers cheaper pricing on some items, such as foods offered
through AmazonFresh, a 2018 analysis by Clark found that Walmart's products are
about 34% lower priced than Amazon's.

2.Lack of competition

Somewhat ironically, just as the rise of online sales (and the surging growth of
Dollar General stores) prompts Walmart to keep costs low to stay competitive, in
many areas, Walmart is the only major retailer in town.
About 90% of Americans live within 15 miles of a Walmart, and the company can
count on millions of customers using its physical stores as their go-to spot for
groceries, clothing, household goods, and more. This huge, reliable customer base
allows them to keep prices low.

3. Low operations cost

Since first opening in the early 1960s, Walmart has followed the guidance of late
founder and namesake Sam Walton to keep operations costs low. Walton himself
famously drove around in an old pickup truck long after he was a multimillionaire;
in our era, the store keeps costs low by using a sophisticated and largely
automated supply-chain management system, by keeping in-store design basic,
by having executives use budget travel options, and, until recently, by paying
hourly employees less than competitors.

4.Bargaining power

As the world's largest retailer, Walmart has huge bargaining power when it comes
to its suppliers. Many brands depend on Walmart sales to stay in business, while
even larger, established companies can little afford to be removed from
Walmart's aisles or webpages.

Walmart can demand lower wholesale rates than just about any other retailer on
earth, and it passes these savings on to customers.

5.Sheer volume of sales

Walmart sells more of just about everything than pretty much any other seller,
and it sells many products for less than anyone else. Taking that into account,
Walmart could make more money even if the margins are smaller.
If the corner store sells three razors for $2.99 that it bought at wholesale for
$1.99, that shop just made $3, for example. If Walmart sold the same three razors
for a lower price of, say, $2.49, it would have made only $1.50.

But when it does that another 10,000 times in a single day and also sells

cat litter, fresh lettuce, basketballs, blue jeans, and everything else, its tighter
margins have little appreciable impact on overall profits.

6. Aggressive shoplifting prevention

In 2015, Walmart said that it loses up to $3 billion each year to theft, or 1% of its
total $300 billion in sales that year. That figure would be much higher if the
retailer didn't aggressively combat shoplifting. The company keeps a registry of all
confirmed shoplifters, and it reportedly pushes for prosecution in many cases of
theft.

And for a time, the company used a controversial Corrective Education program in
which shoplifters could see charges dropped if they paid for attending a course
meant to help reeducate and reform thieves.

7.Direct sourcing.

Walmart hardly ever deals with brokers when making deals with its suppliers. It
works directly with the manufacturers that make the products it sells and the
farms that produce food for its grocery sections, and it increasingly sends its own
trucks and drivers out to pick up and deliver the things it will sell.

And soon enough, it may even control some of the rail operations that move
containers of Walmart goods around the nation.
Pricing based on demand and supply:

The Market and Demand: Good pricing starts with an understanding of how
customer’s perception of value affect the prices they are willing to pay. Both
customers and industrial buyers balance the price of a product.

Price based on market demand considers fluctuations in customer demand and

adjusts prices to fit the changes in perceived value that come with them.

Demand-based pricing comes in a variety of forms — all united by the fact that
they play on consumer demand. These methods can vary based on several
factors, including a company's business goals, its place in its market, consumer
preferences, and the quality of its product.

Examples of Demand-Based Pricing

The airline industry offers one of the most prominent, everyday examples of
demand-based pricing. Flight prices fluctuate based on factors like timing and
seasonality.
For instance, airlines typically charge higher prices for tickets to Las Vegas on New
Year's Eve than they do during most other times of the year.

Pricing in different types of market:

1. Pure Competition - In a purely competitive market, there are large

numbers of firms producing standardized product. Market prices are
determined by consumer demand; no supplier has any influence over the
market price, and thus the suppliers are price takers. The primary reason of
having many firms because there is a low barrier of entry into the business.
Example- Agricultural products –seeds, fertilizers etc.

Pure Competition exist when the following conditions are fulfilled:

(i) Large Number of Buyers and Sellers
(ii) Homogeneous Product

2. Monopolistic Competition - Monopolistic competition refers to the market

situation in which many producers produce goods which are close
substitutes of one another. Two important distinguishing features of
monopolistic competition are:
  (a)   Product differentiation and
(b)   Existence of many firms supplying the market.

For example, in the market of soap and detergent in Bangladesh, there are many
well-known brands like- Lux, Lifebuoy, Savlon, Dettol etc. Since all the
manufacturer produce soaps, it appears to be an example of perfect competition.
Here each seller varies the product slightly to make different from other
competitors like Lux focuses on making beauty soaps and Dettol focuses on
antiseptic properties.

3. Oligopolistic Competition - In an oligopoly, there are only a few firms in the

market. While there is no clarity about the number of firms, 3-5 dominant
firms are considered the norm. So in the case of an oligopoly, the buyers are
far greater than the sellers.
The firms in this case either compete with another to collaborate together. They
use their market influence to set the prices and in turn maximize their profits. So
the consumers become the price takers. In an oligopoly, there are various barriers
to entry in the market and new firms find it difficult to establish themselves. Steel,
automobiles, smart phones are some example of oligopolistic market.

4. Pure Monopoly Competition -In a monopoly type of market structure, there

is only one seller, so a single firm will control the entire market. It can set any
price it wishes since it has all the market power. Consumers do not have any
alternative and must pay the price set by the seller.

Monopolies are extremely undesirable. Here the consumer lose all their power and
market forces become irrelevant. However, a pure monopoly is very rare in reality.
For example- electricity, natural gas, local public utility etc.

Pure Competition Monopolistic Oligopoly Pure monopoly

competition
In pure competition Oligopoly is a Monopoly is a
the number of Monopolistic market situation in market situation in
buyers and sellers competition refers which there are a which there is only
is very large. There to a market few firms selling one seller of a
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them. Price is firms selling a products. It is others. The
determined for the differentiated difficult to pinpoint product has no
entire industry by product. There is the number of firms close substitutes.
the forces of competition which in the oligopolist He is a price
demand and is keen, though not market. There may maker who can set
supply. All firms perfect, among be three or five the price to his
have to sell their many firms making firms. It is also maximum
product at that very similar known as advantage. This
price. No firm can products. No firm competition among may occur
influence price by can have any the few. With only because the firm
a single action. perceptible a few firms in the has a patent on a
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quality adjuster. policies of the to affect the others. government to be
other sellers nor An oligopoly a monopoly .Pure
can it be industry may monopoly occurs
influenced much produce either when the producer
by their actions. homogenous or is so powerful that
Thus monopolistic heterogeneous he is always able
 competition refers products. to take the whole
to competition of all consumers’
among a large income whatever
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producing close output is.
but not perfect
substitutes for
each other.

Analyzing the Pricing Demand Relationship:

The price demand relationship can be analyzed through elastic and inelastic
demand curve .

Elastic demand: refers to the demand for a good or service changes with the
fluctuations in its price. Elastic demand reflects the change in a good or service’s
demand against a determinant. The effect of price on demand is studied under
the price elasticity of demand. The other factors being constant, a decrease in a
good’s price will increase its demand and vice versa.
For example, luxury clothes have elastic demand under the price elasticity of
demand. People usually rush to luxury brands when they announce discounts to
buy more. But when we observe the reality, we realize that other factors such as
consumer income, substitute goods, personal taste, etc., also affect the demand.
A consumer could be addicted to a luxury brand of tea and buy it even after its
price skyrockets.

Inelastic Demand: is when a buyer’s demand for a product does not change as
much as its change in price. When price increases by 20% and demand decreases
by only 1%, demand is said to be inelastic.

This situation typically occurs with everyday household products and services.
When the price increases, people will still purchase roughly the same amount of
goods or services as they did before the increase because their needs stay the
same. A similar situation exists when there is a decrease in price – demand will
not increase substantially because consumers only have a limited need for the
product(s).
 Price Elasticity of Demand = Percentage Change in Quantity
Demanded / Percentage Change in Price

Factors that Influence the Demand Inelastic:

No Substitute- If someone has a car , there is no alternative but to buy petrol to
fill up the car. If someone relies on train to go to work, the train firm can increase
ticket prices will little fall in demand .

The availability of substitute goods, percent of consumer’s income, necessity,

brand loyalty, and the consumer affect the elasticity of demand for a product or
service.

Little Competition -In inelastic demand , the competition among the seller is little
enough regardless of fluctuation in price

A Small Percentage of Income - Elasticity is higher if there are more product or

service alternatives available. But even though the product that consume in a
lower volume may not influence the consumer’s purchase decision.

Customer’s Income- There is a high elasticity when the percentage of the

customer’s revenue that the product price represents is high. This means that
consumers will most likely make a purchase due to the product’s or service’s cost.
Bought Infrequently-The elasticity of some product or service tends to get lower
depending on how necessary the product or service is since consumers will
purchase the good or service infrequently and when necessary consumers buy it
regardless of its price. Like – medicine.

Short-run- In the short-run, demand tends to be more price inelastic. It takes time
for consumers to look for alternatives.

Location- Customers’ attachment to sea sight view of a hotel room may

supersede the responsiveness to book that room even in changes in price.

Examples of inelastic demand :

Petrol – those with cars will need to buy petrol to get to work
Cigarettes – People who smoke become addicted so willing to pay a higher price
Salt – no close substitutes
Chocolate – no close substitutes
Goods where firms have monopoly power. For example, Apple computers,
iPhone, Microsoft Windows, rail fares for commuters.
Water – when you are in the desert and very thirsty (but not if you are in
England!)

What Makes a Product Elastic?

If a price change for a product causes a substantial change in either its supply or
demand, it is considered elastic. Generally, it means that there are acceptable
substitutes for the product. Examples would be cookies, luxury automobiles, and
coffee.

What Makes a Product Inelastic?

If a price change for a product doesn’t lead to much if any change in its supply or
demand, it is considered inelastic. Generally, it means that the product is
considered to be a necessity or a luxury item with addictive constituents.
Examples would be gasoline, milk, and iPhones.
The Economy

Economic conditi ons can have a strong impact on the fi rm’s pricing
strategies. Economic factors such as a boom or recession, inflation, and
interest rates aff ect pricing decisions because they aff ect consumer
spending, consumer perceptions of the product’s price and value, and the
company’s cost of producing and selling a product.

When a company makes a change in pricing based on the type of Economy, it is

usually in response to inflation or recession. Using cost-oriented tactics for
inflation or recession tactics is explained to better understand the intricacies
involved in devising and implementing a cost strategy.

Pricing Based on Type of Economy

Pricing is an important part of the overall marketing mix. After a price has been
established, there are ways to change the base price in response to short-term
needs. There are also times when a company needs to adjust prices for economic
reasons. If a firm does not react to changes in the economy, the end result could
be the dissolution of the company due to decreasing profits and sales.