Lecture 8:

Pricing Strategy (II)

 In this lecture, we will…
1. Describe the major strategies for pricing new
products.

2. Describe product mix pricing strategies.

3. Discuss how companies adjust their prices to take

into account different types of customers and
situations.

4. Discuss the key issues related to initiating and

responding to price changes.
 In this lecture, we will…
1. Describe the major strategies for pricing new
products.

2. Describe product mix pricing strategies.

3. Discuss how companies adjust their prices to take

into account different types of customers and
situations.

4. Discuss the key issues related to initiating and

responding to price changes.
 New-Product Pricing Strategies

1. Market Skimming Pricing

2. Market Penetration Pricing

 Pricing Strategies
 Market skimming is a product pricing strategy by which a firm
charges the highest initial price that customers will pay.
Company makes fewer but more profitable sales.

 As the demand of the first customers is satisfied, the firm lowers

the price to attract another, more price-sensitive segment.

 Therefore, the skimming strategy gets its name from skimming

successive layers of "cream," or customer segments, as prices
are lowered over time.
 Pricing Strategies
 Market skimming pricing strategy should be used when:-

 Product’s quality and image must support its higher price.

 Costs of low volume cannot be so high they cancel the

advantage of charging more.

 Competitors should not be able to enter market easily and

undercut the price.
 Pricing Strategies
 Market Penetration Pricing is a technique in which a company offers a
new product at a price significantly lower than its competitors.

 Penetration pricing gives an edge to the company because many

customers are attracted on the basis of price, or value for money.

 Once it has gained a large market share and customer base, the company
begins to increase the price of the product.

 Companies sometimes use this technique when offering a new product, to

encourage customers to try the product.
 Pricing Strategies

 Market penetration pricing strategy should be used when:-

 Highly sensitive target market

 Production cost of product must fall, as sales volume

increases.

 Need to keep competition out.

 In this lecture, we will…
1. Describe the major strategies for pricing new
products.

2. Describe product mix pricing strategies.

3. Discuss how companies adjust their prices to take

into account different types of customers and
situations.

4. Discuss the key issues related to initiating and

responding to price changes.
 Product Mix Pricing Strategies

1. Product-Line Pricing

2. Optional-Product Pricing

3. Captive-Product Pricing

4. By-Product Pricing

5. Product Bundle Pricing

 Product-Line Pricing

 Involves setting price steps between various

products in a product line based on:
 Cost differences between products
 Customer evaluations of different features
 Competitors’ prices

Normal Hair Oily Hair Hair Fall Defense Anti-dandruff

$3.90 $3.90 $4.90 $4.90
 Optional-Product Pricing

 Pricing optional or accessory products

sold with the main product

New car with sports rims

New car with ordinary rims $60,000
$59,000
 Captive-Product Pricing

 Pricing products that must be used with

the main product
Eg. replacement cartridges for Gillette razors

9-13
 By-Product Pricing
 When the process of making one thing results in a second product as well,
that second thing is called a byproduct.
 Eg1. Sawdust is a byproduct of lumber (planks of wood).
 Eg2. Feathers are byproduct of poultry processing.
 So, these byproducts with little or no value and biz still have to dispose or
find storage.
 So to get rid, they sell them off Low Price so that biz can earn a bit of
additional revenue from the same infrastructure or setup.
 Biz will seek little or no profit other than the cost to cover storage
and delivery

9-14
 Product Bundle Pricing

 Combining several products and offering

the bundle at a reduced price.
Product Mix Pricing Strategies
 In this lecture, we will…
1. Describe the major strategies for pricing new
products.

2. Describe product mix pricing strategies.

3. Discuss how companies adjust their prices to take

into account different types of customers and
situations.

4. Discuss the key issues related to initiating and

responding to price changes.
 Price Adjustment Strategies

1. Discount and Allowance Pricing

2. Segmented Pricing
3. Psychological Pricing
4. Promotional Pricing
 Discounts and Allowances Pricing
 Discount and allowance pricing reduces prices to reward
customer responses such as paying early or promoting the product.
 Discounts
 Cash (price reduction)
 Quantity (price reduction for large volume)
 Trade / Functional (offer to trade members to perform certain functions – e.g
increase short term sales)
 Seasonal (e.g. Winter sale - offered to buyers who buy merchandise from
previous season)
 Allowances
 Trade-in (reduction of price, when an old product is returned)
 Promotional (reward dealers for participating in advertising and sales support
programs)
 Segmented Pricing

 Selling a product or service at two or more prices,

where the difference in prices is not based on
differences in costs.
 Types :
 Customer-Segment
- different customer pay different prices – eg student vs adult movie tickets

 Product-Form
- different versions of the SAME product priced
differently
- EG CDs packaging (some like beautiful
packaging)
 Segmented Pricing
Location pricing
 different locations and priced differently
 concert tickets CIRCLE seat vs STALL
seat

Timing pricing
 price by the season, the month or
 EG Movies on weekday & week-
End and Night and Day.
 Psychological Pricing
 Considers the psychology of prices and not simply the
economics. (e.g. $1.99, $199, $888)
 Consumers usually perceive higher-priced products as having
higher quality.
 Auspicious pricing – the use of 8.

Was $200.00

Now $99.00
 Promotional Pricing
 When prices are temporarily
reduced to stimulate or increase
demand.

 Examples:-
 Loss Leaders - drop price on
well-known brands to attract traffic)
 Special evening pricing - Back to School /
Post-Christmas or Boxing Day Sale
 Cash rebates
 Low/Zero interest financing (0% interest,
installment plan)
Price-Adjustment Strategies
 In this lecture, we will…
1. Describe the major strategies for pricing new
products.

2. Describe product mix pricing strategies.

3. Discuss how companies adjust their prices to take

into account different types of customers and
situations.

4. Discuss the key issues related to initiating and

responding to price changes.
 Initiating Price Changes
(Seller’s perspective)
 Reasons for price cuts:
– Excess capacity
– Falling demand
– Attempt to dominate the market

 Reasons for price increases:

– Cost inflation
– Over-demand
Reactions to Price Changes
Thank you