Pricing Decisions

PRICING STRATEGY AN INTRODUCTION

Topics

 Pricing of Multiple Products

 Price Discrimination and types of Price Discrimination

 Product bundling

 Peak Load ( Congestion) Pricing

 Cost Plus Pricing

 Pricing and employment of Inputs

Pricing Decisions

 Pricing decisions are the choices businesses make when setting prices for their
products or services.
 Pricing is considered part of a company’s marketing strategy
 because it influences its relationship with customers
 When prices are fair and competitive, customers come back, increasing the
profitability of the business.

 Pricing decisions can be simple or complex.

Simple and Complex Pricing

 Simple Pricing :
 Involves charging what competitors charge for similar goods and services.
 This strategy is often used by retailers and wholesalers selling commodities.
 Companies try to increase sales by making small, competitive adjustments such as purchase
discounts, volume discounts and purchase allowances
 Complex Pricing :
 is based on the originality of a product or service and what customers are willing to pay for it
 determined through negotiation with the customer and is common for custom furniture,
artworks and consulting services.
Pricing Decisions

 Understand its customers and how price influences their purchasing

decisions
 Know what competitors are offering and what they charge for their products
and services
 Adjust quickly to changes in markets, vendors and customers
 Help customers understand why its products or services are priced as they
are
 Be able to negotiate with wholesalers, retailers and other suppliers and
resellers
 Track how pricing affects sales
What is willingness to pay?

 Willingness to pay (WTP) is the maximum amount of money a customer

is willing to pay for a product or service.
 It is a common metric measured in pricing research studies, which helps
businesses to set optimum prices for their products and services to attract
customers while maximising their profits.
 Given the complexity of calculating WTP due to multiple factors, there is
no one formula
 Changes in consumers’ income and economic environment, such as
inflation, affect consumers’ willingness to pay. Subject to the nature of
products and services, consumers may react differently in terms of
demand and their willingness to pay.
What are the factors influencing WTP?

 State of the economy

 Seasonal and market trends

 Location of the customer

 Competitive value and product differentiation

 Product quality
Pricing of Multiple Products

 Applicable when a firm makes more than one products

 Multi product pricing, also called CATEGORY Pricing , offer a way to prevent cannibalization
and increasing profitability without sacrificing market share.

 The goal is : “More Profit + Same Customers”

 Multiple product pricing is much about playing perception game.

 You are tweaking prices of your products such that you get maximum profit from same portfolio
of products from same SET of Customers without customers ever realizing attempt to earn more
profit.

 Pricing of Multiple Product is a data driven exercise instead of Judgement Driven

Why Multiproduct Pricing is Tricky?

 To avoid cannibalization of own products

 Internal cannibalization destroys more profit than your most fierce competitor.
 It happens whenever you have a customer who was going to buy your more
expensive product, but switched to the cheaper product when they saw your
discount.
 To avoid cannibalization, price adjustments should never be done in a vacuum.
 Whenever you want to re-price a product you must always consider the impact
on the entire sub-category.
Good-Better-Best

 Whenever you tweak the prices within category, some amount of

cannibalization cannot be avoided
 To capture buyers at various “ WILLINGNESS TO PAY” points, you
may offer similar products under portfolio of Good, Better and Best
 There is no clear rule of thumb and delicate balance needs to be struck
by pricing at each level
 Often offering discount for a period of time, helps test the market
response and you can settle at some point downwards based on it.
Scientific Up / Down Adjustments

 Multi-Product Pricing works by making small, scientific, up/down price

adjustments across all the products in a portfolio.
 The average price of the portfolio should remain about the same – this will
ensure customers don’t see a change in the value-for-price offered by your brand
or store.
 Maintaining the average price should also appease paranoid competitors who
worry that you are disrupting the market, i.e you are not kicking in price war.
 You silently earn more profit without buyers or competitors know you are
 AI for Pricing Explained –
Bigger Product Portfolio = More Profit
Potential

 But modern tools like Market Simulation and eCommerce AI are

now available to calculate Willingness To Pay (WTP) and unlock
these huge profit opportunities.
 In fact, the bigger the product portfolio and the more complex the
interaction between products, the greater the profit opportunity.