MARKETING MANAGEMENT
WELCOME
TO
THE CLASS
OF
PRICING STRATEGIES
BY
DARA RAJENDRABABU
TOPICS TO DISCUSS
• Meaning and Definition of
Different Strategies of Pricing Strategies
Price and Pricing Strategies Pricing Objectives
LEARNING OUTCOMES
• Introduction and Definitions Price and Pricing Strategies
• Understanding The Different Strategies of Pricing
• Understanding the Pricing Strategies Objectives
MEANING OF PRICING
Pricing is a process of fixing the value that a manufacturer will
receive in the exchange of services and goods. Pricing method is
exercised to adjust the cost of the producer’s offerings suitable to
both the manufacturer and the customer. The pricing depends on the
company’s average prices, and the buyer’s perceived value of an
item, as compared to the perceived value of competitors product.
Price is the marketing mix element that produces revenue. Price
refers to the exchange value in terms of money of products and
services which provide a bundle of satisfaction to the consumer.
The price of a product increases with increase in sales revenue.
Every businessperson starts a business with a motive and intention
of earning profits. This ambition can be acquired by the pricing
method of a firm. While fixing the cost of a product and services
the following point should be considered:
The identity of the goods and services
The cost of similar goods and services in the market
The target audience for whom the goods and services are produces
The total cost of production (raw material, labour cost, machinery
cost, transit, inventory cost etc).
External elements like government rules and regulations, policies,
economy, etc.,
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. It
can be used to defend an existing market from new entrants, to
increase market share within a market or to enter a new
market. 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.
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
PRICING STRATEGY FOR
CHALLENGING ECONOMIC TIMES
Pricing is a market consideration, not a cost consideration.
Understand your customers’ primary goals. Be clear on what the customer wants
first, then set pricing and bundling decisions.
Consider bundling products or services together. Always bundle a low- and high-
valued product together. This will create higher sales and greater profitability.
Understand your value proposition. Have a clear understanding of if and how
your product or service is differentiated from the competition.
Know where you are on the scale of "innovative-to-commoditized."
Build the customers’ perception of value. Constantly build on customer
perception. The more subtle the differentiation of the product or service, the more
often customers need to be reminded of the value of your product or service.
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
PRICING STRATEGIES
Marketing
Cost Plus Pricing
Skimming
Value Pricing Contribution
Loss Leader Pricing
Psychological Target Pricing
Pricing Marginal Cost
Going Rate Pricing
(Price Leadership) Absorption Cost
Tender Pricing Pricing
Price Destroyer Pricing
Discrimination Influence of
Penetration
Elasticity
Pricing
MARKET SKIMMING PRICING
Skimming Pricing – The seller sets a relatively high price when the
product is introduced and then lowers the price over time.
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
Seller sets the prices according to the value perceived by
the customer of the product/service.
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
Prices are set very low, sometimes below cost to encourage sales of other
products or a retail outlet.
Goods/services deliberately sold below cost to encourage sales elsewhere
Typical in supermarkets, e.g. at Christmas, selling bottles of gin at $3 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
e.g. ‘Free’ mobile phone when taking on contract package
PSYCHOLOGICAL PRICING
Prices are set according to emotional appeals that influence buying decisions.
E.g. Prestige pricing, Odd/even pricing, Bata pricing, Leader pricing
Used to play on consumer perceptions
Classic example - £9.99 instead of £10.99!
Links with value pricing – high value goods priced according to what consumers
THINK should be the price
GOING RATE PRICING
Price is set on the basis of prevailing market rate.
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
Seller sells a product at two or more prices based on
Customer segments, Location, Time and availability of
product, Product or brand image.
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
The product is introduced at low prices initially and the
price is increased subsequently with increase in demand
and market share.
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.
COST PLUS PRICING
Mark-up / Cost plus pricing – Selling price includes total cost
plus mark-up /margin that the firm desires.
Mark up Price = Unit cost (VC + FC)/(1 – desired return on sale)
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 pricing is very similar to marginal cost pricing. The direct cost
of production for each product is calculated and price is then set at a higher
level. The difference between the direct costs per unit and the price is called
the contribution, so called because this is NOT PROFIT, but a 'contribution'
to the unpaid indirect/fixed costs of production.
No one product will need to account for all the indirect costs, but each
product sold will contribute a proportion to the payment of the firm's overall
fixed costs.
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 RETURN PRICING
Break even or Target return pricing – Firm determines the breakeven point i.e. the
volume of sales required to reach a no profit, no loss situation then sets prices in
order to achieve a certain level of return on investment.
T.R.P = Unit Cost + (Desired return X Invested Capital)/Unit Sales
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 or Absorption cost pricing – Selling Price includes full cost of
production and sales plus a mark-up required (desired) by the firm. It
makes use of standard costing techniques. The cost includes –
Fixed Cost + Variable Cost + Selling and administrative cost +
Advertisement cost
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
Destroyer/predatory pricing: is used to eliminate competition. It
involves a business setting a very low price in order to attract customers
away from competitors, who will struggle to match the low price and
may go bust.
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
INFLUENCE OF ELASTICITY PRICING
Price Inelastic:
% change in Q < % change in P
e.g. a 5% increase in price would be met by a fall in sales of
something less than 5%
Revenue would rise
A 7% reduction in price would lead to a rise in sales of something
less than 7%
Revenue would fall
INFLUENCE OF ELASTICITY PRICING
Price Elastic:
% change in quantity demanded > % change in price
e.g. A 4% rise in price would lead to sales falling by something more
than 4%
Revenue would fall
A 9% fall in price would lead to a rise in sales of something more than
9%
Revenue would rise
BUNDLE PRICING
Price bundling is combining several products or services into
a single comprehensive package for an all-inclusive reduced
price. Despite the fact that the items are sold for discounted
prices, it can increase profits because it promotes the purchase
of more than one item.
Sellers offer a bundle or package of different products or
services for a lower price than they would charge if the
customer bought all of them separately
PRODUCT LINE PRICING
Product line pricing involves the separation of goods and
services into cost categories in order to create various
perceived quality levels in the minds of consumers. You
might also hear product line pricing referred to as price
lining, but they refer to the same practice.
Prices are set on the basis of well-established price points of
other products in the product line.
OPTIONAL PRICING
Optional product pricing is when a company sells a base
product at a relatively low price, but sells complementary
accessories at a higher price.
A base price is set for the basic product and prices are set for
optional features, services along with the main product.
CAPTIVE PRICING
Captive products are strategically used to maximize
revenue. Sellers generally follow a product-mix pricing
strategy when pricing captive products. Low price are
offered for the core product, but high prices are placed
on captive products
A special price is offered to loyal customers
CONCLUSION
It is necessary that the marketing manager decide the objective of
pricing before actually setting price. According to experts, pricing
objectives are the overall goals that describe the role of price in
an organizations long-range plans. The objectives help the
marketing manager as guidelines to develop marketing strategies.
