PRICING STRATEGIES

Pricing strategies usually change as the product passes

through its life cycle

NEW PRODUCT PRICING STRATEGIES

Two broad categories - Skimming and Penetration

MARKET SKIMMING PRICING

Setting a high price for a new product to skim maximum revenue
layer by layer, from the segments willing to pay high price, the
company makes fewer but more profitable sales.

Product quality and image must support high price

Cost of production of smaller lot must not be that high that it eats high price

Difficult for competitors to enter in the market with same features

MARKET-PENETRATION PRICING
Setting a low price for a new product in order to attract a large
number of buyers and a large market share

Market has to be price sensitive

Other costs like distribution cost must fall with rise in sales volume

Must be able to deter entry of competitors

 PRODUCT MIX PRICING STRATEGIES

PRODUCT LINE PRICING

Setting the price steps between various products in a product
line based on the cost differences between the products,
customer evaluation or different features and competitors’ prices.

OPTIONAL PRODUCT PRICING

The pricing of optional or accessory products along with a main product.

CAPTIVE PODUCT PRICING

Setting a price for products that must be used along with a main product.

BY-PRODUCT PRICING
Setting a price for by-products in order to make the main product’s
Price more competitive.

PRODUCT BUNDLE PRICING

Combining several products and offering he bundle at a reduced price.
 PRICE ADJUSTMENT STRATEGIES

DISCOUNT & ALLOWANCE PRICING

CASH DISCOUNT: A price reduction to buyers who pay their bill promptly.

QUANTITY DISCOUNT: A price reduction to buyers who buy large volumes

FUNCTION DISCOUNT: A price reduction offered by the seller to trade

channel members who perform certain functions such as selling, storing
and record keeping.

SEASONAL DISCOUNT: A price reduction to buyers who purchase

Merchandise or service out of season.

ALLOWANCE: Promotional money paid by the manufacturers to retailers

in return for an agreement to feature the manufacturer’s products in some way.
SEGMENTED PRICING
Selling a product or service at two or more prices, where the difference in
price is not based on difference in cost.

Certain conditions must exist e.g. segmentable market, different degree of

demand, lower price must not resell to high price segment etc.

PSYCHOLOGICAL PRICING
A pricing approach that considers the psychology of prices and not simply
the economics; the price is used to say something about the product.

REFERENCE PRICES
Prices that buyers carry in their minds and refer to when they look at a
given product.

PROMOTIONAL PRICING
Temporarily pricing products below the list price and sometimes even
below cost to increase short run sales.
GEOGRAPHICAL PRICING

FOB-ORIGIN PRICING: A geographical pricing strategy in which goods are

placed free on board a carrier, the customer pays the freight from the
factory to the destination.

UNIFORM DELIVERED PRICING: A geographical pricing strategy in

which the company charges the same price plus freight to all customers,
regardless of their locations.

ZONE PRICING: A geographical pricing strategy in which the company

sets up two or more zones. All customers within a zone pay the same
total price, the more distant zone, the higher the price.

BASE POINT PRICING: A geographical pricing strategy in which the seller

designates some city as basing point and charges all customers the freight
cost from that city to the customer location, regardless of the city from which
the goods are actually shipped.

FREIGHT ABSORPTION PRICING: A geographical pricing strategy in which

the seller absorbs all or part of the actual freight charges in order to get the
desired business.
 PRICE CHANGES

PRICE CUTS: because of

A: Excess capacity
B: Company needs more business
C: Follow the leader
D: Price war to hold market share or wash out competitor
E: Dominate the market with low prices and comparable quality

PRICE INCREASE: because of

a: Increase the profit
b: To cover inflation cost
c: To cover over demand

Companies increase their price in a number of ways

a: drop discounts
b: add high priced variants
c: curtail production of low margin products
c: increasing minimum order size etc.

Other methods are (a) cost effective production/distribution, (b) shrink the
product, © substitute the ingredients (d) remove certain features, packaging etc.
BUYER REACTION TO PRICE CHANGES

PRICE CUT: Problem with the product?

Launching new model with bettter features?
Launching substitute?

PRICE INCREASE: Product in demand?

Improved quality?

COMPETITORS REACTION TO PRICE CHANGES

PRICE CUT: The company is in problem and not selling enough

Want higher share in the market
Company wants everybody to reduce price to increase
market size

PRICE INCREASE: Difficult question, everybody behaves differently.

match the price – best option
OTHER CONSIDERATIONS IN PRICING:

Law prohibits discussion between competitors for price setting.

Predatory Pricing is also prohibited - (selling below cost to drive

competition out of business).

No price discrimination by the manufacturer at given level of trade.

(whosoever buys a specific quantity will be charged the same price)

Resale Price Maintenance is prohibited. A manufacturer cannot

require dealers to charge a specified retail price for its product.

Deceptive Pricing – artificial high “regular” prices then announce

“sale” prices.
Such claims are legal if truthful.
 QUIZZ - 1ST JULY 2004

TRUE or FALSE

1: Charging different prices depending on individual customers and

situation is known as “Dynamic Pricing”.

2: Pricing starts with an ideal selling price, then target cost is worked
out which will ensure that the price is met.

3: Fixed costs vary with the level of production.

4: Marketing Manager and Finance Manager do not influence the

prices.

5: Price change does not effect demand specially for the products
which have elastic demand.