Course – Business Economics

Faculty – Dr K.Venkateswarlu
1. Meaning and Need for Pricing Strategies
2. Types of Pricing Strategies
a) Price Skimming
b) Price Penetration
c) Peak-Load Pricing
 A business can use a variety of pricing strategies when selling
a product or service.
 To determine the most effective pricing strategy for a company,
senior executives need to first identify the company's pricing
position, pricing segment, pricing capability and their competitive
pricing reaction strategy. 
 Pricing strategies and tactics vary from company to company, and
also differ across countries, cultures, industries and over time, with
the maturing of industries and markets and changes in wider
economic conditions.
 Pricing strategies determine the price both competitive advantages
and disadvantages to its firm and often dictate the success or failure
of a business; thus, it is crucial to choose the right strategy.
Generally, pricing strategies include the following five
strategies.
1.Cost Plus Pricing —simply calculating your costs and adding
a mark-up. Cost plus pricing is a cost-based method for setting
the prices of goods and services. Under this approach, the direct
material cost, direct labor cost, and overhead costs for a product
are added up and added to a markup percentage (to create a
profit margin) in order to derive the price of the product.
2.Competitive pricing—setting a price based on what the
competition charges
3.Value-based pricing—setting a price based on how much
the customer believes what you’re selling is worth
Generally, pricing strategies include the following five
strategies.
4.Marginal-cost pricing
In business, the practice of setting the price of a product to equal the
extra cost of producing an extra unit of output. By this policy, a
producer charges, for each product unit sold, only the addition to total
cost resulting from materials and direct labor.
Businesses often set prices close to marginal cost during periods of
poor sales. If, for example, an item has a marginal cost of Rs.10.00
and a normal selling price is Rs.20.00, the firm selling the item might
wish to lower the price to Rs.11 if demand has waned. The business
would choose this approach because the incremental profit of Rs. 1
from the transaction is better than no sale at all.
5. Penetration pricing—setting a low price to enter a
competitive market and raising it later
Penetration pricing includes setting the price low with the goals of
attracting customers and gaining market share. The price will be
raised later once this market share is gained.
A firm that uses a penetration pricing strategy prices a product or a
service at a smaller amount than its usual, long range market price
in order to increase more rapid market recognition or to increase
their existing market share. This strategy can sometimes
discourage new competitors from entering a market position if they
incorrectly observe the penetration price as a long range price.
Companies do their pricing in diverse ways. In small companies, prices
are often set by the boss. In large companies, pricing is handled by
division and the product line managers. In industries where pricing
is a key influence, pricing departments are set to support others in
determining suitable prices.
 Penetration pricing strategy is usually used by firms or businesses
who are just entering the market.
 In marketing it is a theoretical method that is used to lower the
prices of the goods and services causing high demand for them in
the future.
 This strategy of penetration pricing is vital and highly recommended
to be applied over multiple situations that the firm may face. Such
as, when the production rate of the firm is lower when compared to
other firms in the market and also sometimes when firms face
hardship into releasing their product in the market due to extremely
large rate of competition.
 In these situations it is appropriate for a firm to use the penetration
strategy to gain consumer attention
 Penetration pricing strategy is usually used by firms or businesses
who are just entering the market.
 In marketing it is a theoretical method that is used to lower the
prices of the goods and services causing high demand for them in
the future.
 This strategy of penetration pricing is vital and highly recommended
to be applied over multiple situations that the firm may face. Such
as, when the production rate of the firm is lower when compared to
other firms in the market and also sometimes when firms face
hardship into releasing their product in the market due to extremely
large rate of competition.
 In these situations it is appropriate for a firm to use the penetration
strategy to gain consumer attention
 Price discrimination is the practice of setting a
different price for the same product in different
segments to the market. For example, this can be
for different classes, such as ages, or for different
opening times.
 Price discrimination may improve consumer

surplus. When a firm price discriminates, it will sell

up to the point where marginal cost meets the
demand curve. There are three conditions needed
for a business to undertake price discrimination,
these include:
1. Accurately segment the market
2. Prevent resale
3. Have market power
 There are three different types of price

discrimination which revolve around the same

strategy and same goal – maximize profit by
segmenting the market, and extracting additional
consumer surplus.
 An observation made of oligopolistic business
behavior in which one company, usually the
dominant competitor among several, leads the
way in determining prices, the others soon
following.
 The context is a state of limited competition, in

which a market is shared by a small number of

producers or sellers.
 Peak pricing is one element of a larger comprehensive
pricing strategy called dynamic pricing.
 Businesses are able to change prices based on
algorithms that take into account competitor pricing,
supply, and demand, and other external factors in the
market. 
 Dynamic pricing is a common practice in several
industries such as hospitality, travel, entertainment,
retail, electricity, and public transport. Each industry
takes a slightly different approach to repricing based
on its needs and the demand for the product.
 Peak pricing is a mechanism where the price of some
good or service is not firmly set; instead, it fluctuates
based on changing circumstances—such as increases
in demand at certain times, the type of customers
being targeted, or evolving market conditions. If
periods of peak demand are not well
managed, demand can exceed supply in a big way.
 In the case of utilities, this may cause brownouts. In
the case of roads, it may cause traffic congestion.
Brownouts and congestion are costly for all users.
Using peak pricing is a way of directly charging
customers for these negative effects.