Pricing Strategy: Key Issues in pricing strategy,

Fixed versus dynamic pricing, Case Study

Concept
■ Pricing is a method adopted by a firm to set its selling price. It usually
depends on the firm's average costs, and on the customer's perceived
value of the product in comparison to his or her perceived value of the
competing products. Different pricing methods place varying degree of
emphasis on selection, estimation, and evaluation of costs, comparative
analysis, and market situation.
■ Pricing is the process of determining what a company will receive in
exchange for its product. Pricing factors are manufacturing cost, market
place, competition, market condition, brand, and quality of product.
■ Price is the only revenue generating element amongst the four Ps, the rest
being cost centers
PRICING STRATEGIES
1. COST BASED PRICING:Price is determined by adding a profit element on top of the
cost of making the product. The main base for fixing a price is cost of the product. This involves
setting a price by adding a fixed amount or percentage to the cost of making or buying the product.

■ Cost plus pricing: Cost-plus (or “mark-up”) pricing is widely used in retailing, where
the retailer wants to know with some certainty what the gross profit margin of each sale
will be. This appears in two forms, full cost pricing which takes into consideration both
variable and fixed costs and adds a percentage as markup. An advantage of this
approach is that the business will know that its costs are being covered. The main
disadvantage is that cost-plus pricing may lead to products that are priced un-
competitively.
■ Marginal-cost pricing: Marginal cost is the change in total production cost that comes
from making or producing one more unit. It's calculated by dividing the change in
production costs by the change in quantity.
■ Economy Pricing: The costs of marketing and promoting a product are kept to a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc. Budget
airlines are famous for keeping their overheads as low as possible and then giving the
consumer a relatively lower price to fill an aircraft. The first few seats are sold at a very
cheap price (almost a promotional price) and the middle majority is economy seats, with
the highest price being paid for the last few seats on a flight (which would be a premium
pricing strategy).
■ Product Life Cycle Pricing: All products have a life span, called product life cycle. A
product gradually progresses through different stages in the cycle: introduction, growth,
maturity and decline stages. During the growth stage, when sales are booming, a small
company usually will keep prices higher. For example, if the company's product is
unique or of higher quality than competitive products, customers will likely pay the
higher price. A company that prices its products high in the growth stage also may have
a new technology that is in high demand.
2. CUSTOMER-BASED PRICING: Where prices are determined by what a firm believes
customers will be prepared to pay. Following are some of the customer based pricing strategies which
are commonly used.

■ Penetration pricing Penetration pricing is the pricing technique of setting a relatively low initial
entry price, usually lower than the intended established price, to attract new customers. The
strategy aims to encourage customers to switch to the new product because of the lower price.
Penetration pricing is most commonly associated with a marketing objective of increasing market
share or sales volume.
■ Price skimming: Skimming involves setting a high price before other competitors come into the
market. This is often used for the launch of a new product which faces little or no competition –
usually due to some technological features. Such products are often bought by “early adopters”
who are prepared to pay a higher price to have the latest or best product in the market. There are
some other problems and challenges with this approach. Price skimming as a strategy cannot last
for long, as competitors soon launch rival products which put pressure on the price.
■ Price discrimination (Differential Pricing): Differential pricing is a pricing strategy
where businesses set different prices for the same product or service based on multiple
factors. Common factors include the customer's location, time of purchase, purchase
history, price sensitivity, and ability to pay. One example of price discrimination can be
seen in the airline industry. Consumers buying airline tickets several months in advance
typically pay less than consumers purchasing at the last minute. When demand for a
particular flight is high, airlines raise ticket prices in response.
■ Temporary Discount Pricing: Small companies also may use temporary discounts to
increase sales. Temporary discount pricing strategies include coupons, cents-off sales,
seasonal price reductions and even volume purchases. For example, a small clothing
manufacturer may offer seasonal price reductions after the holidays to reduce product
inventory. A volume discount may include a buy-two-get one-free promotion.
COMPETITOR-BASED PRICING

■ In this method of pricing competitor prices is the main influence on the price.
If there is strong competition in a market, customers are faced with a wide
choice of who to buy from. They may buy from the cheapest provider or
perhaps from the one which offers the best customer service. But customers
will certainly be mindful of what is a reasonable or normal price in the
market. Most firms in a competitive market do not have sufficient power to be
able to set prices above their competitors. They tend to use “going-rate"
pricing – i.e. setting a price that is in line with the prices charged by direct
competitors. In effect such businesses are “price-takers” – they must accept
the going market price as determined by the forces of demand and supply. An
advantage of using competitive pricing is that selling prices should be line
with rivals, so price should not be a competitive disadvantage. The main
problem is that the business needs some other way to attract customers. It has
to use non-price methods to compete – e.g. providing distinct customer
service or better availability.
OTHER STRATEGIES

■ Target pricing: It is a pricing method whereby the selling price of a product is

calculated to produce a particular rate of return on investment for a specific volume of
production. The target pricing method is used most often by public utilities, like electric
and gas companies, and companies whose capital investment is high, like automobile
manufacturers.
■ Time-based pricing: A flexible pricing mechanism made possible by advances in
information technology, and employed mostly by Internet based companies. By
responding to market fluctuations or large amounts of data gathered from customers -
ranging from where they live to what they buy to how much they have spent on past
purchases - dynamic pricing allows online companies to adjust the prices of identical
goods to correspond to a customer’s willingness to pay.
■ Value-based pricing:Value-based pricing is a strategy of setting prices primarily based
on a consumer's perceived value of a product or service. Value-based pricing is
customer-focused, meaning companies base their pricing on how much the customer
believes a product is worth. For example, a restaurant that sources local, organic
ingredients may charge higher prices, distinguishing itself from competitors that use
conventional produce.
■ Product-Line Pricing: Product-line pricing is establishing and adjusting prices of
multiple products within a product line. A marketer’s goal here is to maximize profits
for an entire product line rather than to focus on the profitability of an individual
product.
1.Captive Pricing:Captive product pricing refers to pricing strategy where the price of one
product is tied to the price of another product. For example, the price of ink cartridges for a
printer may be higher than what the market would typically bear, because the company that
makes the printer is also selling the ink cartridges.
2. Premium Pricing:Premium pricing is often used when a product line contains several
versions of the same product of different quality. It entails giving higher quality or more
versatile products the highest prices.
3. Bait Pricing:advertising an item at an unrealistically low price as 'bait' to lure customers
to a store or selling place.
4. Price Lining:Price lining is the practice of releasing multiple versions of the same
product or service at different price points simultaneously. It gives the impression that a
product has both budget-friendly, standard options and premium options with extra features
and benefits.