Pricing StrategiesMarket-penetration pricing

- setting the price as low as possible to win a large market share, then cut price further as falling costs are experienced (Ex: IKEA Home Furnishings)

May be adopted under the following conditions:

a. the market is highly price sensitive and a low price stimulates market growth;

b. production and distribution costs fall with accumulated production experience;

c. a low price discourages actual and potential competition.

Pricing StrategiesMarket-skimming pricing

- setting the starting price as high and then slowly drop over time (Sony’s introduction of HDTV in 1990 at $43,000, became $6,000 (28-inch) in 1993, then $1,200 (40-inch) in 2007.

May be adopted under the following conditions:a. a sufficient number of buyers have a high current demand;b. the unit costs of producing a small volume are not so high that they cancel the advantage of charging will bear;c. the high initial price does not attract more competitors to the market;d. the high price communicates the image of a superior product.

Pricing StrategiesMark-up pricing

- the most elementary pricing method which adds a standard mark-up to the product’s cost

- the most popular pricing strategy

Advantages of mark-up pricing:a. sellers can determine costs much more easily than they can estimate demandb. where all firms in the industry use this pricing method, prices tend to be similar and price competition is minimizedc. many people feel that cost-plus pricing is fairer to both buyers and sellers

Pricing Strategies

Target-return pricing

- determining the price that would yield its target return on investment (ROI) (Ex. General Motors priced its automobiles 15%-20% ROI)

- tends to ignore price elasticity and competitors’ prices

Formula:

Target-return =unit cost + desired return X investment

price unit sales

Pricing Strategies

Perceived-value pricing

- made up of several elements, such as the buyers’ image of the product performance, the warranty quality, customer support, and softer attributes such as the suppliers’ reputation, trustworthiness, and esteem.

- firms use the other marketing mix elements, such as advertising and sales force, to communicate and enhance perceived value in buyers’ minds.

Pricing Strategies

Value pricing

- charging a fairly low price for a high-quality offering

- reengineering the company’s operations to become a low-cost producer without sacrificing quality, to attract a large number of value-conscious customers

Practitioners of value pricing: IKEA Home Furnishings, Procter & Gamble

Pricing StrategiesGoing-rate pricing

- the firm bases its price largely on competitors’ prices, charging the same, more or less than major competitors

- smaller firms “follow the leader” when the market leader’s prices change rather than when their own demand or costs change

- where costs are difficult to measure or competitive response is uncertain, firms feel the going price is a good solution because it is thought to reflect the industry’s collective wisdom

Pricing Strategies

Auction-type pricing

- usually done using the Internet (Ex. Ebay) to dispose of excess inventories or used goods.

3 major types of auctions:

1. English auctions (ascending bids) where there is one seller and many buyers

2. Dutch auctions (descending bids) where there is one buyer and many sellers. The buyer announces what he/she wants to buy and potential sellers compete by offering the lowest price

Pricing Strategies

Auction-type pricing

- usually done using the Internet (Ex. Ebay) to dispose of excess inventories or used goods.

3 major types of auctions:

3. Sealed-bid auctions – would-be suppliers can submit only one bid and cannot know the other bids

Pricing StrategiesGeographical pricing

- the company decides how to price its products to different customers in different locations and countries

- company may charge higher prices to distant customers to cover the higher shipping costs

Pricing options for geographical pricing:

Barter – the buyer and seller directly exchange goods, with no money and no third party involved

Pricing StrategiesGeographical pricing

Pricing options for geographical pricing:

Compensation deal– the seller receives some percentage of the payment in cash and the rest in products

Buyback arrangement – the seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment

Offset – the seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period

Pricing StrategiesPromotional pricing

- companies use several pricing techniques to stimulate early purchase

Techniques: Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment termsWarranties and service contracts Psychological discounting

Pricing StrategiesDifferentiated pricing

- companies often adjust their basic price to accommodate differences in customers, products, locations, and so on

Customer-segment pricing

Product-form pricing

Image pricing

Channel pricing

Location pricing

Time pricing