Pricing Strategies
Mrs. Jayashree Vispute
Penetration PricingPrice set to ‘penetrate the market’‘Low’ price to secure high volumesTypical in mass market products –
chocolate bars, food stuffs, household goods, etc.
Suitable for products with long anticipated life cycles
May be useful if launching into a new market
Results in a Larger Market Share
Market SkimmingHigh price, Low volumesSkim the profit from the marketSuitable for products that have short life cycles or
which will face competition at some point in the future (e.g. after a patent runs out)
Results in Fewer, More Profitable Sales.
Eg. Playstation, jewellery, digital technology, new DVDs, etc.
Value PricingPrice set in
accordance with customer perceptions about the value of the product/service
Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Loss LeaderGoods/services deliberately sold below
cost to encourage sales elsewhereTypical in supermarkets, e.g. at Diwali,
selling scented soap at Rs. 13 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
Psychological PricingUsed to play on consumer perceptionsClassic example – Rs.999 instead of Rs.1000!Links with value pricing – high value goods
priced according to what consumers THINK should be the price
Going Rate (Price Leadership)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, supermarket products, electrical goods – find very similar prices in all outlets
Tender PricingMany contracts awarded on a tender basisFirm (or firms) submit their price for carrying
out the workPurchaser then chooses which represents best
valueMostly done in secret
Price DiscriminationCharging 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
Destroyer/Predatory PricingDeliberate 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
Contribution PricingContribution = Selling Price – Variable
(direct costs)Prices set to ensure coverage of variable
costs and a ‘contribution’ to the fixed costsSimilar in principle to marginal cost
pricingBreak-even analysis might be useful in
such circumstances
Market SkimmingMarket Skimming Market PenetrationMarket Penetration
>Setting a High Price for a New Product to Maximize Revenues from the Target Market.
>Results in Fewer, More Profitable Sales.
> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
>Results in a Larger Market Share.
New Product Pricing Strategies
Pricing strategiesPremium pricing
Uses a high price, but gives a good product/service exchange e.g. Concorde, The Ritz Hotel
Penetration pricing offers low price to gain market share - then
increases price e.g. France Telecom - to attract new corporate
clients (or Telewest cable)
Economy pricing placed at ‘no frills’, low price e.g. Soups, spaghetti, beans - ‘economy’ brands
Price skimming where prices are high - usually during introduction e.g new albums or films on release ultimately prices will reduce to the ‘parity’
Psychological pricing to get a customer to respond on an emotional,
rather than rational basis .e.g 99 not 100 ‘price point perspective
Product line pricing rationale of a product range e.g. DairyMilk 20, three-pack 60, chotu-size 2
Pricing variations ‘off-peak’ pricing, early booking discounts,etc e.g offering a ‘cash back’ incentive for expensive
goods
Optional product-pricing e.g. optional extras - BMW famously under-
equippedCaptive product pricing
products that complement others e.g Gillette razors (low price) and blades (high
price)Product-bundle pricing
sellers combine several products at the same price
e.g software, books, CDs.Promotional pricing
BOGOF e.g. toothpaste, soups, etc
Geographical pricing different prices for customers in different parts
of the world e.g.Include shipping costs, or place on PLC
Value pricing usually during difficult economic conditions e.g. Value menus at McDonalds
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