Pricing Strategies

Factors Affecting Price Decisions

External
ExternalFactors
Factors

Internal
InternalFactors
Factors
Marketing
MarketingObjectives
Objectives
Marketing
MarketingMix
MixStrategy
Strategy
Costs
Costs
Organizational
Organizational
considerations
considerations

Pricing
Pricing
Decisions
Decisions

Nature
Natureofofthe
themarket
market
and
anddemand
demand
Competition
Competition
Other
Otherenvironmental
environmental
factors
factors(economy,
(economy,
resellers,
resellers,government)
government)

CHPT: 14-2

Internal Factors Affecting Pricing Decisions:

Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Marketing
Objectives

Choose the Price that Produces the

Maximum Current Profit.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.

CHPT: 14-3

External Factors Affecting Pricing Decisions

Market and
Demand
Competitors Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

Market and Demand Factors Affecting Pricing

Decisions
Pricing in Different Types of Markets\
Pure
Pure Competition
Competition

Many
ManyBuyers
Buyersand
andSellers
Sellers
Who
WhoHave
HaveLittle
Little
Effect
Effecton
onthe
thePrice
Price

Monopolistic
Monopolistic
Competition
Competition

Pure
Pure Monopoly
Monopoly
Single
SingleSeller
Seller

Oligopolistic
Oligopolistic
Competition
Competition

Many
FewSellers
SellersWho
WhoAre
Are
ManyBuyers
Buyersand
andSellers
Sellers Few
Who
Sensitiveto
toEach
EachOthers
Others
WhoTrade
TradeOver
Overaa Sensitive
Pricing/
Range
Pricing/Marketing
Marketing
Rangeof
ofPrices
Prices
Strategies
Strategies

Major Considerations in Setting Price

Price Setting
Selecting the Pricing objective
Determining Demand
Estimating Costs
Analyzing Competitors Costs, Prices and offers
Selecting a Pricing Method
Selecting the final price
Adapting the price.

Pricing Strategies

Cost-Based Pricing

Pricing is
Simplified

Price
Competition Is
Minimized
Much Fairer to
Buyers & Sellers

Competition-Based Pricing

Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge.

Value Pricing

Old Russian Proverb

There are two fools in every market one who

asks too much and one who asks too little

What is a value proposition?

An overall mixture of benefits you offer a customer with a

product or service solution.

That means customers compare the perceived worth of

your solutions to the price you ask for it.

If your price is higher than the perceived worth, your

quantity demanded suffers, If you price your solution

below the perceived worth, you miss out on money
customers were willing to pay

Value Pricing
Price set in accordance

with customer
perceptions about the
value of the
product/service
Offering value at a low

price.

Contd..
Shift from cost based to value based pricing
What

factors differentiate your product from the

competition?
How much those difference are really worth to the
customer?
How much of a price premium (if any) you should be able
to sustain over the competitors?
What improvements to your product would add the most
value from the customers perspective?

Example
Tata Motors launched a compact sedan called Tata Indigo

CS with a base price under Rs4.5 Lac sometime back.

Mc Donalds offer Value Menus.

Applications When

you want to gain market share,

obtain market acceptance of a new product.

Retail Set up EDLP by Walmart.

Loss Leader

Loss Leader
Goods/services deliberately sold below cost to encourage

sales elsewhere

One of the oldest marketing tricks is selling a product at

cost or even a loss in what is called the Loss leader"

strategy

For example, in 2011, Amazon advertised its new online

music service by offering Lady Gaga's new album for $0.99

-- a $3 million loss to the company.

Contd.
Loss leader can backfire. In Amazon's case, the initial

offering drew thousands of new customers to its website,

but crashed the company's servers -- Amazon successfully
relaunched the deal the following week.
Although Amazon absorbed the cost of the Lady Gaga deal,

a small business might not be able to recover from running

out of the product, or failing to entice customers to
purchase other profitable items.

Applications
Unwanted Merchandise/ Slow moving items
Attracting Customers
Brand Building
Tracking Advertising

Examples
When Apple Inc reduces the prices on its latest products,

savvy Apple watchers know a new release is just around

the corner
Even e-commerce effectively uses loss-leader pricing to

attract customers. The next time you visit a website to take

advantage of a discount offered on shoes, notice the
"customers also looked at these products" messages
showing other shoes and accessories you might find
attractive.

Contd.
Advertising a loss-leader product at a price that will

certainly attract customers.

Coupled with a coupon that can be traced to a particular

newspaper shows how well your ads are targeting by the

amount of merchandise that is sold.

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions
Classic example - Rs9.99 instead of Rs10.
Links with value pricing high value goods priced

according to what consumers THINK should be

the price

Contd..
Psychological pricing is a pricing tactic that is
designed to appeal to customers who use
emotional rather than rational responses to pricing
messages

Contd
Sometimes prices are set at what seem to be unusual price

points
For example, why are DVDs priced at 12.99 or 14.99?

The answer is the perceived price barriers that customers

may have. They will buy something for 9.99, but think
that 10 is a little too much.
So a price that is one pence lower can make the difference

between closing the sale, or not!

The main advantage of psychological pricing is that it allows

a business to influence the way that customers view a product
without the need to actually change the product.

Going Rate (Price Leadership)

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, supermarkets, electrical goods

find very similar prices in all outlets

New Product Pricing Strategies

Market Skimming
Skimming
Market
Setting
Setting aa High
High Price
Price

for aa New
New Product
Product to
to
for
Skim Maximum
Maximum
Skim
Revenues from
from the
the
Revenues
Target Market.
Market.
Target
Results
Results in
in Fewer,
Fewer, But
But

More Profitable
Profitable Sales.
Sales.
More

Use under these Conditions:

Products Quality and Image

must support its higher Price.

Costs cant be so high that
they cancel the advantage of
charging More.
Competitors shouldnt be
able to enter market easily
and undercut the high price.

New Product Pricing Strategies

Use Under These Conditions:
Market must be highly Price-

sensitive so a low price

produces more market
growth.
Production/ Distribution
Costs must fall as sales
volume increases.
Must keep out competition
& maintain its low price
position or benefits may only
be temporary.

MarketPenetration
Penetration
Market
Setting
Settingaalow
lowprice
pricefor
foraa

newproduct
productin
inorder
orderto
to
new
Penetratethe
themarket
market
Penetrate
quicklyand
anddeeply.
deeply.
quickly

Attract
Attractaalarge
largenumber
numberof
of

buyersand
andwin
winaalarger
larger
buyers
marketShare.
Share.
market

Product Mix-Pricing Strategies:

Product Line Pricing
Involves setting price steps

between various products in

a product line based on:
Cost differences between

products,
Customer evaluations of
different features, and
competitors prices.

Contd.
Companies with more than one product within the same

line use a product line pricing strategy

What this means is that different products on a line will

have different prices depending on their features or benefits

The price on each product in the line is set with that price's

impact on the sales and profitability of other items in the

line in mind

One goal of this pricing method is to maximize overall

profits

Examples
In Automobiles , price range in a given line from base

model to top end models with difference in features.

Product Mix- Pricing Strategies

Optional-Product
Pricing optional or

accessory products sold

with the main product.
i.e. camera bag.
Captive-Product
Pricing products that
must be used with the
main product. i.e. film.

Contd
Kotler defines captive-product pricing as, Setting a price

for products that must be used along with a main product

Producers of captive products often price the main product

low and then set high markups on the supplies or

expendable products.
Many companies make very low margins on the main

products but are able to make very high margins on the

expendable secondary products (Kotler)

Contd..
Could you give some examples???

Razor blades, Printers, and Theme parks as examples of

companies that use captive product pricing

Contd.

Logic - once customers make an initial investment in a base

product, they must buy additional components to get value

from their purchase

Contd.
The first benefit of captive pricing is the ability to attract a

sizable customer base because initial purchases are at low

price points
Repetitive revenue, stable profit margins and potential

customer loyalty
By keeping customers hooked to your products and brand,

you also have greater opportunity to market and promote

new versions or unrelated products to them

Contd.
A portion of the audience may feel duped by the lure of a
low-priced product only to pay perpetually to use it

Negative brand attitudes can fester.

Additionally, the provider must maintain strong investment
and commitment to offer the components and products
necessary.

Product Bundle Pricing

Defined as combining several products and

offering the bundle at a reduced price

Contd

Contd..
For example, a camera retailer may offer a discounted price

when customers purchase both a digital camera and a howto photography DVD that is lower than if both items were
purchased separately.

In this example the retailer may promote this as: Buy both

the digital camera and the how-to photography DVD and

save 25%.

Contd.
Marketer is presenting a price adjustment without the

perception of it lowering the price of the main product.

Optional Pricing
Companies will attempt to increase the amount customer spend
once they start to buy. Optional 'extras' increase the overall price
of the product or service.
Airlines will charge for optional extras such as guaranteeing a
window seat or reserving a row of seats next to each other.
Mobile handsets with Service connection.