DESIGNING PRICING

STRATEGIES

8 LAWS OF PRICE SENSITIVITY AND

CONSUMER PSYCHOLOGY

1. UNIQUE-VALUE EFFECT: Buyers are less price-sensitive

when the product is more exclusive and special. Do you truly
believe that a shirt with a Nike Swoosh is worth on average $15
more than one without? It's the perception of Nike being a quality
brand that convinces customers to pay the higher price.

2. SUBSTITUTE-AWARENESS EFFECT: Buyers are less price-

sensitive when they are less aware of substitutes. There is no
substitute for Indian railways hence customers pay the price as
demanded by the government.

3. DIFFICULT-COMPARISON EFFECT: Buyers are less price-

sensitive when they cannot easily compare the quality of
substitutes. Customers may also be less inclined to find
alternatives on the fly if they are short on time or are given a
sense of urgency. This is exactly why limited-time offers work so
well.

4. SHARED-COST EFFECT: Buyers are less price-sensitive

when part of the cost is borne by another party. If you and three
friends have a barbeque, the price of all the food appears lower
because the amount you pay is only a fourth of the total price.
5. SUNK-INVESTMENT EFFECT: Buyers are less price-sensitive
when the product is used in conjunction with assets previously
bought. If you have purchased car of a Maruti Suzuki then you
have to pay for the components and parts in case of repairs of the
same company.

6. INVENTORY EFFECT: Buyers are less price-sensitive when

they cannot store the product. For Example: Petrol, Diesel,
Natural Gas, Milk Etc.
7. SWITCHING COSTS EFFECT: The higher the inconvenience
a customer must make to switch providers, the more price
sensitive the customer becomes to look for alternatives. Switching
costs take many forms - investment of time, resources, complexity
of purchase, number of people a buyer needs to convince (like
their husband), etc.

8. FRAMING EFFECT: Customers are more aware, or price

sensitive, when they consider the price as a loss instead of a
worthwhile gain. They also are more aware of pricing when prices
are not paid as part of a bundle, but separately.

You've seen the advertisements that eagerly tell you to purchase

their product for only five easy payments of $49.99, right? We
know that it's really just $249.95, paid in full or in parts. But
marketers rely on this trick because they know customers are
likely to veer away from the higher number if it is displayed. By
doing this, marketers are reducing the "loss" which customers
perceive.
COST OF GOODS SOLD
Before you start calculating your business’s profit, you need to know your
cost of goods sold. And, knowing what the cost of goods sold is plays an
important role in setting prices. But what is the cost of goods sold? Cost of
goods sold consists of all the costs associated with producing the goods or
providing the services offered by the company.

You will need to gather information about the exact cost of your product or
service related to:

1. Opening inventory, the value of all the products, parts, and

materials in your inventory at the beginning of the year. It must be the
same as your ending inventory at the end of the year before.

2. Cost of new purchases for inventory and raw materials.

3. Salaries, wages and benefits given to employees and

managers.

4. Other costs including total freight costs and administrative

expenses like rent, electricity, stationery, snacks, equipments,
furniture, machine, internet, government bills, insurance, legal costs,
marketing cost etc.

6. Ending inventory - the value of all items in inventory at the end of

the year.

The basic formula for cost of goods sold is: 

 Opening Inventory (at the beginning of the year)

 Plus Purchases, raw material, salaries and Other Costs
 Minus Ending Inventory (at the end of the year)
 Equals Cost of Goods Sold.
PRICE DISCOUNTS & FINANCING

_Seasonal discounting: It is a price reduction to buyers who buy

products or services out of season. For example: winter clothes in
summer season.

_Occasional discounts: Discounts given on festivals, national

events or important days.

_Psychological discounting: This strategy involves setting an

artificially high price and then offering the product a substantial
savings.

_Partnership discount: Discount given to a customer for

referring us another customer.

_Low-interest financing: Instead of cutting price the companies

can offer low-interest financing.

_Longer payment terms: Sellers, especially mortgage banks

and auto companies, stretch loans over more years and thus
lower the monthly payments.

_Warranties and service contracts: Companies can promote

sales by adding a free or low-cost warranty or service contract.
TOP PRICING STRATEGIES

PRICE SKIMMING
Price skimming is the strategy of charging a relatively high price during the
launch of a new, innovative product in order to cover development cost as
much as possible and then lowering the price over time to fight competition
and access different segments of market.

One popular example of price skimming is Apple’s iPhone sales. When the
iPhone 5s first came out, it was priced at $649 for the 16GB version. Now
you can find it for $210.
PENETRATION PRICING

Penetration pricing is a pricing strategy where the price of a product is

initially set low to rapidly gain huge market share and discourage
competition . Once market share is achieved prices will be increased
gradually over time with improved quality and features.

An example of penetration pricing would be Amazon' s kindle fire. They

offered their tablet for much cheaper than any of the other tablets on the
market to discourage competitors such as apple, Microsoft, Samsung etc.
FREEMIUM PRICING
Freemium pricing is the practice of offering a basic set of services for
free, and enhanced features and/or content for a premium fee. This
approach will result in a large proportion of customers using the
company's offerings for free, and a smaller proportion paying for
additional services.
CAPTIVE PRODUCT PRICING

Captive product pricing is used when the value of the main product is

very low, but the value of the supporting product, which is necessary for
working of main product, is high. Every time you buy a printer, you need
ink in order to actually use the printer effectively. Every time you buy a
razor, you need the blades in order to actually be able to shave. When
you buy a car, after some time parts of it get broken and you have to
change them in order to make the car function properly again. 
COMPETITIVE PRICING
When a product is priced in accordance with what the competition is
charging, it’s known as competitive pricing. 

Competitive pricing is also common with franchises, such as McDonald’s

and Burger King, which are able to be competitive and profitable.
VALUE ADDED PRICING

Value-added pricing, an alternative customer value-based pricing strategy,

means attaching value-added features and services to differentiate the
product and charging higher prices. Therefore, value-added pricing does
not aim at cutting prices to match competitors, but attaching value-added
features to differentiate the products from competitors’ offers. The added
value justifies a higher price in customers’ eyes.

Take an example of higher-priced premium airlines such as Singapore

Airlines, Emirates, Etihad Airways . Flying with these airlines will cost you
much more – but customers are willing to spend that additional price
because they will get more value. Value is added in terms of comfort,
luxury, premium service, status symbol, safety, responsiveness and so
further. These additional value-added features increase the service’s value
in customers’ eyes – and justify a higher price.

Another example would be APPLE INC.

BUNDLE PRICING

Bundle pricing is when you encourage people to buy things in bundles or

packages by offering discounts. In this strategy, businesses will often
bundle goods that are discontinued, overstocked or being phased out with
popular items to help boost sales and avoid liquidation pricing. Businesses
also use it to introduce new products by pairing it with old, popular products
or other complementary products for lower prices. This can help to boost
sales overall or to improve brand identity for the new product. For example,
the Xbox One S is a newer Microsoft gaming product, and therefore they
bundle it with the necessary complementary products. Buying them
separately will be much more expensive:

 Xbox One S = about $240

 Xbox wireless controller = $25
 Battlefield 1 = about $40
 1 month EA Access = $5
 Total price: $310
With the bundle price, that’s a total savings of $52.
DISCRIMINATORY PRICING

It occurs when a company sells the same product or service at different

price in different locations or consumers based on age, gender, occasion,
income, time, quantity purchased etc.

A typical example of price discrimination is the airline industry. Airlines offer

different prices depending on the seasonality. For example, people pay a
higher price to fly overseas during summer and Christmas holidays. Most
airlines charge a higher price over the weekend for economy seats and a
lower price for business travelers, who are paying a higher price for flying
Monday to Friday.

Seasonality is important because the demand is picking up and airlines

seek to realize a profit from selling more air tickets. Moreover, demand is
inelastic during high season because people want to travel at any price.
Therefore, no matter how high the price, people will travel.
Airlines may also offer coupons to selected consumers, who are flying on a
business seat for the price of an economy seat. For example, large
supermarket chains offer to their regular customers a 20% to 25% off for
selected items, which target their purchasing habits. In that way,
consumers are spending more money in the store and get rewarded with a
lower airline fare or with a coupon of $20 to spend on their next purchase.