Pricing Products: Pricing Strategies

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Topics Included

New Product Pricing Strategies Product Mix Pricing Strategies Price Adjustment Strategies Price Changes

Pricing Strategies

Pricing is a dynamic process. It covers:

different customers and different situations

Pricing Strategies

Pricing strategies usually changes as the product passes through its life cycle. The introductory stage is especially challenging.

New Product Pricing Strategies

Pricing an Innovative Product

Two methods used are:

Pricing an Innovative product

Market Skimming Pricing Market Penetration Pricing

Market Skimming Pricing

The practice of price skimming involves:

Charging a relatively high price for a short time

Prices are lowered later when demand from the early adopters falls.

Mostly used with high prestige and unique products.

Limitations of Marketing Skimming Pricing

Higher prices Enough buyers exist Entry of competitors should not be there.

Skimming Pricing Strategy

Examples:
Bareeze Nestle

Juices

Market Skimming Pricing

4) Attract other 1) Charges the highest Layer of price customers

3)Lowers the prices

2) Sales Slowdown

Advantages of Price Skimming

High short-term profits Prices can be reduced when new competitors arrive. Segmentation of the market Beneficial when quality difference is large. An example manufacturers of designer-label clothing.

Penetration Pricing

Penetration pricing involves

the setting of lower rather than higher prices and achieve a large market share.

Used for products that are of good quality, but not better than competing products

Limitation of Market Penetration Pricing

Production and distribution capabilities to meet the anticipated increase in demand

Penetration Pricing

Examples
Bonus Five

Detergent

Star Foam

Market Penetration Pricing

4) Cut in price further 1) Low Price

3) Fall in cost Of production

2) Attract large Market share

Advantages of Market Penetration Pricing

large sales volumes lower costs per unit

Product Mix Pricing Strategies

Product mix

The array of products offered for sale by a company where each product fills a specific customer need.

The strategy for setting a products price often has to be changed when the product is part of a product mix. In this case the firm looks for a set of prices that maximizes the profit on the total product mix

Pricing Strategies

Product line pricing Optional product pricing Captive product pricing By-product pricing Product bundle pricing

Product line pricing

Setting price steps between items in the same product line based on

Cost differences between products Customer evaluations of different features Competitors prices

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50 Grand WEGA SXRD Rear Projection HDTV

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$ 299.99

$ 2,499.99

$3,499.99

Optional product pricing

Pricing optional or accessory products sold with the main product. Pricing these options can be tricky; the company has to decide which items to include in the base price, and which to offer as options.

Captive product pricing:

Setting a price for products that must be used along with a main product.

Captive product pricing

By-product pricing

Pricing low-value by-products to get rid of them, or to reduce the price of the main product. The manufacturer will seek a market for these by-products and should accept any price that covers the cost of storing and delivering them.

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Product bundle pricing:

Combining several products and offering the combination at a price below that of buying the products individually. Price bundling can promote the sale of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.

Bundle pricing

3-Piece Piney River Furniture Set

Boots Cappuccino Set

Calvin Klein Eternity Gift Set

Dove Evening Indulgence

Price Adjustment Strategies:

Strategies to adjust the basic price of a product or service to reward customers for certain responses and changing situations. It include:

Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing

Discount And Allowance Pricing

Pricing to adjust the basic price to reward customers for certain responses. e.g., early payments of the bills, volume purchases, and off season buying
Discount includes: Cash discount Quantity discount Functional discount Seasonal discount Allowances includes Trade in allowance Promotional allowance

Cash discount:

Price reduction to buyers who pay their bills promptly. Price reduction to buyer who buys large volumes of product. Offered by the seller to trade channel members who perform certain functions. e.g., storing, selling, record keeping etc. Price reduction to a buyer who buys merchandise or service out of season.

Quantity discount:

Functional discount:

Seasonal discount:

Trade in allowance:

Price reduction given for turning in an old item when buying a new one. Payments or price reduction to reward dealers for participating in advertising and sale support program.

Promotional allowance:

Segmented Pricing:

Selling of a product or a service at two or more prices, where the difference in price is not based on the cost. It comprises: Customer- segment pricing Product form pricing Location pricing Time pricing

Customer- Segment Pricing

Different customers pay different prices for the same product or the services Different versions of the product are priced differently but not according to the difference in cost. Company charges different prices for different locations. Firm varies its price by the season. The month, the day and even the hour.

Product form pricing

Location pricing

Time pricing

Psychological Pricing:

Pricing approach that considers the psychology of prices and not simply the economics, the price is used to say something about the product. Reference prices:
Prices that buyer carries in their mind and refer to when they look at the given product.

Promotional Pricing:

Temporarily pricing products below the list price and sometimes even below the the cost, just to increase short term sales.

Geographical Pricing

Companies decide how to price its product for the customers located in different parts of the country as well as in the world. It includes: FOB-origin pricing Uniform- delivered pricing Zone pricing Basing -point pricing

FOB-origin pricing

Geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination.
Geographical pricing strategy in which company charges the same price plus freight to all customers , regardless of their location.

Uniform- delivered pricing

Zone pricing

A geographical pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price The more distant the zone the higher the price Geographical pricing strategy in which the seller designates some city as abasing point and charges all customers the freight cost from that city to the customers.

Basing -point pricing

Freight absorption pricing

A geographical pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business.

Price Changes
Initiating price changes

Initiating price cuts Initiating price increase Buyer reactions to price changes Competitors reactions to price changes

Responding to price changes

Initiating price changes

Initiating price cuts

It may drop its follow-the-leader pricing The fall of the market share in the face of strong price competition To dominate the market through lower cost

Initiating price changes

Initiating price increase

Major factor in price increase is cost inflation Over demand of product leads to price increase Prices can also be raised invisibly

Initiating price changes

Techniques for avoiding such problems

One is to maintain sense of fairness surrounding any price increase Price increase should be supported by the company Making low-visibility price increase

Initiating price changes

Buyer reactions to price changes

When the price is lowered

The The The The

model/product is outdated product has expired product has Poor quality company is abandoning the business

Initiating price changes

When the price is increased

The sales are lowered The model is latest Greediness

Initiating price changes

Competitor reactions to price changes

When the price is lowered

Grab larger market share It is doing poorly Trying to boost up its sales

Responding to price changes

No
Has competitor cut price? Hold current price continue to Monitor competitors price

Yes
Will lower price negatively affect our market share & product?

No

Reduce price

Yes No
Can should affective action taken?

Raise perceived quality

Yes

Improved quality and increase price

Launch low price fighting brand

Thank You