Pricing Strategy

Pricing Strategy
A strategically correct value attached to a product/service corresponding to what it delivers
We need to set price when we have a new product, or when we enter a new market with an existing product. How? Need to decide what position you want your product to be in the market.

Price - Quality Segments

PRICE

PRODUCT QUALITY

Price Quality Segments

High
1. Premium Strategy

Medium
2. High Value Strategy 5. Medium Value Strategy 8. False economy Strategy

Low
3. Super Value Strategy 6. Good Value Strategy

High

Medium

4. Overcharging Strategy

Low

7. Rip off Strategy

9. Economy Strategy

Pricing Objectives
Profit Maximization Market Share Maximization Maximize Quantity Quality Leadership Partial Cost Recovery Survival Status Quo

Selecting Pricing Objectives

Analysing Demand
1. Measure the impact of price change on total revenue 2. Predicts unit sales volume and total revenue for various price levels. 3. Different customers have different price sensitivities and needs.

Price elasticity of demand

Inelastic Demanded
Elastic Demanded

Price in Rs.

Price in Rs.

10 5

10 5

95

100

50

100

Quantity Demanded

Quantity Demanded

Impact of Cost on Pricing Strategy

Fixed and variable costs
Full-Cost Pricing
Markup pricing, break-even pricing and rate-of-return pricing

Variable-cost pricing

3 types of relationships
Ratio of fixed costs to variable costs Economies of scales Cost structure

Pricing Method
1. 2. 3. 4. 5. 6. 7. 8. 9. Going Rate pricing Value Pricing Penetration pricing Destroyer pricing Mark up pricing Market skimming Marginal cost pricing Price discrimination Target Return Pricing

Contd
1. Market Skimming pricing : Charging a high price initially and reducing the price over time. Commonly used when introducing new & innovative products in the market. 2. Penetration pricing : Charging a low price when entering the market to capture market share. Used when competitors are closing in with similar or better products.

Contd
Mark up Pricing : It is an Elementary method adding standard markup to product cost One of the Most popular pricing method Used by e.g. Resellers / Retailers

Contd...
Marginal cost Pricing :Marginal cost the cost of producing ONE extra or ONE fewer item of production
Aircraft flying from Mumbai to Chennai Total Cost (including normal profit) = 15,000$ of which 13,000$ is fixed cost* Number of seats = 160, average price = 93.75$ MC of each passenger = 2000/160 = 12.50$

If flight not full, better to offer passengers chance of flying at 12.50$ and fill the seat than not fill it at all!

Contd
Target return pricing: Determine the price that would yield its target rate of Return on Investment (ROI). Break-even Volume e.g. MHADA

Destroyer Pricing :Deliberate 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.

Contd
Value Pricing : Low price for a high-quality offering Everyday low pricing (EDLP) e.g. Supermarkets

Going Rate Pricing : It Based on Competitors Pricing strategy Follow the Leader e.g. Bottled water, Soft Drink, Toothpaste etc.

factors affecting pricing decisions

Market conditions : how much are the customers willing to pay? Can advertising increase product image and price?

Production costs :Prices must cover the costs spent in production if a profit is to be made. The price must cover variable costs (for the short term) and fixed costs (for the long term) otherwise a company will face closing. is the product aimed at a mass market or a niche market?

Contd...
Taxes and subsidies :VAT and customs duties will raise the price of a product. Government subsidies will allow businesses to charge lower prices.

Business objectives : Is the business looking to maximise profits? Or is the company looking to increase its market share?

Marketing mix : What stage is the product at in the lifecycle? What forms of promotion are being used? Where is the product being sold?

Initiating Price Changes

Shrinking the amount of product instead of raising the price Substituting less expensive materials or ingredients Reducing or removing product features Removing or reducing product services, such as installation or free delivery Using less expensive packaging material or larger package sizes Reducing the number of sizes and models offered

Creating new economy brands

Price-Reaction Program for meeting a competitors price cut