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Pricing Strategies

Outline Introduction Pricing strategies and process Reactions to price changes Impact on discounting

Introduction 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 (see quality-price relationshipnext slide)


Price-Quality Strategies

Philip Kotler identified 9 price-quality

High Price High Quality Premium Over Charging Rip-off Low Quality High Value Mid Value Low Price Super Value Good Value

False Economy Economy


Pricing Process 1. Set Pricing Objectives (see next slide) 2. Analyze demand 3. Draw conclusions from competitive
intelligence 4. Select pricing strategy appropriate to the political, social, legal and economical environment 5. Determine specific prices

Possible Pricing Objectives Profit objectives e.g. Volume objectives e.g. Other objectives e.g.
Targeted profit return

Dollar or unit sales growth Market share growth Match competitors price Non-price competition

Discussion: Impact of Ethics on Pricing

How should you price if your product is

a life-saving drug? What are the ethical considerations?

Customers have no choice Need to pay for the research When cheaper options doesnt work Competition decides

New-Product Pricing Strategies 1. Skimming pricing

Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products Charging a low price when entering the market to capture market share

1. Penetration pricing

New-Product Pricing Strategies (contd) 3. Intermediate pricing

Pricing somewhere in between the skimming strategy and the penetration strategy

Pricing Strategies for Established Products

Three strategic alternatives: Maintain the price if you are the leader e.g.

In 1999, Shell in Singapore maintained its price when

other petrol companies engaged in a price war until towards the end of the engagement we need to reduce price in anticipation of the developing market situations

Reduce the price e.g.

In this regularly

Increase the price

during inflation, or if demand is expected to increase or

if you wish to harvest e.g. in Indonesia

Price-Flexibility Strategy One-price policysetting one fixed

price for all markets Flexible-price policysetting different prices in different markets based on:

Geographic Location, Time of delivery, or The complexity of the product


How much flexibility in price?

Depends on the Demand-Cost gap and

the influence of competition, social, legal and ethical considerations Example: Life-saving drugs


Pricing Strategies


Pricing Strategies


Penetration Pricing


Market Skimming

Plasma screens: Currently at high prices but for how long?


Value Pricing

Companies may be able to set prices Companies may be able to set prices according to perceived value. according to perceived value. 17

Loss Leader


Psychological Pricing


Going Rate (Price Leadership)


Tender Pricing

A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF priced at 13 billion!


Price Discrimination

Prices for rail travel differ for the same journey at different times of the day


Destroyer Pricing/Predatory Pricing


Microsoft have been accused of predatory pricing strategies in offering free software as part of their operating system Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.


Absorption/Full Cost Pricing


Marginal Cost Pricing



Marginal Cost Pricing

Aircraft flying from Bristol to Edinburgh 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!
*All figures are estimates only


Contribution Pricing


Target Pricing


Cost-Plus Pricing


Influence of Elasticity


New Product Pricing Strategies New Product Pricing Strategies

Market Skimming Market Skimming
> Setting a High Price for a New Product to Maximize Revenues from the Target Market. > Results in Fewer, More Profitable Sales.

Market Penetration Market Penetration

> Setting a Low Price

for a New Product in Order to Attract a Large Number of Buyers.

> Results in a Larger Market Share.


PRICE DISCRIMINATION Price discrimination is the business

practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.


Price discrimination is not possible when a
good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power. Perfect Price Discrimination

Perfect price discrimination refers to the situation

when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.

PRICE DISCRIMINATION Two important effects of price


It can increase the monopolists profits. It can reduce deadweight loss.


PRICE DISCRIMINATION Examples of Price Discrimination

Movie tickets Airline prices Discount coupons Financial aid Quantity discounts


TREND PROJECTION METHOD This method is essentially concerned with the study of movement of variables through time. The use of this method requires a long & reliable time series data There are 3 techniques of trend projection based on timeseries data Graphical method Fitting trend eqn./ least square method Box-Jenkins method.


Time-Series Analysis Secular Trend


Cyclical Fluctuations Seasonal Variation

Long-Run Increase or Decrease in Data Long-Run Cycles of Expansion and Regularly Occurring Fluctuations

Irregular or Random Influences



Trend Projection Linear Trend:

St = S0 + b t b = Growth per time period Constant Growth Rate St = S0 (1 + g)t g = Growth rate Estimation of Growth Rate lnSt = lnS0 + t ln(1 + g)

Analysis of Time Series Analysis

A time series is a set of observations taken at specified times, usually at equal intervals Mathematically noted as Y1, Y2 Y3 Y4 .. Classification components of time series analysis Long term secular movements: General direction in which the graph of a time series appears to be l0ong over along period of time Also called as secular variation trend 2. Cyclical movements: refers to long term oscillations or swings about a trend line or curve May or may not be periodic Eg: business cycle

3. Seasonal Movements /Seasonal variations: refers to identical which a time series appears to fallow during corresponding months of successive years

4. Irregular or random movements: refers to sporadic motions of time series

due to chance events such as floods, strikes, elections etc.,


Estimation of trend Method of least squares Free hand method Moving average method Method of semi averages Estimation of seasonal variations Average percentage method percentage trend/ ratio to trend method Percentage moving average


Types of market structure

Mkt str No. of firms and degree of product differentiation Nature of industry where prevalent Control over price Method of marketing


Large no. of firms Financial markets and some none with identical farm products products

Market exchange or auction

Imperfect Monopolistic Many firms with real or perceived product differentiation Manufacturing: tea,toothpastes,TV sets, shoes, refrigerators etc., None Competitive advertising, quality rivalry Competitive advertising, quality rivalry


Little or no product Aluminum, steel, differentiation cigratees,cars, etc, A single producer, Public utilities: telephones, without close electricity etc., substitute



Considerable Promotional but usually advertising if regulated supply is larges


Economics of scale

Two types Internal/real economics External/Pecuniary economics


Internal economics: are those arise from the expansion of the plant-size of the firm and are internalizes.this means that internal economics are exclusively available to the expanding firm. Internal economics may be classified under the following categories Economics in production Economics in marketing Managerial Economics Economics in transport and storage


External / pecuniary economics of scale Accrue to the expanding firms from the advantages arising outside the firm. E.g. input markets Large scale purchase of raw material Large scale acquisition of external finance Massive advertisement campaigns Large scale hiring of means of transport and warehouses etc.,


Diseconomies of scale Are disadvantages that arise to the expansion of production scale and lead to a rise in the cost of production Reasons Internal diseconomies Managerial inefficiency Labour inefficiency External diseconomies