Pricing Strategies

Penetration Pricing

Penetration Pricing Price set to ‘penetrate the market’ ‘Low’ price to attract new customers Typical in mass market products – chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market This makes it difficult to eventually raise prices. Some commentators claim that penetration pricing attracts only the switchers (bargain hunters), and that they will switch away as soon as the price rises. There is much controversy over whether it is better to raise prices gradually over a period of years (so that consumers don’t notice), or employ a single large price increase. Optionally, after the product gains market share, prices can be raised. Question: is this For Products where demand is highly price elastic, yes, think in terms of switching Examples are numerous, but may be best exemplified in a grocery store scenario. Have you ever walked down the freezer isle glancing for the current price on your favorite brand of ice cream?  Your first look may confirm your suspicion that Ben and Jerry’s is not on sale this week.  Hold on though… something catches your eye — there is *one* B&J’s flavor that is $2 less than the others… and it’s brand new!  Do you proceed to buy it?  Many do.  That’s how I got hooked on “Cinnamon Buns”.

Market Skimming

Market Skimming High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewelery, digital technology, new DVDs, etc. the Sony PlayStation 3 was initially sold at $599, but the price has gradually reduced to $299. Price skimming occurs in mostly technological markets as firms set a high price during the first stage of the product life cycle. The top segment of the market which are willing to pay the highest price are skimmed of first—top 30%. When the product enters maturity the price is lowered. It is effective only when the firm is facing an inelastic demand curve. Why??? Many are predicting a firesale in laptops as supply exceeds demand. Copyright: iStock.com

Value Pricing

Value Pricing Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products How do you actually decide price? Value-based pricing is dependent upon an understanding of how customers measure value Often this value pricing strategy is used for products or services in their mature or declining life cycle stage; because at this stage in their product life cycle they have already, hopefully, built a strong brand identity. Get 10 people to answer a simple questionnaire, asking them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do something more formal, of course -- perhaps hire a market research firm. But even a sole practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z price Z' will buy.   Companies may be able to set prices according to perceived value. Copyright: iStock.com

Loss Leader

Loss Leader Goods/services deliberately sold below cost to encourage sales elsewhere Typical in retail stores, e.g. at Christmas, selling toys at below cost in the hope that people will be attracted to the store and buy other things Lead to the purchases of other items more than covers ‘loss’ on item sold e.g. ‘Free’ mobile phone when taking on contract package A case (24) of diet Pepsi 12 oz cans for $4.99, limit one per family…An example is a supermarket selling sugar or milk at less than cost to draw customers to that particular supermarket. Ever wonder how or why cell phone companies just give you a free phone when you sign a contract? both Sony and Microsoft have sold their consoles, the Playstation 3 and Xbox 360, respectively, at a loss and made up for it through game software and accessory profits.

Psychological Pricing

Psychological Pricing Used to play on consumer perceptions Classic example - $9.99 instead of $10.00! Odd-even: $5.95, $.79, $699 OR $12, $50 Multiple Unit-3 for !1.00 better than $.34 each Some Menus, have class think of examples, give them magazines???? For this whole PPT? Good idea. Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

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, airlines, supermarkets, electrical goods – find very similar prices in all outlets Research involved to determine price The going rate pricing method is used in pricing paper, cement, fertilizers, steel, petrol and chemical industries. Not based on costs…

Price Discrimination

Price Discrimination Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market Examples, is this fair? Plumbers that work on sat or sun, high price, airline tickets A person who might pay more for an item is thought to have a low elasticity of demand. Another person who will not pay as much has a high elasticity of demand. Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. I studied both of the boxes carefully; I had to anyway because I have celiac disease and reading ingredient lists is what us celiacs do. Anyhow, it appears that the only difference between the regular and extra strength versions is that the regular version the pills have 200mg of the active ingredient and you take them three times a day, whereas in the extra strength version the pills have 300mg of the active ingredient and you take them twice a day. So either way you're getting 600mg of the dose each day times the number of pills you take at each sitting. The regular strength box had 18 pills, the extra strength box had 12 pills. So in both cases, you are paying for 3600mg of the active ingredient. Other than the instructions on when to take the pills, the two bottles seem identical in every way. Except for price. The regular version costs $9.99. The extra strength version? $15.99. By introducing the extra strength version the company was able to charge more for an identical product, to people with more money who do not read boxes too carefully. Of course, the downside is that it (arguably) weakens the brand perception of the regular strength version. Prices for rail travel differ for the same journey at different times of the day Copyright: iStock.com

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory 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 Walmart!!! In many countries there are legal restrictions for using this pricing strategy, which may be deemed anti-competitive. Predatory pricing practices may result in antitrust claims of monopolization or attempts to monopolize. However, because the antitrust laws are ultimately intended to benefit consumers, and discounting results in at least short-term net benefit to consumers, the U.S. Supreme Court has set high hurdles to antitrust claims based on a predatory pricing theory

Influence of Elasticity

Influence of Elasticity Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price

Influence of Elasticity Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall

Influence of Elasticity Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise