Pricing Strategies

Factors Affecting Price Setting ä Pricing Objectives ä profit ä competition ä market share ä Cost ä ratio of fixed costs to variable costs ä economies of scale available to the firm ä cost structure of a firm relative to its competitors ä Competition ä Demand

Price Elasticity of Demand (PED) Price elasticity refers to customers’ responsiveness or sensitivity to changes in price. PED = Percentage change in quantity demanded/percentage change in price Inelastic demand – when PED < 1 Elastic demand – when PED > 1 Unitary demand – when PED = 1

Situations Increasing Price Elasticity ä Availability of substitute products ä Higher total expenditure ä Noticeable price differences ä Easy price comparison

Situations Decreasing Price Elasticity ä Real or perceived necessities ä Lack of product substitutes ä Complementary products ä Product differentiation ä Perceived product benefits ä Situational influences

Classification of Price Strategies ä Differential Pricing ä same brand sold at different prices to consumers ä Competitive Pricing ä prices are set to exploit competitive position ä Product Line Pricing ä related brands are priced to exploit mutual dependencies

Differential Pricing Strategies ä Second Market Discounting ä a firm sells its product in a secondary market at a discount ä Periodic Discounting ä hold price during “prime period” and discount to take advantage of price sensitive customers ä Random Discounting (i.e., sales) ä rely on uninformed consumer to pay regular price, yet take advantage of those that search for the lowest price

Competitive Pricing Strategies ä Penetration Pricing ä pricing as low as possible to take control of the market and keep competition out ä Experience Curve Pricing ä exploiting experience in manufacturing, marketing, etc. and economies of scale in pricing ä Price Signaling ä use price to signal quality ä Geographic Pricing ä basing price on geographic area ä FOB ä zone pricing ä uniform delivered pricing ä freight absorption pricing

Product Line Pricing Strategies ä Price Bundling ä pricing two or more products as a bundle at a price better than the aggregate prices of the items in the bundle ä Premium Pricing ä pricing different versions of the product at different prices to exploit consumer heterogeneity in demand ä Image Pricing ä a firm brings out an identical version of its current product with a different name (or model number) and a higher price ä Complementary ä pricing such that the loss in the sales of one product is covered by the profit from the sale of a related product ä captive pricing ä two-part pricing ä loss leader pricing

Government Regulation ä Price Fixing ä Deceptive Pricing ä Price Discrimination ä Predatory Pricing ä Promotional Pricing