Competition based pricing strategies

Price leadership •Dominant firm can be set its own prices• Few substitutes, in the eye of the customer• Competitors follow the leader by establishing their prices based on the price set by the price leader.

Predatory pricing•It involves temporarily reducing price in an attempt to force rivals out of the industry since they can not compete profitably• The strategy often stems from an extension of a price war• Some companies sell products at below cost price (Anti-competitive). • A similar strategy is called “Limit pricing or pre-emptive pricing”. It involves setting prices just low enough to discourage potential rivals. • Predatory pricing and limit pricing are anticompetitive.

Going rate pricing (Higher level extension)• A firm charges a similar price to that of

competitors for their products and services

Market-led pricing strategiesPenetration pricing• It sets a low price in order to gain market

share and brand awareness• Over the time, as the product establishes

itself, the price can be raised.• For product that have a high price elasticity

demand= Low price, High sales volumes

Skimming pricing• It tends to be used for technologically

advanced and innovative products• High price to maximize profits before

competitors are attracted to the industry• When competitors appear, the original firm

will skim, or gradually reduce, its prices.

Prestige pricingA firm permanently sets high price because of

image, reputation or status associated with the product.

Luxury cars High class jewelery

Price discriminationWhen the same product, usually service, is sold

in different markets at different prices.* Children and adults pay different prices for

entering the same cinema

• Airline companies increase their prices during Christmas and summer holiday periods (Customers are more willing to pay higher prices)

Loss leader (Higher level extension)* It involves selling a product at or below its cost

value.It costs

$800,but it is sold for between $499 and

$599The aims is to recoup the loss by sales of

complementary goods

Psychological pricing (Higher level extension)

Promotional pricing• When marketing new products by charging a

low price to entice customers and build brand awareness.

• It is also used to get rid of excess stocks or renew the interest if sales have been falling.

• Rivals can copy the technique.• It is similar to discount pricing. It can be used

at the beginning or later in the product’s life cycle (Extension strategy)

Business Case 1Virgin BlueVirgin Blue is the creation of Sir Richard Branson, founder and CEO of the Virgin Group. The airline carrier was launched in 2000 by Sir Richard Branson and Virgin Blue CEO Brett Godfrey, to enter the Australian Market. Initially set up as a low fare carrier, the company only flew between Brisbane and Sydney. Since then, it has become Australia’s second largest airline, catering for all major cities in Australia. Customers pay for their in-flight meals and drinks. To further cut costs, Virgin Blue uses a system of e-ticketing (a telephone and internet-based ticketing system)

1) Describe three potential pricing strategies that airline companies can adopt when entering a new market

2) Evaluate two possible pricing strategies that airline carriers such as Virgin Blue could use to increase their sales revenue.

Answers1) Penetration pricing: Setting a low (initial) price to enter the market and then raising prices and profit margin once the airline becomes more established in the market

Promotional pricing: Similar to penetration pricing, the use of promotional pricing involves setting a low price to entice customers to try airline service and to build brand awareness.

Price leadership: It’s likely that airline entering a new market will set prices with reference to those set by the market leaders.

PREMIUM PRICING AND PRESTIGE PRICING DO NOT SUIT VIRGIN BLUE

b) Price discrimination: This would involve charging different prices for essentially the same service. Ex:

a) Higher prices to adults and those traveling during peak seasons

b) The state of the economy (Lower prices services will tend to be during recession. Penetration Pricing: It’s useful for highly competitive market, once a solid customer base is secured, prices can be raised to increase sales revenues

IF PRICES ARE SET “TOO” LOW INITIALLY, THE AIRLINE COULD BE ASSOCIATED WITH NEGATIVE SUBSTANDARD CONNOTATIONS.

Psychological pricing: $195 might seem far more attractive that $200

Cost-plus pricing: These will help the airline to ensure that prices cover the costs of production

Business case No. 2Sony launched the PlayStation 3 in late 2006. It was quick to win positive reviews. Although analysts questioned the price which was set at over $100 more than the Xbox-360 from Microsoft, its main rival. Sony said its state of the art console with a built-in Blue-ray DVD player made the premium price value for money.Despite the higher prices charged by Sony, the Japanese manufacturer loses money on each games console sold. It makes up for this when customers buy several games and other software products for the PS3’s product life cycle.

a) Define the term premium priceb) In the context of the case study, examine the

relationship between a product’s cash flow position and its life cycle.

Answersa) Premium pricing refers to the practice of charging a higher price for a product due to its favorable market position, eg: Being the market leader or perception among buyers about the quality of the product.

b) R&D: Negative cash flowLaunch: Net cash flow will be negative. Innovators can purchase the productGrowth: Net cash flow will go into positive territory as the product establishes itself in the marketMaturity: It is possibly a cash cow for Sony at this stage, thereby contributing significantly to the cash flow of the company.

Saturation: Sales have peaked or have started to fall.Decline: Cash flow position will become unfavorable unless the firm introduces effective extensive strategies.