pricing lecture.ppt

8/14/2019 pricing lecture.ppt

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http://www.bized.ac.uk

Copyright 2006 Biz/ed

Pricing Strategies


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Penetration Pricing

Price set to penetrate the market

Low price to secure high volumes

Typical in mass market products chocolate bars, food stuffs, householdgoods, etc.

Suitable for products with long

anticipated life cycles May be useful if launching into a new

market


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Market Skimming

High price, Low volumes

Skim the profit from themarket

Suitable for products thathave short life cycles orwhich will facecompetition at somepoint in the future (e.g.after a patent runs out)

Examples include:Playstation, jewellery,digital technology, newDVDs, etc.

Many are predicting a firesale inlaptops as supply exceedsdemand.

Copyright: iStock.com


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Value Pricing

Price set inaccordance withcustomer

perceptions aboutthe value of theproduct/service

Examples include

statusproducts/exclusiveproducts

Companies may be able to set pricesaccording to perceived value.



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Loss Leader

Goods/services deliberately sold belowcost to encourage sales elsewhere

Typical in supermarkets, e.g. atChristmas, selling bottles of gin at 3 inthe hope that people will be attracted tothe store and buy other things

Purchases of other items more thancovers loss on item sold

e.g. Free mobile phone when taking oncontract package


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Psychological Pricing

Used to play on consumerperceptions

Classic example - 9.99 instead of10.99!

Links with value pricing high

value goods priced according towhat consumers THINK should bethe price


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Going Rate (Price Leadership)

In case of price leader, rivals have difficulty incompeting on price too high and they losemarket share, too low and the price leader

would match price and force smaller rival outof market

May follow pricing leads of rivals especiallywhere those rivals have a clear dominance ofmarket share

Where competition is limited, going ratepricing may be applicable banks, petrol,supermarkets, electrical goods find verysimilar prices in all outlets


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Tender Pricing Many contracts awarded on a tender basis

Firm (or firms) submit their price for carryingout the work

Purchaser then chooses which represents bestvalue

Mostly done in secret


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Price Discrimination

Charging a differentprice for the samegood/service in

different markets Requires each

market to beimpenetrable

Requires differentprice elasticity ofdemand in eachmarket

Prices for rail travel differ for the samejourney at different times of the day



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Destroyer/Predatory Pricing

Deliberate price cutting or offer of freegifts/products to force rivals (normally

smaller and weaker) out of business orprevent new entrants

Anti-competitive and illegal if it can beproved


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Absorption/Full Cost Pricing

Full Cost Pricingattempting toset price to cover both fixed and

variable costs Absorption Cost PricingPrice set

to absorb some of the fixed costs

of production


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Marginal Cost Pricing

Marginal cost the cost of producing ONEextra or ONE fewer item of production

MC pricing allows flexibility

Particularly relevant in transport where fixedcosts may be relatively high

Allows variable pricing structure e.g. on aflight from London to New York providingthe cost of the extra passenger is covered, theprice could be varied a good deal to attractcustomers and fill the aircraft


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Marginal Cost Pricing Example:

Aircraft flying from Bristol to Edinburgh Total Cost (includingnormal 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 at12.50 and fill the seat than not fill it at all!

*All figures are estimates only

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