Price strategies

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PRICE

Bünyamin Güler BUSe 07

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OUTLINE Price Price policy and price desisions

-Pricing strategies matrix

-Other pricing strategies(including competition based strategies)

Price for new product

-Internal factors

-External factors Sources

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Price

What is the definition of price ?

-The amount as of money or goods, asked for or given in exchange for something else.

-Market value, or agreed exchange value, that will purchase a definite quantity, weight, or other measure of a good or service.

What is value ?

-As an example football transfers...

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Price policy and price desisions

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Pricing strategies matrix

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Premium Pricing.(value pricing )

-Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists.

-Price set in accordance with customer perceptions about the value of the product/service.(Why customer perceptions ?)

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Penetration pricing Why would you offer your high quality product

for low price ?

-Offers low price to gain market share - then increases price

As an example ;

-Mass market products.(chocolate bars, food stuffs, household goods, etc.)

-May be useful if launching into a new market.(Internet or Telecom companies...)

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Economy pricing.

-This is a no frills low price. The cost of marketing and manufacture are kept at a minimum.

As an example;

-Soups, spaghetti, beans - ‘economy’ brands ( At Penny ,Aldi...)

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Market Skimming-High price, Low volumes-Suitable for products that have short life cycles or which will face competition at some point in the futureExamples ;-Playstation, jewellery, digital technology, new DVDs,new albums or films on release.

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Other strategies

Loss Leader

-Goods/services deliberately sold below cost to encourage sales elsewhere

Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things

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Other strategies

Psychological Pricing

-Used to play on consumer perceptions What could be the best example ?

-Classic example - £9.99 instead of £10.99!

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Other strategies

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

Where competition is limited, ‘going rate’ pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

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Other strategies

Tender Pricing

-Many contracts awarded on a tender basis

-Firm (or firms) submit their price for carrying out the work

-Purchaser then chooses which represents best value

-Mostly done in secret

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Other strategies Price Discrimination

-Charging a different price for the same good/service in different markets

-Requires different price elasticity of demand in each market

Destroyer Pricing(Predatory)

-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

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Other strategies

Absorption/Full Cost Pricing

Full Cost Pricing-Attempting to set price to cover both fixed and variable costs

Absorption Cost Pricing-Price set to ‘absorb’ some of the fixed costs of production

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Other strategies Marginal Cost Pricing What is Marginal Cost ?

-The cost of producing ONE extra or ONE fewer item of production

-MC pricing – allows flexibility

-Particularly relevant in transport where fixed costs may be relatively high

-See the example #7

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Example #7 Aircraft flying from Berlin to

Paris

-Total Cost = £15,000 of which £13,000 is fixed cost*

-so 2000 is variable 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!

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Other strategies Contribution Pricing Contribution = Selling Price – Variable

-Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs

-Similar in principle to marginal cost pricing

-Break-even analysis might be useful in such circumstances

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Other strategies

Target Pricing

-Setting price to ‘target’ a specified profit level

-Estimates of the cost and potential revenue at different prices, and the break-even have to be made, to determine the mark-up

-Mark-up = Profit/Cost x 100

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Other strategies

Cost-Plus Pricing

-Calculation of the average cost (AC) plus a mark up

-AC = Total Cost/Output

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Internal Factors

• Marketing objectives

• Marketing mix strategies

• Costs

• Organizational considerations

• Market positioning influences pricing strategy

• Other pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership

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Internal Factors



• Costs


• Pricing must be carefully coordinated with the other marketing mix elements

• Target costing is often used to support product positioning strategies based on price

• Nonprice positioning can also be used

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Internal Factors



• Costs


• Types of costs: Variable Fixed Total costs

• How costs vary at different production levels will influence price setting

• Experience (learning) curve affects price

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Internal Factors



• Costs


• Who sets the price? Small companies: CEO or

top management Large companies:

Divisional or product line managers

• Price negotiation is common in industrial settings where pricing departments may be created

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External Factors

• Nature of market and demand

• Competitors’ costs, prices, and offers

• Other environmental elements

• Types of markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

• Consumer perceptions of price and value

• Price-demand relationship Demand curve Price elasticity of demand

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External Factors




• Consider competitors’ costs, prices, and possible reactions

• Pricing strategy influences the nature of competition Low-price low-margin

strategies inhibit competition High-price high-margin

strategies attract competition

• Benchmarking costs against the competition is recommended

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External Factors




• Economic conditions Affect production costs Affect buyer perceptions of

price and value

• Reseller reactions to prices must be considered

• Government may restrict or limit pricing options

• Social considerations may be taken into account

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Sources

http://entrepreneurs.about.com/od/salesmarketing/a/pricingstrategy_2.htm

http://www.marketingteacher.com/Lessons/lesson_pricing.htm

http://www.slideshare.net/mehmetcihangir/pricing-products-pricing-considerations-and-approaches-presentation-765073

http://www.amazon.co.uk/gp/reader/0131856774/ref=sib_dp_pt#reader-page(last










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Price strategies