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Luiz Afonso dos Santos Senna - PhD
Pricing Strategies and Tactics
Khaja Hammad uddin
Luiz Afonso dos Santos Senna - PhD
Fatores na fixação de PreçoFatores na fixação de Preço
Luiz Afonso dos Santos Senna - PhD
Market Structure
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Mor
e C
ompe
titiv
eLess C
ompetitive
Luiz Afonso dos Santos Senna - PhD
Perfect Competition
Many buyers and sellers Buyers and sellers are price takers Product is homogeneous Perfect mobility of resources Economic agents have perfect knowledge Example: Stock Market
Luiz Afonso dos Santos Senna - PhD
Monopoly
Single seller and many buyers No close substitutes for product Significant barriers to resource mobility
Control of an essential input Patents or copyrights Economies of scale: Natural monopoly Government franchise: Post office
Luiz Afonso dos Santos Senna - PhD
Oligopoly
Few sellers and many buyers Product may be homogeneous or
differentiated Barriers to resource mobility Example: Automobile manufacturers
Luiz Afonso dos Santos Senna - PhD
Monopolistic Competition
Many sellers and buyers Differentiated product Perfect mobility of resources Example: Fast-food outlets
Luiz Afonso dos Santos Senna - PhD
Market Structure ,Pricing decisions
Market structure and pricing decisions are closely
related.
The degree to which the firm gets to choose price is
determined in large part by market structure
There are two extreme cases: perfect competition
and monopoly
Luiz Afonso dos Santos Senna - PhD
Perfect Competition
Conditions necessary:
Large numbers of buyers and sellers
Homogeneous product
Free entry and exit
Perfect information
Luiz Afonso dos Santos Senna - PhD
Perfect Competition
Demand curve for any given firm is horizontal. Price is set by market at Pe
Firm can sell as much or as little as desired at market price, but nothing if they raise P.
Pe
S
D
DPe
Luiz Afonso dos Santos Senna - PhD
Monopoly
Conditions necessary Single seller of product No close substitutes Significant barriers to entry
There are few examples of perfect competition and pure monopoly.
Luiz Afonso dos Santos Senna - PhD
Pricing in Perfect Competition
Do not choose price. Choose output quantity. What will be our profit (loss) from our output
decision? Should we produce now? (SR) Should we stay in the industry? (LR)
Luiz Afonso dos Santos Senna - PhD
Costs at different levels of production
Cost per unit at different levels of production
Luiz Afonso dos Santos Senna - PhD
Pricing in a Monopoly
Profit maximization will be achieved by setting price so that MC=MR.
It is not reached by setting price as “high as possible.”
Like any firm, the monopolist is constrained by their demand curve.
One cannot choose both P and Q.
Luiz Afonso dos Santos Senna - PhD
Price Discrimination
Selling the same good to different people at different prices
Conditions necessary: Identifiable customer groups with differing price
elasticities Maintain separation of groups--prevent resale.
Luiz Afonso dos Santos Senna - PhD
Types of Price Discrimination First degree
Identify and charge each customer what they are willing to pay
Limit: D = MR, no consumer surplus. Second degree
Quantity discounts. Volume purchases are given lower prices. Need to measure goods and services bought by consumers.
Luiz Afonso dos Santos Senna - PhD
Types of Price Discrimination
Third degreeSegment markets in some way. Charge
all in the segment the same prices. Treat each segment as a separate
market– then do MR=MC in each
Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Common theme - Rivalrous behavior Pricing - limit pricing - set prices low as signal
to possible entrants or other competitors your willingness and ability to defend your market share.
Must have credibility.Trading SR profit for more profits later
Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Use the legal / regulatory systems
File patent application
File regulatory challenge
Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Capacity and production
Announce capacity expansion
Revise/modify products - more
difficult to copy Advertising
Raise cost of entry for others
Luiz Afonso dos Santos Senna - PhD
Oligopoly and Monopolistic Competition Most industries are one or the other
Oligopoly: many heavy manufacturing Autos, steel, chemicals, pharmaceuticals
Monopolistic Competition Service companies, retail stores, large
corporations (McDonald’s, Wendy’s)
Luiz Afonso dos Santos Senna - PhD
Pricing Strategies
Profit maximizing rule: Set production at level where MR = MC
Non - Maximizing pricing rules there are a variety of these
Luiz Afonso dos Santos Senna - PhD
Pricing Strategy
How does a company decide what price to charge for its products and services?
What is “the price” anyway? doesn’t price vary across situations and over time?
Some firms have to decide what to charge different customers and in different situations
They must decide whether discounts are to be offered, to whom, when, and for what reason
Luiz Afonso dos Santos Senna - PhD
Why is Pricing Important?
In a company with average economics*, 1% increase in volume = 3.3% increase in
profit 1% increase in price = 11.1% increase in
profit Improvements in price typically have 3-4
times the effect on profit as proportionate increases in volume.
*Based on average of 2,463 companies
Luiz Afonso dos Santos Senna - PhD
Price vs. Nonprice Competition
In price competitionprice competition,, a seller regularly offers products priced as low as possible and accompanied by a minimum of services
In non price competitionnon price competition, a seller has stable prices and stresses other aspects of marketing
With value pricingvalue pricing, firms strive for more benefits at lower costs to consumer
With relationship pricing,relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm
Luiz Afonso dos Santos Senna - PhD
Nonprice Competition
Some firms feel price is the main competitive tool, that customers always want low prices
Other firms are looking for ways to add value, thereby being able to avoid low prices
Sometimes prices have to be changed in response to competitive actions
Many firms would prefer to engage in non non price competitionprice competition by building brand equity and relationships with customers
Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Establish Pricing Objectives Increase sales
volume? Prestigious image? Increase market
share?
Luiz Afonso dos Santos Senna - PhD
Steps for Determining PricesStudy CostsStudy Costs
Can you make a profit?
Can you reduce costs without affecting quality or image?
Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Estimate Demand What do customers
expect to pay? Prices usually are directly
related to demand.
Luiz Afonso dos Santos Senna - PhD
Steps for Determining PricesDecide on a
Pricing Strategy Price higher than the
competition because your product is superior
Price lower, then raise it once your product is accepted
Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Set PriceMonitor and evaluate its effectiveness
as conditions in the market change
Product and Pricing Strategies
Luiz Afonso dos Santos Senna - PhD
Other Pricing StrategiesOther Pricing Strategies
Price-BasedPrice-Based
OptimizationOptimization
SkimmingSkimming
PenetrationPenetration
Luiz Afonso dos Santos Senna - PhD
Price Adjustment StrategiesPrice Adjustment Strategies
Discount PricingDiscount Pricing
BundlingBundling
Dynamic PricingDynamic Pricing
Luiz Afonso dos Santos Senna - PhD
Pricing Strategies
Luiz Afonso dos Santos Senna - PhD
Penetration Pricing
Luiz Afonso dos Santos Senna - PhD
Penetration Pricing
Price set to ‘penetrate the market’
‘Low’ price to secure high volumes
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
Luiz Afonso dos Santos Senna - PhD
Market Skimming
Luiz Afonso dos Santos Senna - PhD
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, jewellery, digital technology, new DVDs, etc.
Luiz Afonso dos Santos Senna - PhD
Value Pricing
Luiz Afonso dos Santos Senna - PhD
Value Pricing
Price set in accordance with customer perceptions about the value of the product / service
Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery
Luiz Afonso dos Santos Senna - PhD
Loss Leader
Luiz Afonso dos Santos Senna - PhD
Loss Leader
Goods/services deliberately sold below cost to encourage sales elsewhere
Purchases of other items more than covers ‘loss’ on item sold
e.g. ‘Free’ mobile phone when u fill petrol of Rs 500 at Reliance petrol pump.
Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Luiz Afonso dos Santos Senna - PhD
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
Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Odd-Even PricingOdd numbers convey a bargain
image -- $.79, $9.99, $699
Even numbers convey a quality image -- $10, $50, $100
Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Prestige Pricing – sets a higher than
average price to suggest status
Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Multiple-Unit Pricing – 3 for $.99Suggests a bargain and helps
increase sales volume.Better than selling the same items
at $.33 each.
Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Everyday Low Prices (EDLP) – set on a consistent basis
Luiz Afonso dos Santos Senna - PhD
Going Rate (Price Leadership)
Luiz Afonso dos Santos Senna - PhD
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, petrol, supermarkets, electrical goods – find very similar prices in all outlets
Luiz Afonso dos Santos Senna - PhD
Tender Pricing
Luiz Afonso dos Santos Senna - PhD
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
Most government contractsA European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!
Luiz Afonso dos Santos Senna - PhD
Price Discrimination
Luiz Afonso dos Santos Senna - PhD
Price Discrimination
Charging a different price for the same good/service in different markets
Requires different price elasticity of demand in each market
Air/rail First class Business class Economy class
Prices for rail travel differ for the same journey at different times of the day
Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Cash Discounts – offered to buyers to encourage them to pay their bills quickly.2/10, net 30
Quantity Discounts – offered for placing large orders
Trade Discounts – the way manufacturers quote prices to wholesalers and retailers.
Luiz Afonso dos Santos Senna - PhD
Promotional Pricing -- Used with sales promotion Loss Leader Pricing – offering very
popular items for sale at below-cost prices
Special-EventBack-to-school specialsDollar daysAnniversary sales
Rebates and Coupons
Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Seasonal Discount – offered outside the customary buying season
Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Allowances – go directly to the buyer. Customers are offered a price reduction if they sell back an old model of the product they are purchasing
Luiz Afonso dos Santos Senna - PhD
Destroyer Pricing/Predatory Pricing
Luiz Afonso dos Santos Senna - PhD
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
Typical of oligopoly with collusionMicrosoft – have been accused of predatory
pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market
Luiz Afonso dos Santos Senna - PhD
Predatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business or
out of a market.
Luiz Afonso dos Santos Senna - PhD
Absorption/Full Cost Pricing
Luiz Afonso dos Santos Senna - PhD
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
Luiz Afonso dos Santos Senna - PhD
Marginal Cost Pricing
Luiz Afonso dos Santos Senna - PhD
Marginal Cost Pricing
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
Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied, a good deal to attract customers and fill the aircraft.
Get one extra student and get fees discount.
Luiz Afonso dos Santos Senna - PhD
Target Pricing
Luiz Afonso dos Santos Senna - PhD
Target Pricing
Setting price to ‘target’ a specified profit level Estimates of the cost and potential revenue at
different prices, and thus the break-even have to be made, to determine the mark-up
Mark-up = Profit/Cost x 100
This strategy is used by many clothes retailers where they can add upto 60% mark-up on the basic cost of the clothes. So even with a 50% sales offer they still make a profit!