Pricing strategies by AFee

PRICING STRATRGIES

bySarfaraz Ahmed Mohtesham

AITM , BHATKAL

copyright © 2013 FAA EDUCATION. All rights copyright © 2013 FAA EDUCATION. All rights reserved.reserved.

PRICINGPrice is the sum value of all the values that consumers exchange for the benefits or having or using the product or service

Different forms - Goods bought, hire charges, tuition fees

Dynamic Pricing - Varying pricesFlexibility


OBJECTIVE OF PRICING

ProfitSurvivalMarket ShareCash FlowStatus QuoProduct QualityCommunicating ImageShort term/Long term

copyright © 2013 FAA EDUCATION. All rights reserved.copyright © 2013 FAA EDUCATION. All rights reserved.

Pricing ObjectivesPricing Objectives

Meet Business

Objectives

Volu

me

Sales

Max

imiz

atio

n

Mar

ket S

hare

Profitability

Profit-Maxim

ization

Target Return G

oals

Other Pricing Objectives Status Quo Image Social & Ethical Considerations


FACTORS INFLUENCING PRICINGFACTORS INFLUENCING PRICING

The Customer's Demand ScheduleThe Customer's Demand Schedule

The Cost Function and The Cost Function and

Competitors PricesCompetitors Prices


Factors in Setting PriceFactors in Setting Price


You donYou don’’t sell through price. You sell t sell through price. You sell

the price.the price.

Pricing Strategies


i.i. Price SkimmingPrice Skimming

ii.ii. Penetration PricingPenetration Pricing

iii.iii. Loss Leader PricingLoss Leader Pricing

iv.iv. Peak Load PricingPeak Load Pricing

Different Pricing Strategies which we will cover through this PRESENTATION


Price SkimmingPrice Skimming Price Skimming is charging a high initial pricePrice Skimming is charging a high initial price

Price SkimmingPrice Skimming::

– Appropriate for distinctly new productsAppropriate for distinctly new products– Provides the firm with opportunity to Provides the firm with opportunity to

profitably reach market segments not profitably reach market segments not sensitive to high initial pricesensitive to high initial price

– Enables marketer to capture early profitsEnables marketer to capture early profits– Enables innovator to recover high R&D Enables innovator to recover high R&D

costs more quicklycosts more quickly


Price Skimming Strategy :Price Skimming Strategy :

As the product goes through its product life cycle, As the product goes through its product life cycle, the strategy is the strategy is to lower the price in line with production to lower the price in line with production and demand capacityand demand capacity


Price skimming Price skimming is a pricing strategy which is a pricing strategy which companies adopt when they launch a new companies adopt when they launch a new product, in this strategy while launching a product, in this strategy while launching a product company sets high price for a product product company sets high price for a product initially and then reduce the price as time passes initially and then reduce the price as time passes by so as to recover cost of a product quickly.by so as to recover cost of a product quickly.

ExampleExampleAn example of price skimming would be mobiles which are An example of price skimming would be mobiles which are have some added features are sold at higher prices and have some added features are sold at higher prices and then prices began to decline as time passes by, another then prices began to decline as time passes by, another example of price skimming would be 3D televisions which example of price skimming would be 3D televisions which are right now being sold. Given below are some of the are right now being sold. Given below are some of the advantages and disadvantages of price skimming –advantages and disadvantages of price skimming –


Price Skimming Price Skimming AdvantagesAdvantages

High price, Low volumesHigh price, Low volumes Skim the profit from the Skim the profit from the

marketmarket Suitable for products that Suitable for products that

have short life cycles or have short life cycles or which will face which will face competition at some competition at some point in the future (e.g. point in the future (e.g. after a patent runs out)after a patent runs out)

Examples include: Examples include: Playstation, jewellery, Playstation, jewellery, digital technology, new digital technology, new DVDs, etc.DVDs, etc.

Plasma Screens: Currently athigh prices but for how long?


Disadvantages of Price SkimmingDisadvantages of Price Skimming

•CompetitionCompetition. There will be a continual stream of competitors challenging the seller's extreme . There will be a continual stream of competitors challenging the seller's extreme price point with lower-priced offerings. price point with lower-priced offerings.

•Sales volumeSales volume. . A company that uses price skimming is limiting its sales, which means that it A company that uses price skimming is limiting its sales, which means that it cannot lower costs by building sales volume. cannot lower costs by building sales volume.

* * Cost inefficiencyCost inefficiency. The very high profit margins engendered by this strategy may cause a company to avoid making the cost cuts required to keep it competitive when it . The very high profit margins engendered by this strategy may cause a company to avoid making the cost cuts required to keep it competitive when it eventually eventually lowers its prices. lowers its prices.


What is Price Penetration?

Penetration pricing

is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers.

The strategy works on the expectation that customers will switch to the new brand because of the lower price.

Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term.


Penetration PricingPenetration Pricing

Penetration Pricing is charging a very low initial Penetration Pricing is charging a very low initial price.price.

Penetration Pricing is appropriate when there is: Penetration Pricing is appropriate when there is: › High price elasticity of demandHigh price elasticity of demand› Strong threat of imminent competitionStrong threat of imminent competition› Opportunity for substantial production cost Opportunity for substantial production cost

reduction as volume expandsreduction as volume expands


The advantages of penetration pricing to the firm are:The advantages of penetration pricing to the firm are:

** It can create goodwill among the early adopters It can create goodwill among the early adopters segment. This can create more trade through segment. This can create more trade through word of mouth. word of mouth.

** It creates cost control and cost reduction pressures It creates cost control and cost reduction pressures from the start, leading to greater efficiency.from the start, leading to greater efficiency.

** It discourages the entry of competitors. Low prices act It discourages the entry of competitors. Low prices act as a barrier to entryas a barrier to entry


The The main disadvantage main disadvantage with penetration pricing is that it with penetration pricing is that it

establishes long term price expectations for the product, andestablishes long term price expectations for the product, and

image preconceptions for the brand and company. This image preconceptions for the brand and company. This

makes it difficult to eventually raise prices. Some makes it difficult to eventually raise prices. Some

commentators claim that penetration pricing attracts only thecommentators claim that penetration pricing attracts only the

switchers (bargain hunters), and that they will switch away asswitchers (bargain hunters), and that they will switch away as

soon as the price rises. There is much controversy over soon as the price rises. There is much controversy over

whether it is better to raise prices gradually over a period ofwhether it is better to raise prices gradually over a period of

yearsyears



Price Strategies for New Price Strategies for New ProductsProducts

PRIC

EPRIC

EPRICE

Skimming Penetration

Penetration Pricing

Skimming Pricing

Low price establish product in the market

High price/Prestige pricing appeal to early adopters; recover high R&D costs

Lower price over time

Move inventory, stimulate D, extend product life


Loss Leader PricingLoss Leader Pricing

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

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

Purchases of other items more than Purchases of other items more than covers ‘loss’ on item soldcovers ‘loss’ on item sold

e.g. ‘Free’ mobile phone when taking e.g. ‘Free’ mobile phone when taking on contract packageon contract package


The loss leader is a tried-and-true pricing strategy that can be a great way to grow any business. Using it you can get The loss leader is a tried-and-true pricing strategy that can be a great way to grow any business. Using it you can get old customers back, bringold customers back, bring

new ones in the door, and increase sales.new ones in the door, and increase sales.

Other than getting a sale, the loss leader strategy can also be also used for:Other than getting a sale, the loss leader strategy can also be also used for:

* * Getting rid of unwanted merchandiseGetting rid of unwanted merchandise

* * Attracting new customersAttracting new customers

* * Building your brandBuilding your brand

* * Build repeat customersBuild repeat customers


PEAK LOAD PRICINGPEAK LOAD PRICING

When demand is not evenly distributed, a firm needs to have facilities to accommodate periods of high demand.When demand is not evenly distributed, a firm needs to have facilities to accommodate periods of high demand.

Even with large facilities, the firm may experience times when the demand is greater than can be handled. Then the firm may experience costly computer system crashes. Even with large facilities, the firm may experience times when the demand is greater than can be handled. Then the firm may experience costly computer system crashes.

During off-peak times (periods of lower demand), there is excess capacity.During off-peak times (periods of lower demand), there is excess capacity.

The firm charges less at off-peak times.The firm charges less at off-peak times.

Example: More phone calls are made during business hours than in the evenings and on weekends. So the phone companies charge more during business hoursExample: More phone calls are made during business hours than in the evenings and on weekends. So the phone companies charge more during business hours


Real World Examples of Peak Load Pricing:Real World Examples of Peak Load Pricing:

Gas prices in the 1970's and Utility companies are good examplesGas prices in the 1970's and Utility companies are good examples

of peak load pricing. When a good or service is limited in of peak load pricing. When a good or service is limited in

availability, peak load pricing can effectively reduce consumer availability, peak load pricing can effectively reduce consumer

consumption because consumers are swayed by the high prices. consumption because consumers are swayed by the high prices.

On the other hand, when prices are lower, consumers are more On the other hand, when prices are lower, consumers are more

likely to purchase more. likely to purchase more.

Another example would be tourist pricing. Another example would be tourist pricing.

In a tourist town, one might see prices of many goods rise during In a tourist town, one might see prices of many goods rise during

tourist season.tourist season.


? ueries Qcopyright © 2013 FAA EDUCATION. All rights copyright © 2013 FAA EDUCATION. All rights

reserved.reserved.


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Pricing strategies by AFee