Pricing stratagies

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Pricing Strategies

Penetration Pricing

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

Market Skimming

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.
Many are predicting a firesale in laptops as supply exceeds demand.
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Value Pricing

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.
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Loss Leader

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
Purchases of other items more than covers ‘loss’ on item sold
e.g. ‘Free’ mobile phone when taking on contract package

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions
Classic example - £9.99 instead of £10!
Links with value pricing – high value goods priced according to what consumers THINK should be the price

Going Rate (Price Leadership)

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

Tender Pricing

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

Price Discrimination

Price Discrimination
Charging a different price for the same good/service in different markets
Requires each market to be impenetrable
Requires different price elasticity of demand in each market
Prices for rail travel differ for the same journey at different times of the day
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Destroyer Pricing/Predatory Pricing

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

Absorption/Full Cost Pricing

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

Marginal Cost Pricing

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

Marginal Cost Pricing
Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal 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 at £12.50 and fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

Contribution Pricing
Contribution = Selling Price – Variable (direct costs)
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

Target Pricing

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

Cost-Plus Pricing

Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up
AC = Total Cost/Output

Influence of Elasticity

Influence of Elasticity
Any pricing decision must be mindful of the impact of price elasticity
The degree of price elasticity impacts on the level of sales and hence revenue
Elasticity focuses on proportionate (percentage) changes
PED = % Change in Quantity demanded/% Change in Price

Influence of Elasticity
Price Inelastic:
% change in Q < % change in P
e.g. a 5% increase in price would be met by a fall in sales of something less than 5%
Revenue would rise
A 7% reduction in price would lead to a rise in sales of something less than 7%
Revenue would fall