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Pricing Strategies

  • Pricing of a product depends on the market (monopoly, competitive, etc)
  • In general ‘price’ cannot be changed much in an competitive markets like FMCG, etc
  • Pricing also depends on its product category
  • Pricing depends on the long run vision of the firm on that product eg: to maximize sales or to maximize profits, or to capture market share etc.

Pricing Strategies Objectives

In general products have a life cycle of their own, for example: A newly launched product might have a slow start to enter the market and then it gets diffused and faces the competition, then comes the maturity stage for the product when it hits the max volumes and after that comes the declining phase of the product life cycle.

At each stage/phase of product life cycle, different pricing strategies are needed.

  • Long Run Profits
  • Short Run Profits
  • Increase Sales Volume
  • Company Growth
  • Match Competitors Price
  • Create Interest & Excitement about the Product
  • Discourage Competitors from cutting price.
  • Social , Ethical and Ideological Objectives
  • Discourage New Entrants
  • Survival

Decisions In Pricing Strategy

  • Fixed & Variable Cost
  • Competition
  • Company Objectives
  • Proposed Positioning Strategies
  • Target Group & Willingness to Pay
  • External Market Demand
  • Internal Factors : Product Cost & Objectives of Company

Factors Affecting Pricing

  • Consumer’s primary goals with respect to the product affects pricing of a product
  • Having or not having a Unique Selling Point (USP) for the product vs. competition
  • Bundling low-value and high-value products or services (eg: sedan features in a hatchback car)
  • Geographical segmentation of market (city -district - income groups) also plays an important factor in pricing. Different regions in the same country may have varied prices sometimes

Types of Pricing Strategies

Market Skimming Prices

  • This type of pricing strategy depends, if one has complete information on customer demand (willingness and ability to buy)
  • High Price low volume products.
  • Skim Profit from the Market
  • Suitable for the products that have short life cycle or which will face some comptetion at some point in the future.

Example

PlayStation , Digital Technology , Fast Fashion , etc.

Value Pricing

  • Based on consumer perception.
  • Price charged according to Customers Perception.
  • Price set by the company as per the Percived value.
  • Value pricing for a firm largely depends on the insights about via consumer

Example

Status Products (apple iphone) / Exclusive Products

Loss Leader Pricing

  • Goods / services deliberately sold below cost to encourage large volume of sales for a certain period of time.
  • Purchases of other items more than covers 'loss' on item sold.

Example

Festival Sales , Supermarket special sales , etc.

Psychological Pricing

  • Setting a price according to what consumers think the price to be .
  • Its used to play on consumer perception , high value goods are priced according to what customers THINK should be the price of that premium good.

Example

Rs. 9.99 instead of Rs 10.99

Going Rate Pricing

  • Constantly monitor rival’s pricing
  • Match the price or cut the price below the competitors price
  • Increase the price when needed based on competitor’s price

Tender Pricing

  • This is Low cost but high value delivery model
  • Typically government tenders
  • Many contracts are given via tenders
  • Reputation (past track record) is important
  • Entry barriers are high (tender placing requirements such as annual turnover of minimum 10cr and etc)
  • Chances of collusion are there as tenders are kept somewhat secret.

Price Discrimination

  • Same product or service are sold to different people at different prices is called price discrimination

Example

Airline Tickets , Perishable Goods , etc.

  • This strategy is possible where there is no resale of the product is possible.

Subcategories of Price Discrimination

  • Peak load pricing is a variant of price discrimination (metro prices at peak hours vs. non-peak hours)
  • Cross-price subsidization: For example, there are 2 customers customer#1 does not have the ability to pay more for a service - you subsidize the price and customer#2 has ability to pay more - you charge more to recover from subsidizing the price for customer#1, electricity is another example, classes in train travel , etc.

Penetration Pricing

  • Pricing set to penetrate the market

Example

Jio gave free data to new consumers in order to penetrate the market and expand its userbase.

  • Initially price is very very low and focus on high volume sales
  • Suitable for newly launched product
  • Commonly a long term strategy

Cost Plus Pricing

  • Cost-plus pricing is a pricing model used to maximize the rates of return for the companies
  • Cost price(CP) + Mark-Up(MU) = Selling Price
  • Cost price = FC + VC (FC: fixed costs. VC: variable cost)

Target Pricing

  • I want this much of profits
  • To reach those profits, vary the mark-ups
  • Markup = profit /cost X 100
  • When demand is low, you reduce the mark-up
  • When the demand is high, you increase the mark-up

Marginal Cost Pricing

  • Marginal cost is the cost of producing one extra unit or one fewer unit.
  • Margincal Cost allows flexibility as it allows variable pricing structure.
  • Particularly relevant in transport where fixed costs may be relatively high.
  • Marginal cost pricing MC = Δ Total Cost / Δ Output = $80 / 2 = $40

Full Cost Pricing

  • Full cost pricing is an attempt at pricing the commodity to cover both fixed and the variable costs

Absorption Cost Pricing

  • Absorption cost pricing is an attempt to price the commodity to cover variable costs and some of the fixed costs
  • In certain markets where the sunk cost is high, one uses absorption cost pricing.

Destroyer Pricing

  • To destroy the post entry of new entrant
  • Undercut the pricing to destroy the competition and force to exit

Summary

  • The firm should have an idea about the demand of the product and the perception of that product by the consumer.
  • The firm should have full information about the costs which go into manufacturing the product.
  • The firm should also have information about the rivals pricing strategy.

With all this information a firm arrives at an appropriate pricing strategy.