Pricing Strategies

Pricing StrategiesPricing Strategies

*From http://www.bized.ac.uk

A farmer buys a new E-A farmer buys a new E-class Mercedes from class Mercedes from Three Point Motors. He Three Point Motors. He is annoyed about the is annoyed about the price of the extras that price of the extras that are not standard are not standard equipment. equipment.

Invoice:Invoice:

1 car (standard version) baseprice1 car (standard version) baseprice $ 42,000 $ 42,000

2 colours (Black/White)2 colours (Black/White) $ 1500 $ 1500

Leather upholsteryLeather upholstery $ 1000 $ 1000

2 Dent Resistent Bumpers @ $ 1750 2 Dent Resistent Bumpers @ $ 1750 $ 3500 $ 3500

Environmentally friendly exhaust catalistEnvironmentally friendly exhaust catalist $ 600 $ 600

All terrain and weather tyresAll terrain and weather tyres $ 1000$ 1000

Brake system 2 circuitsBrake system 2 circuits $ 400$ 400

Multi tone hornMulti tone horn $ 135 $ 135

HALOGEN Lights HALOGEN Lights $ 1500 $ 1500

Multiple fuel use possibilityMultiple fuel use possibility $ $ 1.250 1.250

Total for car as orderedTotal for car as ordered $ $ 52,885 52,885

The farmer makes the following invoice:The farmer makes the following invoice:

Invoice:Invoice:

1 cow (standard version) baseprice1 cow (standard version) baseprice $ 2.400 $ 2.400

2 colours (Black/White)2 colours (Black/White) $ $

150 150 Leather upholstery Leather upholstery $ $

100 100

Milk reservoir for summer and winter use Milk reservoir for summer and winter use $ 50$ 50

4 Milk taps @ $12,50 each4 Milk taps @ $12,50 each $ 50 $ 50

2 Bumpers, finished in Horn @ $ 17,50 2 Bumpers, finished in Horn @ $ 17,50 $ 35 $ 35

Fly swatter, semi automaticFly swatter, semi automatic $ 30 $ 30

Environmentally friendly exhaust catalistEnvironmentally friendly exhaust catalist $ 60 $ 60

All terrain and weather bootsAll terrain and weather boots $ 100$ 100

Brake system 2 circuits (Legs front and rear) Brake system 2 circuits (Legs front and rear) $ 400$ 400

Multi tone hornMulti tone horn $ 135 $ 135

Eyes,Eyes, HALOGEN HALOGEN $ 150 $ 150

Multiple fuel use possibilityMultiple fuel use possibility $ $ 1.250 1.250

Total for cow as orderedTotal for cow as ordered $ $ 4.910 4.910

A while later the director of Three point motors buys a cow from the same farmer for his hobby farm.

Pricing StrategiesPricing Strategies

Penetration PricingPenetration Pricing

Penetration PricingPenetration Pricing Price set to ‘penetrate the market’Price set to ‘penetrate the market’

‘‘Low’ price to secure high volumesLow’ price to secure high volumes

Typical in mass market products – chocolate bars, Typical in mass market products – chocolate bars, food stuffs, household goods, etc.food stuffs, household goods, etc.

Suitable for products with long anticipated life cyclesSuitable for products with long anticipated life cycles

May be useful if launching into a new marketMay be useful if launching into a new market

Market SkimmingMarket Skimming

Market SkimmingMarket Skimming High price, Low volumesHigh price, Low volumes Skim the profit from the marketSkim the profit from the market Suitable for products that have Suitable for products that have

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

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

LCD/Plasma screens: Currently athigh prices but for how long?

Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery

Value PricingValue Pricing

Value PricingValue Pricing

Price set in accordance Price set in accordance with customer with customer perceptions about the perceptions about the value of the value of the product/serviceproduct/service

Examples include status Examples include status products/exclusive products/exclusive products 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

Psychological PricingPsychological Pricing

Psychological PricingPsychological Pricing

Used to play on consumer perceptionsUsed to play on consumer perceptions

Classic example - $9.99 instead of $10.00!Classic example - $9.99 instead of $10.00!

Links with value pricing – high value goods Links with value pricing – high value goods priced according to what consumers priced according to what consumers THINK should be the priceTHINK should be the price

Going Rate (Price Leadership)Going Rate (Price Leadership)

Going Rate (Price Leadership)Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low on price – too high and they lose market share, too low and the price leader would match price and force smaller and the price leader would match price and force smaller rival out of marketrival out of market

May follow pricing leads of rivals especially where those May follow pricing leads of rivals especially where those rivals have a clear dominance of market sharerivals have a clear dominance of market share

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

Price DiscriminationPrice Discrimination

Price DiscriminationPrice Discrimination

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

Requires each market to Requires each market to be impenetrablebe impenetrable

Requires different price Requires different price elasticity of demand in elasticity of demand in each marketeach market

Prices for rail travel differ for the same journey at different times of the day

Title: Inter-City 125. Copyright: Getty Images, available from Education Image Gallery

Destroyer Pricing/Predatory PricingDestroyer Pricing/Predatory Pricing

Destroyer/Predatory PricingDestroyer/Predatory Pricing

Deliberate price cutting or Deliberate price cutting or offer of ‘free offer of ‘free gifts/products’ to force gifts/products’ to force rivals (normally smaller rivals (normally smaller and weaker) out of and weaker) out of business or prevent new business or prevent new entrantsentrants

Anti-competitive and Anti-competitive and illegal if it can be provedillegal if it can be proved

Microsoft – 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.

Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery

Target PricingTarget Pricing

Target PricingTarget Pricing

Setting price to ‘target’ a specified profit Setting price to ‘target’ a specified profit levellevel

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

Cost-Plus Pricing Cost-Plus Pricing

Cost-Plus PricingCost-Plus Pricing

Calculation of the average cost (AC) plus Calculation of the average cost (AC) plus a mark up / margina mark up / margin

AC = Total Cost/OutputAC = Total Cost/Output

Price = AC + desired mark upPrice = AC + desired mark up