pricing strategies1

Luiz Afonso dos Santos Senna - PhD

Pricing Strategies and Tactics

Khaja Hammad uddin


Fatores na fixação de PreçoFatores na fixação de Preço


Market Structure

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Mor

e C

ompe

titiv

eLess C

ompetitive


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


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


Oligopoly

Few sellers and many buyers Product may be homogeneous or

differentiated Barriers to resource mobility Example: Automobile manufacturers


Monopolistic Competition

Many sellers and buyers Differentiated product Perfect mobility of resources Example: Fast-food outlets


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


Perfect Competition

Conditions necessary:

Large numbers of buyers and sellers

Homogeneous product

Free entry and exit

Perfect information


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


Monopoly

Conditions necessary Single seller of product No close substitutes Significant barriers to entry

There are few examples of perfect competition and pure monopoly.


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)


Costs at different levels of production

Cost per unit at different levels of production


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.


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.


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.


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


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



Use the legal / regulatory systems

File patent application

File regulatory challenge



Capacity and production

Announce capacity expansion

Revise/modify products - more

difficult to copy Advertising

Raise cost of entry for others


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)


Pricing Strategies

Profit maximizing rule: Set production at level where MR = MC

Non - Maximizing pricing rules there are a variety of these


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


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


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


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


Steps for Determining Prices

Establish Pricing Objectives Increase sales

volume? Prestigious image? Increase market

share?


Steps for Determining PricesStudy CostsStudy Costs

Can you make a profit?

Can you reduce costs without affecting quality or image?



Estimate Demand What do customers

expect to pay? Prices usually are directly

related to demand.


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



Set PriceMonitor and evaluate its effectiveness

as conditions in the market change

Product and Pricing Strategies


Other Pricing StrategiesOther Pricing Strategies

Price-BasedPrice-Based

OptimizationOptimization

SkimmingSkimming

PenetrationPenetration


Price Adjustment StrategiesPrice Adjustment Strategies

Discount PricingDiscount Pricing

BundlingBundling

Dynamic PricingDynamic Pricing


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.


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.

Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery


Loss Leader


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.


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



Odd-Even PricingOdd numbers convey a bargain

image -- $.79, $9.99, $699

Even numbers convey a quality image -- $10, $50, $100



Prestige Pricing – sets a higher than

average price to suggest status



Multiple-Unit Pricing – 3 for $.99Suggests a bargain and helps

increase sales volume.Better than selling the same items

at $.33 each.



Everyday Low Prices (EDLP) – set on a consistent basis


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

Most government contractsA European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!



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


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.


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



Seasonal Discount – offered outside the customary buying season



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


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

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


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.


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.

Get one extra student and get fees discount.


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

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!