Pricing Strategies MBA.pptx

8/14/2019 Pricing Strategies MBA.pptx

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Importance Of Pricing Strategies

The fixing of the price level for a good or

service is a vital component of the marketing

mix.

Price can have a great impact on the

consumer demand for the product.

Price will largely determine the degree of

value added, by the business, to bought-in

components .


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Pricing levels greatly influence the revenue

and profit made by a business.

Price is an indicator of the marketing

objectives of the business and it can help

establish the image and identity of a product.

Hence, getting the pricing decision wrong

means much hard work in market research

and product development can be put at risk.


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If a product has a lot of competitors in its

market, the price it charges will be very

important.

The business must constantly monitor what its

competitors are charging for their products to

make sure its prices remain competitive.


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The Pricing Decision

There are many determinants of the pricing

decision for a product. Here are the main

ones:

1. Costs of production:- If the business is to

make a profit on the sale of a product then, at

least in the long term, the price must cover all

of the costs of producing it and of bringing itto the market.


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2. Competitive conditions in the market :-If the firm is a monopolist , it is likely to have

more freedom in price setting than if it is one

of many firms making the same type ofproduct. Hence it is quite clear that more the

competition there is the more likely it is that

prices will be fixed similar to those fixed byother rival firms.


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3. Competitors prices:-

Related to the previous point ,it may be

difficult to set price very different from that

of the Market leader unless true product

differentiation can be established. ( recall the

relevant concepts related to product

differentiation!)


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4. Business & marketing objectives:-

If the aim is to become market leader throughmass marketing, then this will require a differentprice level to that set by a business aiming atselect niche marketing.

Hint:Niche marketing :- It is the businessstrategy of devising and selling productsspecifically for a small unexploited part of a

market . Although lacking benefits such aseconomies of scale, small producers are oftenable to survive by adopting this strategy eventhough the rest of the market is dominated bymuch larger firms.


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5.Price elasticity of demand :- Recall its

significance !!!

6. Whether it is a new or an existing product:-

If new, a decision will have to be made as to

whether a skimming or a penetration

strategy is to be adopted.


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Pricing Methods

The business objective being sought will affect

which of the pricing strategies the businessdecides to use. The following are some pricingstrategies that a business could use for itsproducts.

Cost-plus pricing Penetration pricing

Price skimming

Competitive pricing

Promotional pricing

Psychological pricing


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Cost-plus pricing

It involves estimating how many of theproduct will be produced,then calculating the

total cost of producing this output and finally

adding a percentage mark-up for profit.

For example,if the total cost of making 1000

chocolate bars is $1000 and you want to make

a 50% profit on each bar,then the following

calculation need to be used.

$1000/1000+50% = $1.50 is the selling price

per bar.(1+0.50=$1.50)


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The calculation to find 50% of $1000/1000 is as follows:

$1000/1000 X 50/100 = 1 X 50/100 = 0.50

Total cost/Output X % Mark-up = Selling price.

Advantages :The method is easy to apply.

Finding out the design of the product when the sellingprice is predetermined i.e. product tailoring. Byworking back from this price,the product and thepermissible cost is decided upon.

This means that market realities are taken into accountas this approach considers the viewpoint of the buyerin terms of what he wants and what he will pay.


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Disadvantages: You could lose sales if the

selling price is a lot higher than your

competitors price.

Provides incentive for inefficiency.

Includes sunk costsrather than just using

incremental costs. Uses normal or standard output level to

allocate fixed costs.
http://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Sunk_costshttp://en.wikipedia.org/wiki/Sunk_costshttp://en.wikipedia.org/wiki/Perverse_incentive


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Penetration pricing When the price is set lower than the competitors

prices in order to be able to enter a new market.

For example ,a company launches a new

chocolate bar at a price several paise below the

prices of similar chocolate bars that are already inthe market.

Advantage: It ensures that sales are made and

new product enters the market. Disadvantage: The product is sold at a low price

and therefore the sales revenue may be low.


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Price skimming

This is where a high price is set for a new product

in the market. The product is usually a new

invention or a new development of an old

product.

For example, a new computer games system isinvented then it will be sold at a very high price

than the existing computer games because of its

better graphics and its new. Hence ,consumerswill be willing to pay the high price. Thus, it helps

the business to earn high profits which will make

the research and development costs worthwhile.


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Price skimming

Advantage: Skimming can help to establish the

product as being of good quality.

Disadvantage:It may put off some potential

customers because of the high price.


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Competitive pricing

This is when the product is priced in line with

or just below competitors prices to try to

capture more of the market.

For example,a company wants to sell a brand

of washing powder then it needs to sell it at asimilar price to all the other brands available

otherwise consumers will buy their

competitors brands.


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Competitive pricing

Advantage:Sales are likely to be high as yourprice is at a realistic level and the product is

not under -or over-priced.

Disadvantage:In order to decide what this

price should be,you would have to research

what price your competitors are charging andthis costs time and money.


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Promotional pricing

This is when a product is sold at a very lowprice for a short period of time. Thus it would

be used when you want to price the product

at a low price for a set amount of time.

For example ,at the end of summer, a shop

might have a lot of summer clothes left

unsold. Then it might have a sale offering Buy

one ,get one free. Thus it will clear the end-

of-season stock.


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Promotional pricing

Advantages: It is useful for getting rid of

unwanted stock that will not sell otherwise.

It can help to renew interest in a business if

sales are falling.

Disadvantage:The sales revenue will be lower

because the price of each item will be low.


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This has two aspects. Firstly, it is very commonfor manufacturers and retailers to set prices

just below key price levels in order to make

the price appear much lower than it is.

Therefore ,$99 is used instead of $101 and $

1.99 and not $2.01.

Misleading by offering a price just below a

whole number. For example,99cents which is

just below $1.


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Super markets may charge low prices forproducts purchased on a regular basis and thiswill give customers the impression of being

given good value for money.

Similarly, price can be so high that they exceed

consumer perceptions of the quality andimage of the good and sales will be damagedas a result.


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More on pricing : Loss leaders

This is a common tactic used by retailers. It

involves the setting of very low prices for

some products - possibly even below variable

costs-in the expectation that consumers willbuy other goods too.

The firms hope that the profits earned by

these other goods will exceed the loss madeon the low-priced ones.


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Often, the purpose of loss leaders is to

encourage the purchase of closely related

complementary goods.


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Competition-based pricing:

Price leadership

It exists in markets where there is one

dominant firm and other firm simply charge a

price based upon that set by the market

leader.

Some markets have a number of firms of same

size, but prices are still similar in order to

avoid a price war. An example of this would bethe large petrol companies.


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Destroyer Pricing

Sometimes, firms will note the price of

competitors products and then deliberately

undercut them in order to try to force them

out of the market.


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Conclusion

It would therefore be important for the businessto apply different methods to its portfolio ofproducts , depending on costs of production andcompetitive conditions within the market.

Price levels can have such a powerful influenceon consumer purchasing behaviour thatmarketing managers should ensure that marketresearch is used to test the impact of different

price levels on potential demand of fast-movingconsumer goods.

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Pricing Strategies MBA.pptx