Pricing strategies by AFee

PRICING
STRATRGIES
by
Sarfaraz Ahmed Mohtesham
AITM , BHATKAL
copyright © 2013 FAA EDUCATION. All rights reserved.

PRICING
Price is the sum value of all the values
that consumers exchange for the benefits
or having or using the product or service
Different forms - Goods bought, hire
charges, tuition fees
Dynamic Pricing - Varying prices
Flexibility


OBJECTIVE OF PRICING
Profit
Survival
Market Share
Cash Flow
Status Quo
Product Quality
Communicating Image
Short term/Long term

li
bi tion s
ita iza oal
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Pr it-Ma etur
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Pr rge
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Meet
Business
Objectives

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Sa V
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M Ma um
ar
ke xim e
t S iz
ha ati
r e on

Pricing Objectives

Other Pricing Objectives

 Status Quo
 Image
 Social & Ethical Considerations

FACTORS INFLUENCING PRICING
The Customer's Demand Schedule
The Cost Function and
Competitors Prices


Factors in Setting Price


Pricing Strategies

You don ’t sell through price. You sell the price.


Different Pricing Strategies

which we will cover through this PRESENTATION

Price Skimming
ii. Penetration Pricing
iii. Loss Leader Pricing
iv. Peak Load Pricing
i.


Price Skimming


Price Skimming is charging a high initial price



Price Skimming :

– Appropriate for distinctly new products
– Provides the firm with opportunity to profitably
reach market segments not sensitive to high
initial price
– Enables marketer to capture early profits
– Enables innovator to recover high R&D costs
more quickly

Price Skimming Strategy :
As the product goes through its product
life cycle, the strategy is to lower the price
in line with production
and demand
capacity


Price skimming is a pricing strategy which companies
adopt when they launch a new product, in this strategy
while launching a product company sets high price for a
product initially and then reduce the price as time
passes by so as to recover cost of a product quickly.
Example
An example of price skimming would be mobiles which are have
some added features are sold at higher prices and then prices
began to decline as time passes by, another example of price
skimming would be 3D televisions which are right now being sold.
Given below are some of the advantages and disadvantages of
price skimming –

Price Skimming
Advantages






Plasma Screens: Currently at
high prices but for how long?

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.


Disadvantages of Price Skimming
•Competition.

There will be a continual stream of competitors
challenging the seller's extreme
price point with lower-priced offerings.
•Sales

volume. A company that uses price skimming is limiting its
sales, which means that it
cannot lower costs by building sales volume.
* Cost inefficiency. The very high profit margins engendered by this
strategy may cause a company to avoid making the cost cuts
required to keep it competitive when it eventually
lowers its prices.


What is Price Penetration?
Penetration pricing
is the pricing technique of setting a relatively low initial entry
price, often lower than the eventual market price, to attract new
customers.
The strategy works on the expectation that customers will
switch to the new brand because of the lower price.
Penetration pricing is most commonly associated with a
marketing objective of increasing market share or sales
volume, rather than to make profit in the short term.


Penetration Pricing
Penetration Pricing is charging a very low initial
price.
Penetration Pricing is appropriate when there is:

›
›
›

High price elasticity of demand
Strong threat of imminent competition
Opportunity for substantial production cost
reduction as volume expands


The advantages of penetration pricing to the firm are:
* It can create goodwill among the early adopters
segment. This can create more trade through
word of mouth.
* It creates cost control and cost reduction pressures
from the start, leading to greater efficiency.
* It discourages the entry of competitors. Low prices act
as a barrier to entry


The main disadvantage with penetration pricing is that it
establishes long term price expectations for the product, and
image preconceptions for the brand and company. This
makes it difficult to eventually raise prices. Some
commentators claim that penetration pricing attracts only the
switchers (bargain hunters), and that they will switch away as
soon as the price rises. There is much controversy over
whether it is better to raise prices gradually over a period of
years


Price Strategies for New
Products
Penetration Pricing

PRIC
E

Low price  establish product in
the market

PRICE

PRIC
E

Skimming Pricing

High price/Prestige pricing
 appeal to early adopters;
recover high R&D costs

Skimming  Penetration
Lower price over time
 Move inventory, stimulate
D, extend product life


Loss Leader Pricing






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

The loss leader is a tried-and-true pricing
strategy that can be a great way to grow any
business. Using it you can get old customers
back, bring
new ones in the door, and increase sales.
Other than getting a sale, the loss leader strategy can
also be also used for:
*
*
*
*

Getting rid of unwanted merchandise
Attracting new customers
Building your brand
Build repeat customers


PEAK LOAD PRICING
When demand is not evenly distributed, a firm needs to have
facilities to accommodate periods of high demand.
Even with large facilities, the firm may experience times when the
demand is greater than can be handled. Then the firm may
experience costly computer system crashes.
During off-peak times (periods of lower demand), there is excess
capacity.
The firm charges less at off-peak times.
Example: More phone calls are made during business hours than
in the evenings and on weekends. So the phone companies
charge more during business hours

Real World Examples of Peak Load Pricing:
Gas prices in the 1970's and Utility companies are good examples
of peak load pricing. When a good or service is limited in
availability, peak load pricing can effectively reduce consumer
consumption because consumers are swayed by the high prices.
On the other hand, when prices are lower, consumers are more
likely to purchase more.
Another example would be tourist pricing.
In a tourist town, one might see prices of many goods rise during
tourist season.


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