S8 Price Methods

8/3/2019 S8 Price Methods

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Pricing Strategy

Price is the only element in

the marketing mix thatproduces revenue


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What is Price?

Cost Plus Margins

Perceived Value of the Product

Revenue generating element


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Factors influencing Pricing

Policy Selecting the Pricing Objectives

Determining Demand

Price Elasticity of Demand

Estimating Cost


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Selecting the Pricing

Objectives

Survival

Max current profit

Max sales growth

Max skimming

Product quality leadership


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Determining Demand

Each price that a company chargesleads to a different level of

demand Demand and Price are inversely

related

Price Elasticity of demandElastic Demand

Inelastic Demand


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Conditions for inelastic

Demand There are few or no substitutes or

competitors

Buyers do not readily notice thehigher price

Buyers are slow to change their

buying habits & search for lowerprices


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Demand sets a ceiling on theprice that a company can

charge for its product andcost sets the floor.


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Estimating Cost

Fixed Cost Does not vary with production or sales

revenue

Variable Cost Varies directly with level of production

Total Cost

Sum of fixed & variable cost for any givenlevel of production

Benchmarking cost Learning the price & quality of competitors

offer


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Pricing Methods


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Pricing Strategies


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Penetration Pricing


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Penetration Pricing

Price set to penetrate the market

Low price to secure high volumes

Typical in mass market products chocolate bars, food stuffs, householdgoods, etc.

Suitable for products with long

anticipated life cycles May be useful if launching into a new

market


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Market Skimming


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Market Skimming

High price, Low volumes

Skim the profit from themarket

Suitable for products thathave short life cycles orwhich will facecompetition at somepoint in the future (e.g.after a patent runs out)

Examples include:Playstation, jewellery,digital technology, newDVDs, etc.

Many are predicting a firesale inlaptops as supply exceedsdemand.


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Value Pricing


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Value Pricing

Price set inaccordance withcustomer

perceptions aboutthe value of theproduct/service

Examples include

statusproducts/exclusiveproducts

Companies may be able to set pricesaccording to perceived value.


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Loss Leader


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Loss Leader

Goods/services deliberately sold belowcost to encourage sales elsewhere

Typical in supermarkets, e.g. at Diwali,selling diyas,10 at 2Rs. in the hope thatpeople will be attracted to the store andbuy other things

Purchases of other items more thancovers loss on item sold

e.g. Free talk time when you buy a sim


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Psychological Pricing


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Psychological Pricing

Used to play on consumerperceptions

Classic example - 9.99 instead of10.99!

Links with value pricing high

value goods priced according towhat consumers THINK should bethe price


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Going Rate (Price Leadership)


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Tender Pricing


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Tender Pricing Many contracts awarded on a tender basis

Firm (or firms) submit their price for carryingout the work

Purchaser then chooses which represents bestvalue

Mostly done in secret


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Price Discrimination


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Price Discrimination

Charging adifferent price forthe samegood/service indifferent markets

Requires differentprice elasticity ofdemand in eachmarket

Prices for air travel differ for the samejourney at different time of the day


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Destroyer Pricing/Predatory Pricing


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Destroyer/Predatory Pricing

Deliberate price cutting or offer of freegifts/products to force rivals (normally

smaller and weaker) out of business orprevent new entrants

Anti-competitive and illegal if it can beproved


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Absorption/Full Cost Pricing


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Absorption/Full Cost Pricing

Full Cost Pricing attempting toset price to cover both fixed and

variable costs Absorption Cost Pricing Price set

to absorb some of the fixed costs

of production


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Marginal Cost Pricing


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Marginal Cost Pricing

Marginal cost the cost of producing ONEextra or ONE fewer item of production

MC pricing allows flexibility

Particularly relevant in transport where fixedcosts may be relatively high

Allows variable pricing structure e.g. on aflight from London to New York providingthe cost of the extra passenger is covered, theprice could be varied a good deal to attractcustomers and fill the aircraft


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Marginal Cost Pricing Example:

Aircraft flying from Bristol to Edinburgh Total Cost (includingnormal profit) = 15,000 of which 13,000 is fixed cost*

Number of seats = 160, average price = 93.75

MC of each passenger = 2000/160 = 12.50

If flight not full, better to offer passengers chance of flying at12.50 and fill the seat than not fill it at all!

*All figures are estimates only


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Target Pricing


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Target Pricing

Setting price to target a specifiedprofit level

Estimates of the cost and potentialrevenue at different prices


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Cost-Plus Pricing


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Cost-Plus Pricing

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

AC = Total Cost/Output


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Influence of Elasticity

S8 Price Methods

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