Developing Pricing Strategies
Lecture 15
Price
• Price is the art of communicating the
value of a product or service at a
particular point of time
“Don’t get to know the cost of
everything and the value of nothing”
Issues in Pricing
• The Communication Value
– to the customer/to the firm
• Sensitivity
• Explosive & Far-reaching Consequences
– to changes
– as a major strategy (price wars)
– legally
• The Perceived Value Issue
Factors Affecting Price Decisions
Factors to Consider When
Setting Prices
External Factors
• The market and demand
– Pricing in different types of markets
– Price elasticity of demand
– Price and demand relationship
– Consumer perceptions of price and value
– Competitor’s prices and offers
– Other external factors (e.g. economic,
demographic, geographical)
The Market and Demand
• Pure competition The market consists of
many buyers and sellers trading in a uniform
commodity. No single buyer or seller has
much effect on the going market price
(tomatoes or flour).
• Monopolistic competition The market
consists of many buyers and sellers. A range
of prices occurs because sellers can
differentiate their offers to the buyers (Cars)
The Market and Demand
• Oligopolistic competition The market
consists of a few sellers who are highly
sensitive to each other’s pricing and
marketing strategies. The product can be
uniform or non-uniform. The sellers are few
because it is difficult for new sellers to
enter the market (Accountancy Firms).
• A pure monopoly consists of one seller.
The seller may be a government monopoly,
a private, regulated monopoly or a private,
non-regulated monopoly. Pricing is handled
differently in each case (PTCL, WAPDA).
Perceptions of Price and Value
• Pricing requires more than technical expertise. It
requires creative judgment and awareness of
buyers’ motivations.
• The key to effective pricing is the same one that
opens doors in other marketing functions: a
creative awareness of who buyers are, why they
buy and how they make their buying decisions.
• The recognition that buyers differ in these
dimensions is as important for effective pricing as
it is for effective promotion, distribution or product
development.
Competitors’ Prices and Offers
• Competitors’ prices and their reactions to
other companies’ pricing must be
considered.
• Each company must learn the price and
quality of their competitors’ offers which
may provide a basis for its own strategy.
Product and Service Adjustment
Strategies
New-Product Pricing
Market Skimming
 Setting a High Price
for a New Product to
“Skim” Maximum
Revenues from the
Target Market.
 Results in Fewer,
But More Profitable
Sales.
• Use Under These
Conditions:
– Product’s Quality and
Image Must Support Its
Higher Price.
– Costs Can’t be so High
that They Cancel the
Advantage of Charging
More.
– Competitors Shouldn’t
be Able to Enter Market
Easily and Undercut the
High Price.
– New Handycams by
Sony.
New-Product Pricing
Market Penetration
 Setting a Low Price
for a New Product in
Order to “Penetrate”
the Market Quickly
and Deeply.
 Attract a Large
Number of Buyers
and Win a Larger
Market Share.
• Use Under These
Conditions:
– Market Must be Highly
Price-Sensitive so a Low
Price Produces More
Market Growth.
– Production/ Distribution
Costs Must Fall as Sales
Volume Increases.
– Must Keep Out
Competition & Maintain
Its Low Price Position or
Benefits May Only be
Temporary.
– Student Biryani.
Legal Aspects of Pricing
• Price fixing
– Competitors illegally getting together to raise or
stabilise prices
• Misleading list prices
– Suggesting that prices customers are being asked
to pay have been discounted
• Resale price maintenance
– Producer or wholesaler specifies a minimum price
below which goods may not be resold
• Bait pricing
– Setting very low prices to attract customers, but
trying to sell more expensive models/brands once
customers are in the store
• Price Wars