Pricing Practices Pricing Practices Pricing Practices

Pricing practice

1. 1
Ms. Mahimi Kanchana
Faculty of Engineering
University of Moratuwa
Pricing Practices

2. Lecture Outline
2
Pricing in Theory
02
03
Pricing Strategies
04 Actual Pricing practices in the real world
01
Factors affecting Pricing of Multiple Products

3. What is Price?
3
The amount of money expected, required, or given
in payment for something.

4. Pricing in Theory
4
Monopolistic,monopolisticallycompetitiveandoligopolistic
firmsmaximizeprofitswhereMR=MCandchargeaprice
indicatedonthedemandcurve.
Perfectlycompetitivefirmsmaximizeprofitswhere,
P=MR=MC

5. Pricing in Theory (Contd.)
5
Forthisanalysisweassumedthatafirm,
–producesonlyoneproduct,
–sellsitsproductinonlyinonemarket,
–isacentralizedentityand
–haspreciseknowledgeondemandandcostcurvesitfaces.
Noneoftheaboveassumptionsistrueforthemodernworldfirms.

6. Actual Pricing Practices
6
Today,manyfirmsproducemultipleproducts,sellinmany
markets,aredecentralizedwithanumberofsemiautonom
ousdivisions,andhavegeneralknowledgeondemandan
dcostcurves.
Inpricingpractices,welearnhowdothefirmspricetheir
productsinthesecomplicatedsituations.

7. Pricing Strategy
7
Abusinesscanuseavarietyofpricingstrategieswhensellinga
productorservices.ThePricecanbesettomaximizeprofitability
foreachunitsoldorfromthemarketoverall.Itcanbeusedtode
fendanexistingmarketfromnewentrants,toincreasemarketsh
arewithinamarketortoenteranewmarket.Businessesmaybe
nefitfromloweringorraisingprices,dependingontheneedsand
behaviorsofcustomersandclientsintheparticularmarket.Findi
ngtherightpricingstrategyisanimportantelementinrunninga
successfulbusiness.

8. Pricing Strategy Objectives
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▪Long Run Profits
▪Short Run Profits
▪Increase Sales Volume
▪Company Growth
▪Match Competitors Price
▪Create Interest &
Excitement about the
Product
▪Discourage Competitors
From cutting Price
▪Social, Ethical & Ideological
Objectives
▪Discourage New Entrants
▪Survival

9. Decisions in Pricing Strategy
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▪Fixed & Variable Cost
▪Competition
▪Company Objectives
▪Proposed Positioning Strategies
▪Target Group & Willingness to Pay
▪External Market Demand
▪Internal Factors; Product Cost & Objectives of Company

10. Pricing Strategy for Challenging Economic
Times
10
▪Pricing is a market consideration, not a cost consideration.
▪Understand your customers’ primary goals. Be clear on what the
customer wants first, then set pricing and bundling decisions.
▪Consider bundling products or services together. Always bundle a low-
and high-valued product together. This will create higher sales and
greater profitability.

11. Pricing Strategy for Challenging Economic
Times
11
▪Understand your value proposition. Have a clear understanding of if
and how your product or service is differentiated from the competition.
▪Know where you are on the scale of "innovative-to-commoditized."
▪Build the customers’ perception of value. Constantly build on
customer perception. The more subtle the differentiation of the
product or service, the more often customers need to be reminded of
the value of your product or service

12. Factors Affecting Pricing
12

13. Types of Actual Pricing Practices
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▪Marketing Skimming
▪Value Pricing
▪Loss Leader
▪Psychological Pricing
▪Going Rate (Price
Leadership)
▪Price Discrimination
▪Penetration Pricing
▪Cost Plus Pricing
▪Contribution Pricing
▪Target Pricing
▪Marginal Cost Pricing
▪Absorption Cost Pricing
▪Destroyer Pricing

14. Market Skimming Pricing
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▪High Price low volume
▪Skim the Profit from the Market
▪Suitable for the products that have short life cycleor Which
will face competition at some point in future.
▪Most appropriate when demand is inelastic
▪Examples; Play Station, Digital Technology, Apple products
etc.

15. Value Pricing
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▪Based on consumer Perception.
▪Price charged according to the Customers Perception.
▪Price set by the company as per the perceived value.
▪Example; Status Products/ Exclusive Products.

16. Loss Leader Pricing
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17. Loss Leader Pricing
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▪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 phonewhen taking on contract package

18. Psychological Pricing
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▪Used to play on consumer perceptions
▪Classic example -£9.99 instead of £10.99!
▪Links with value pricing –high value goods priced according
to what consumers THINK should be the price

19. Going Rate Pricing
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▪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

20. Price Discrimination Pricing
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▪Charging a different price for the same good/service in different
markets
▪Requires each market to be impenetrable
▪Requires different price elasticity of demand in each market

21. Price Discrimination Pricing
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▪Prices for rail travel differ for the same journey at different times of
the day
▪The purpose of price discrimination is to capture the market's
consumer surplus. Price discrimination allows the seller to generate
the most revenue possible for a good or service .

22. Price Discrimination Pricing
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Price discrimination occurs when identical goods or services are sold at
different prices from the same provider. There are three types of price
discrimination:
▪First degree -the seller must know the absolute maximum price
that every consumer is willing to pay.
▪Second degree -the price of the good or service varies according
to quantity demanded.
▪Third degree -the price of the good or service varies by attributes
such as location, age, sex, and economic status.

23. Penetration Pricing
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▪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
Ex : Chinees Home Appliances

24. Cost Plus Pricing
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▪Cost-plus pricing is a pricing strategy that is used to maximize the
rates of return of companies.
▪Cost-plus pricing is also known as mark-up pricing where,
Cost + Mark-up = Selling price.
▪In practice, most firms use either value-based pricing or cost-plus
pricing.

25. Contribution Pricing
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▪Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
Contribution = Selling Price –Variable (direct costs)
▪Similar in principle to marginal cost pricing
▪Break-even analysis might be useful in such circumstances

26. Target Pricing
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▪Setting price to ‘target’ a specified profit level
▪Estimates of the cost and potential revenue at different prices,
and thus the break-even have tobe made, to determine the mark-
up
Mark-up = Profit/Cost x 100

27. Marginal Cost Pricing
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▪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.onaflightfromLondontoNewYork–providingthecostoftheextra
passengeriscovered,thepricecouldbevariedagooddealtoattractcustomers
andfilltheaircraft

28. Absorption Cost Pricing
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▪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

29. Destroyer Pricing
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▪Deliberatepricecuttingorofferof‘freegifts/products’to
forcerivals(normallysmallerandweaker)outofbusiness
orpreventnewentrants
▪Anti-competitiveandillegalifitcanbeproved

30. Thank You