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Pricing StrategiesPricing Strategies

*From http://www.bized.ac.uk

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A farmer buys a new EA farmer buys a new E--

class Mercedes fromclass Mercedes from

Three Point Motors. HeThree Point Motors. He

is annoyed about theis annoyed about the

price of the extras thatprice of the extras that

are not standardare not standard

equipment.equipment.

Invoice:Invoice:

1 car (standard version) baseprice1 car (standard version) baseprice $ 42,000$ 42,000

2 colours (Black/White)2 colours (Black/White) $ 1500$ 1500

Leather upholsteryLeather upholstery $ 1000$ 1000

2 Dent Resistent Bumpers @ $ 17502 Dent Resistent Bumpers @ $ 1750 $ 3500$ 3500

Environmentally friendly exhaust catalistEnvironmentally friendly exhaust catalist $ 600$ 600All terrain and weather tyresAll terrain and weather tyres $ 1000$ 1000

Brake system 2 circuitsBrake system 2 circuits $ 400$ 400

Multi tone hornMulti tone horn $ 135$ 135

HALOGEN LightsHALOGEN Lights $ 1500$ 1500

Multiple fuel use possibilityMultiple fuel use possibility $$ 1.2501.250

Total for car as orderedTotal for car as ordered $$ 52,88552,885

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The farmer makes the following invoice:The farmer makes the following invoice:

Invoice:Invoice:

1 cow (standard version) baseprice1 cow (standard version) baseprice $ 2.400$ 2.400

2 colours (Black/White)2 colours (Black/White) $ 150$ 150

Leather upholsteryLeather upholstery $ 100$ 100

Milk reservoir for summer and winter useMilk reservoir for summer and winter use $ 50$ 504 Milk taps @ $12,50 each4 Milk taps @ $12,50 each $ 50$ 50

2 Bumpers, finished in Horn @ $ 17,502 Bumpers, finished in Horn @ $ 17,50 $ 35$ 35

Fly swatter, semi automaticFly swatter, semi automatic $ 30$ 30

Environmentally friendly exhaust catalistEnvironmentally friendly exhaust catalist $ 60$ 60

All terrain and weather bootsAll terrain and weather boots $ 100$ 100

Brake system 2 circuits (Legs front and rear)Brake system 2 circuits (Legs front and rear) $ 400$ 400

Multi tone hornMulti tone horn $ 135$ 135

Eyes,Eyes, HALOGENHALOGEN $ 150$ 150

Multiple fuel use possibilityMultiple fuel use possibility $$ 1.2501.250

Total for cow as orderedTotal for cow as ordered $$ 4.9104.910

A while later the director of Three point motorsbuys a cow from the same farmer for his hobby farm.

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Pricing StrategiesPricing Strategies

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Penetration PricingPenetration Pricing

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Penetration PricingPenetration Pricing

Price set to penetrate the marketPrice set to penetrate the market

Low price to secure high volumesLow price to secure high volumes

Typical in mass market productsTypical in mass market products chocolatechocolatebars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.

Suitable for products with long anticipated lifeSuitable for products with long anticipated lifecyclescycles

May be useful if launching into a new marketMay be useful if launching into a new market

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Market SkimmingMarket Skimming

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Market SkimmingMarket Skimming

High price, Low volumesHigh price, Low volumes

Skim the profit from the marketSkim the profit from the market

Suitable for products that haveSuitable for products that haveshort life cycles or which willshort life cycles or which will

face competition at some pointface competition at some pointin the future (e.g. after a patentin the future (e.g. after a patentruns out)runs out)

Examples include: Playstation,Examples include: Playstation,jewellery, digital technology,jewellery, digital technology,new DVDs, etc.new DVDs, etc.

LCD/Plasma screens: Currently athigh prices but for how long?

Title: Thin-shaped television. Copyright: Getty Images,available from Education Image Gallery

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Value PricingValue Pricing

Price set in accordancePrice set in accordancewith customerwith customerperceptions about theperceptions about thevalue of thevalue of theproduct/serviceproduct/service

Examples include statusExamples include statusproducts/exclusiveproducts/exclusiveproductsproducts

Companies may be able to set pricesaccording to perceived value.

Title: BMW At The Frankfurt Auto Show. Copyright:Getty Images, available from Education Image Gallery

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Psychological PricingPsychological Pricing

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Psychological PricingPsychological Pricing

Used to play on consumer perceptionsUsed to play on consumer perceptions

Classic exampleClassic example -- $9.99 instead of $10.00!$9.99 instead of $10.00!

Links with value pricingLinks with value pricing high value goodshigh value goodspriced according to what consumerspriced according to what consumers

THINK should be the priceTHINK should be the price

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Going Rate (Price Leadership)Going Rate (Price Leadership)

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Going Rate (Price Leadership)Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competingIn case of price leader, rivals have difficulty in competingon priceon price too high and they lose market share, too lowtoo high and they lose market share, too lowand the price leader would match price and force smallerand the price leader would match price and force smallerrival out of marketrival out of market

May follow pricing leads of rivals especially where thoseMay follow pricing leads of rivals especially where thoserivals have a clear dominance of market sharerivals have a clear dominance of market share

Where competition is limited, going rate pricing may beWhere competition is limited, going rate pricing may beapplicableapplicable banks, supermarkets, electrical goodsbanks, supermarkets, electrical goods findfindvery similar prices in all outletsvery similar prices in all outlets

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Price DiscriminationPrice Discrimination

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Destroyer Pricing/Predatory PricingDestroyer Pricing/Predatory Pricing

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Target PricingTarget Pricing

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Target PricingTarget Pricing

Setting price to target a specified profitSetting price to target a specified profitlevellevel

Estimates of the cost and potentialEstimates of the cost and potentialrevenue at different prices, and thus therevenue at different prices, and thus thebreakbreak--even have to be made, to determineeven have to be made, to determinethe markthe mark--up.up.

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CostCost--Plus PricingPlus Pricing

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CostCost--Plus PricingPlus Pricing

Calculation of the average cost (AC) plusCalculation of the average cost (AC) plusa mark up / margina mark up / margin

AC = Total Cost/OutputAC = Total Cost/Output

Price = AC + desired mark upPrice = AC + desired mark up