pricing lecture.ppt
TRANSCRIPT
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Pricing Strategies
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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
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.
Copyright: iStock.com
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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
Goods/services deliberately sold belowcost to encourage sales elsewhere
Typical in supermarkets, e.g. atChristmas, selling bottles of gin at 3 inthe hope that people will be attracted tothe store and buy other things
Purchases of other items more thancovers loss on item sold
e.g. Free mobile phone when taking oncontract package
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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)
In case of price leader, rivals have difficulty incompeting on price too high and they losemarket share, too low and the price leader
would match price and force smaller rival outof market
May follow pricing leads of rivals especiallywhere those rivals have a clear dominance ofmarket share
Where competition is limited, going ratepricing may be applicable banks, petrol,supermarkets, electrical goods find verysimilar prices in all outlets
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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
Charging a differentprice for the samegood/service in
different markets Requires each
market to beimpenetrable
Requires differentprice elasticity ofdemand in eachmarket
Prices for rail travel differ for the samejourney at different times of the day
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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
Full Cost Pricingattempting toset price to cover both fixed and
variable costs Absorption Cost PricingPrice set
to absorb some of the fixed costs
of production
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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