Today…

Long Term Pricing Strategies

Short Term Pricing Strategies

Price

Consumers will only pay what they can afford and what they think is a reasonable price for the product.

Consumers use price as a measure of quality.

When setting a price for a product you need to consider:

Costs of production

Profit mark-up

Competitor prices

Long Term Pricing Strategies

Low Price - Charge lower than competitors. Only appropriate where there is a little brand loyalty and competition in the market is high.

Market Price - Setting price at a similar price to competitors. Homogeneous product means that price competition is not of benefit. They compete in other areas – service etc.

High Price - High quality products, premium goods and services where image is important, such as perfumes.

Low Price

Aimed at the widest possible market and usually the products are cheap to make and have low profit margins.

Firms rely on volume sales to make their profits.

Market Price (Going Rate/Price

Leadership) 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

High Price (Value Pricing)

Price set in accordance with customer perceptions about the value of the product/service.

Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Title : BMW At The Frankfurt Auto Show. Copyright Getty Images available from http://edina.ac.uk/eig/

Short Term Pricing Strategies

Skimming

Using a high price initially for a new product where there is little competition.

Penetration Pricing

Used to introduce a product to an established market. Allows the business to achieve sales and gain market share very quickly. Usually set a low price to attract customers. Once product is established price can increase.

Market Skimming

High price, Low volumes Skim the profit from the

market Suitable for products that

have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)

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

Plasma Screens: Currently athigh prices but for how long?Title: thin-shaped television. Copyright Getty Images available from http://edina.ac.uk/eig/

Penetration Pricing

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

Short Term Pricing Strategies

Destroyer Pricing

Setting a very low price to destroy the competition. Product probably being sold at a loss, however once competition is destroyed the price will return to market price.

Promotional Pricing

Used to boost sales and create interest in a product by lowering the price. Supermarkets use this for some of their sales lines, as loss leaders.

Demand-orientated Pricing

Price varies with the demand, ie crops, trains, phones etc.

Destroyer/Predatory Pricing

Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

Anti-competitive and illegal if it can be proved

Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

Title: Bill Gates speaks at UNIX convention. Copyright Getty Images available from http://edina.ac.uk/eig/

Promotional Pricing (Loss Leader)

Goods/services deliberately sold below cost to encourage sales elsewhere

Typical in supermarkets – e.g. Christmas, sell 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 phone when taking on contract package

Demand Orientated Pricing (Price

Discrimination) 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

Prices for rail travel differ for the same journey at different times of the day

Title: Inter-City 125. Copyright Getty Images available from http://edina.ac.uk/eig/