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					 PRICING

STRATEGIES
PRICING STRATEGIES
         U. SINGH NINDRA
      Business Development Manager




 a Fortune 7 Company with over $50 billion in annual revenues
  PRICING STRATEGIES

•Pricing is one of the most powerful weapons you
           can place in your arsenal.

          •Smart Pricing is an asset.

    •The key is to understand how customers
                 perceive value.
PRICING STRATEGIES

          Winning pricing tactics
Gain the edge on - tough competition, industry
          over capacity and diminishing margins.


Outdated or conventional pricing methods
    - can be a real drain on your profit plan.
         TYPES OF
    PRICING STRATEGIES


•    Differential Pricing
•    Competitive Pricing
•    Product Line Pricing
    DIFFERENTIAL
       PRICING


... whereby the same brand is
   sold at different prices to
           consumers
    COMPETITIVE
      PRICING


 ...whereby prices are set to
exploit competitive position
      PRODUCT LINE
         PRICING


  ... whereby related brands are
sold at prices that exploit mutual
          dependencies
    DIFFERENTIAL
 PRICING STRATEGIES


• Second Market Discounting
•Periodic Discounting
•Random Discounting
         SECOND MARKET
          DISCOUNTING
•e.g., OEM parts facing competition from generic and lower
priced parts.

•Options - either maintain price and lose market share, or
drop price and lose margin.

•A relevant strategy might be to enter the generic market
segment with an unbranded market and arrest the loss of
sales to that segment without either foregoing margin or
position in the branded segment.
SECOND MARKET
 DISCOUNTING
    SECOND MARKET
     DISCOUNTING

                        Advertising
                        Promotions
                        Discounts
                        Quality Claims

Community Involvement
               PERIODIC
             DISCOUNTING
•Temporary markdowns and periodic discounting of off-
season fashion goods, off-season travel fares, matinee tickets
and happy hour drinks.

•The manner of discounting is predictable over time and not
necessarily unknown to consumers.

•If demand is not exactly known, a strategy of pricing high
and systematically discounting with time is likely to ensure
that the firm covers its costs and makes a reasonable profit.
               RANDOM
             DISCOUNTING
•The manner of discounting is crucial.

•It should be “random” to uninformed consumers and

infrequent, so that these consumers do not get lucky too often.

STRATEGY
•Maximize the number of informed consumers at the low
price.
•Maximize the number of uninformed at the high price rather
than the low price.
     COMPETITIVE
  PRICING STRATEGIES


• Penetration Pricing
•Experience Curve Pricing
•Price Signaling
•Geographic Pricing
           PENETRATION
             PRICING

• Used to introduce new products
•Used by a new competitor in the marketplace

•Essentials for this strategy are
   - price sensitivity on the part of consumers, and
   - threat of competitive entry
EXPERIENCE CURVE
     PRICING

                                  Current Price
          5

DOLLARS       D
          4
                  C
          3           B
                          A
          2                                                        Market Price


          1                                               Industry Costs




              2       4   6   8
                                                  YEARS
    EXPERIENCE CURVE
         PRICING

Essential requirements:
•Experience effects are strong

•The firm has more experience than competitors

•The consumers are price sensitive
       PRICE SIGNALING

Consumers may use price to infer quality

It is most common for new or amateur consumers in
a market, who do not know the quality of
competitive brands but find quality important.
Purchase of a high priced wine by the casual buyer
     PRICE SIGNALING




  Dom Perignon               E&J Gallo
Consumers may use price to infer quality
      PRICE SIGNALING

Essential requirements:
•Information about price more easily available than
information about quality.

•Consumers must want high quality enough to risk
buying the higher priced product even without a
certainty of high quality.
     PRICE SIGNALING

Essential requirements (contd.):


 Thus, uninformed consumers who infer quality from
 price find it worthwhile to do so on average.
     PRICE SIGNALING

Pitfalls:


Price Signaling used to fix prices

Examples - Airlines, Energy
     PRICE SIGNALING

Some Variations:

•IMAGE PRICING

•REFERENCE PRICING
 A high priced model next to a much higher priced
 version of the same product, so that the former seem
 more attractive to risk averse uninformed consumers.
               Reference Pricing




SL500 Roadster
5.0L 24-valve V-8 engine
302 hp @ 5,600 rpm
339 lb-ft @ 2,700 - 4,250 rpm
0-60 mph in 6.1 seconds


MSRP: $89,220.00*
                 Reference Pricing




SL600 Roadster
Twin-turbocharged 36-valve 5.5L V-
12 engine
493 hp @ 5,000 rpm
590 lb-ft @ 1,800 - 3,500 rpm
0-60 mph in 4.5 seconds


MSRP: $126,670.00*
            GEOGRAPHIC
              PRICING
Market segments separated by transportation costs

-No discrimination between competing buyers in the
same region (zone pricing)
-The firm’s strategy should not appear to be predatory

-In choosing the basing point, the firm should not
attempt to fix prices among competitors
     PRODUCT LINE
  PRICING STRATEGIES


• Price Bundling
•Premium Pricing
•Image Pricing
•Complimentary Pricing
           PRICE BUNDLING
Heterogeneity of demand for non-substitute
perishable products

Demand for films from two movie houses, Astro & Classic

                       Maximum Price ($’000) paid by
Film                   Classic             Astro
Romancing the Stone    12                  18
Places in the Heart    25                  10


What is the best pricing strategy?
     PREMIUM PRICING

EXAMPLES:

•Basic and specialty breads
•Front and rear auditorium seating
•Deluxe and basic hotel rooms.
•Premium versions of autos differ from the basic
only by features and options, whose production
costs generally are not high enough to justify the
higher mark up.
         IMAGE PRICING
•A firm brings out an identical version of its current
product with a different name and a higher price.
•The intention is to signal quality.
•Differences between brands are not real but only in
the images or positions adopted.
•e.g., alternative brands of cosmetics, soaps, wines
and dresses that differ only in brand names.
       COMPLIMENTARY
          PRICING
THREE RELATED STRATEGIES
CAPTIVE PRICING
•e.g., razors and blades, cameras and films, autos
and spare parts, and computers and software
packages.[durable goods & accessories]

•If the premium on the accessories is too high,
marginal producers of the accessories may enter the
market and drive down the prices.
       COMPLIMENTARY
          PRICING
TWO-PART PRICING

•In case of services, it is known as Two-Part
Pricing.
• Service price is broken into two parts
     • fixed fee
     • variable usage fee
• e.g., pricing by telephone & car rental companies
       COMPLIMENTARY
          PRICING
LOSS LEADERSHIP PRICING

• In retailing, it is known as Loss Leadership.
• It involves dropping the price on a well-known
  brand to generate store traffic
• The drop should compensate consumers for:
     • the transaction cost involved in making the extra trip
     • switching from their normal place of purchase
     • foregoing the cheaper basket of prices they pay at the
     alternative store
     … and
    above all



SMART PRICING
 STRATEGIES
         … through
       SMART PRICING


• Develop & sustain a competitive advantage

• Become a leader in your market

• Think long-term, and

• DOMINATE YOUR MARKETPLACE

				
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posted:3/1/2010
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