Pricing Strategies

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					    Pricing Strategies for Marketing

Pricing Strategies
For Marketing

Table of Contents
Executive Summary ........................................................................................................................ 3
Learn How to Improve Performance .............................................................................................. 4
   The Breakeven Analysis .............................................................................................................. 5
What Pricing Should Do ................................................................................................................. 6
Pricing Strategies ............................................................................................................................ 7
Questions Associated with Pricing ............................................................................................... 10
The 9 Laws of Pricing Sensitivity................................................................................................. 13
Pricing Definitions ........................................................................................................................ 15
   Common Pricing Mistakes ........................................................................................................ 18
   Pricing Tactics ........................................................................................................................... 18

© Copyright 2011 Docstoc Inc.                                                                                                   2
Executive Summary

         ricing is one of the most important ingredients of the marketing blend. It is the only
         ingredient that produces a turnover for the company. Many companies do not view their
         pricing strategies as a part of their overall marketing strategy. Because pricing strategies
have a profound impact on a company‟s overall profit margin, they should be given the same
consideration as the promotion and advertising strategies. A price that is higher or lower can
dramatically alter gross margins and sales volumes, which indirectly affects other expenses like
reducing storage costs, or establishing opportunities for volume discounts with suppliers. The
four “P‟s” of marketing are:

             1. Pricing                                2. Product
             3. Promotion                              4. Place

       Setting prices is very hard. There are costs associated with producing, designing and
promoting a product line. The product‟s pricing has to incorporate the expenditures for all of
those components into its overall price. It needs to support the relationship between supply and
demand. If a product is priced too high or too low, it could wind up being a loss of sales for the

       The company that prices by instinct is more likely to fall behind their competitors
irregardless of how good their products and services are. This is particularly true for the agencies
that are viewed as strong performers. They do extremely well at conceiving, building and
distributing products; but because they haven't gotten their pricing structured properly, they are
not adequately compensated in their markets, either in profits or in share price performance.

       The companies that master their effective pricing efforts do so because they quickly
adopt modeling tools that are data-driven, and they use those tools to monitor, assess and modify
their prices. They examine the impact of the many variables so as to optimize the product‟s price.
These companies are using cutting edge technology-enabled strategies to manage and optimize
their pricing structures, which enable them to adjust and fine-tune their prices much faster.

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       The companies that take a scientific approach to defining their pricing structures usually
out perform the agencies that don‟t. The top performing agencies will include advanced pricing
strategies, and the supportive technologies in their pricing strategy.

Learn How to Improve Performance
       By putting together a pricing strategy that is powerful and structured. The main question
that businesses will have about their pricing strategy is, "How am I supposed to know what price
I should charge?" Prices are set by:

             Calculating your costs
             Estimating the benefits to consumers
             Comparing your products, services, and prices to others that are similar.

       Establish pricing by looking at how much it costs to produce the product or service and
then adding a fair price for the benefits that the customer will enjoy. Taking a look at what
others are charging for similar products or services will help to guide you when you are deciding
what a "fair" price would be for these benefits.

       Developing a pricing strategy that is adequate entails finding out just how much to charge
for your product or service. The pricing must be competitive enough to allow for a reasonable
profit. The important word here is “reasonable”, keeping in mind that there is a limit to how
much consumers are willing to pay.

       There are other factors that will establish your pricing strategy and that will make it the
best possible. Think about the five forces that influence the other business decisions, and realize
that pricing needs to take into account these same factors:

           1. Company objectives
           2. Competition
           3. Fixed and variable costs
           4. Proposed positioning strategies
           5. Target group and willingness to pay

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       If a premium item is priced too low, customers will not believe the quality is good
enough. On the other hand, if the selling price is too high customers will purchase the
competitors' goods that are priced lower.

The Breakeven Analysis
        The pricing strategy that you outlined in your marketing plan is a very useful way of
collecting the information that you will need, and should answer the following questions:

             What is the cost of your product or service? Be sure to include all of the fixed and
              variable costs when calculating these figures, for example:
                  ─ the cost of labor
                  ─ the cost of materials
                  ─ freight costs
                  ─ administrative costs
                  ─ costs associated with marketing the product
             How does the pricing of your product or service compare to the market price of
              similar products or services? Explain how the pricing of your product or service is
                  ─ If the price you plan to charge is lower, why are you able to do this?
                  ─ If it were higher, why would your customer be willing to pay more? This
                    is where the "strategy" part of the pricing strategy comes into play; will
                    your business be more competitive if you charge more, less, or the same as
                    your competitors and why?
             What return on your investment (ROI) are you expecting to have using this pricing
              strategy, and within what time frame?

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What Pricing Should Do
        Pricing structures that have been well devised should accomplish three things:

            1. Accomplish the company‟s financial aspiration which is to earn a profit.
            2. Match the realities of the market place by ensuring that the consumers will pay the
            3. Support the product‟s positioning and be consistent with the other variables in the
               marketing composition
                    a. Pricing is influenced by the kind of distribution channel utilized, the type
                       of promotions used, and the quality of the product.
                            i. Pricing will be high if manufacturing costs are and distribution is
                               exclusive, and if the product is supported by in depth advertising
                               and marketing campaigns.
                           ii. A lower price can be an acceptable alternative for product quality,
                               effective promotions, or an energetic selling effort by distributors.

        An efficient price is one that is closely aligned with what consumers are willing to pay. It
is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would
be the one that can balance between the pricing below which the company winds up with losses
(the price floor) and the pricing beyond which the company has a no demand situation (the price

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Pricing Strategies
       A company can adopt a number of pricing strategies all of which are based predominately
on the company‟s overall objectives. A company that makes use of these pricing strategies will
see their bottom line rise!

Bundling and Quantity Discounts
       Another method of rewarding customers for making larger purchases is through quantity
discounts, or bundling. Examples:

              Make the per-unit price lower when a customer purchases a quantity of five
               instead of just one.

              Charge less when a customer purchases several related items at the same time.

              Bundle overstocks with popular items to avoid having to have a closeout.

              Bundle established items with a new product to help build awareness.

       This technique is useful when you have a surplus of inventory. Offer the inventory at a
huge discount to get around having to sore it or even throw it away. The objective is to minimize
your losses instead of making a profit.

Competitive Pricing
       Using the competitor‟s retail or wholesale pricing as a benchmark, establish a pricing
structure that is comparable to theirs. Depending on your positioning strategy, your price may be
slightly below, above or exactly the same as your competitors. You must collect your
competitors pricing information using methods that are legally sanctioned.

Cost plus Markup
       The opposite of competitive pricing, it requires you to look at your own cost structure
instead of looking at the market. You decide the profit that you want to make, add that to your
costs, and then decide on a selling price. This method will assure a certain per-unit margin;
however, it may leave you with prices that are out-of-sync with customer expectations, which
can hurt your profit overall.

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Loss Leader
       This is a viable short-term promotional technique. The practice involves selling items at
or below cost to attract customers, who will also purchase high-profit items. This concept is a
useful if you have customers who typically purchase several items at one time.

Membership or Trade Discounting
       This is one manner of segmenting customers in that you attract business from profitable
customer segments by giving them special prices. It could be by means of:

              Charging less for certain items.
              Offering a blanket discount.
              Offering free product rewards.
Optional Pricing
       The company sells optional extras along with the product to maximize its turnover. This
strategy is most commonly used in the auto industry.

Penetration Pricing
       The company establishes a low price to increase sales and their market share.

Premium Pricing
       The price set is high as an indication of the product‟s exclusiveness. Examples would be:

              Bentley etc.
              Chanel
              First class transport services
              Gucci
              Harrods
              Mercedes
              Rolex

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Product Line Pricing
       This concept began back with the five and dime stores. Everything in those stores would
cost either 5 or ten cents. The underlying rationale is that consumers viewed those amounts as
suitable pricing points for a whole range of products. The advantage was the ease of
administration. The disadvantage was that the pricing was inflexible during inflationary times;
or when prices were unstable.

       Another way to look at product line pricing is when different products are priced within
the same product range at different price points. For example, a DVR manufacturer offers
different DVR recorders with different features at different prices. The greater the features and
benefits derived, the more the consumer is willing to pay. This form of price discrimination helps
companies to maximize their turnover and profits.

Promotional Pricing
       This is where the pricing plays a major role in the marketing composition.

Price Skimming
       At first, the company establishes a high price and then slowly lowers it to make the
product available to a wider market. The objective is to skim market profits layer by layer.

Psychological Pricing
       The seller reflects on the psychology of price and the positioning of price within the
market place. Instead of charging $1000 for an item, their price will be $999.

       Versioning is commonly used with services or technical products. Vendors sell the same
general product in two or three configurations. A very basic version may be offered on a „trial‟
basis. For example, during the trial period, the item may be offered for free, or for a nominal
cost. Upgrades or additional services are made available to the consumer at a higher price.

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Questions Associated with Pricing
       The following are the typical kinds of questions that
need to be asked when developing pricing structures:

             How much should be charged for a product
              or service? This is the general starting point
              for discussing pricing; however, a better
              question to ask is “How much to consumers
              value the product, services or other
              intangibles that the vendor offers”.
             What are the pricing objectives?
             Should profit maximizing pricing be used?
             How should the pricing be set?
                  ─ Cost plus pricing
                  ─ Value based pricing
                  ─ Rate of return pricing
                  ─ Competitor indexing
             Should there be single pricing or multiple
             Should prices be modified for certain
              geographical areas (zone pricing)?
             Should there be discounts for quantity
             What are the competitors charging?
             Should one of the following strategies be
                  ─ Price skimming
                  ─ Penetration pricing
             What image should the pricing convey?
             Should psychological pricing be utilized?
             How important are consumer issues
              relating to pricing sensitivities?
                  ─ Sticker shock
                  ─ Elasticity
             Should real time pricing be used?

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            Is price discrimination or yield
             management suitable?
            Are there any legal restrictions on:
                 ─ Retail price maintenance
                 ─ Price collusion
                 ─ Price discrimination
            Have price points already been established
             for the product category?
            Keeping in mind that the more
             competitive the industry is, the less
             flexibility there will be, how flexible can
             the pricing be?
                 ─ The price floor is determined by
                   certain production factors like:
                            Costs (many times only
                             variable costs are considered)
                            Economies of scale
                            Marginal costs
                            Degree of operating leverage
                 ─ The price ceiling is determined by:
                            Price elasticity
                            Price points
            Are there any transfer pricing
            What is the likelihood of getting involved
             in pricing wars?
            How visible should the price be?
                 ─ Neutral (not important)
                 ─ Highly visible (to aid in promoting a
                   low priced economical product or to
                   reinforce the prestigious image of a
                   quality product)
                 ─ Hidden (to allow vendors to generate
                   an interest in the product without
                   pricing considerations)
            Are there any joint product pricing factors to consider?

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            What are the non-price costs of purchasing the
             products, for example:
                 ─ Travel time to the store
                 ─ Store wait time
                 ─ Disagreeable elements associated with the
                   purchase of the product for example:
                           Going to the Dentist equates with some
                            kind of pain
                           Being near a fish market equates with
            What kind of payment processes will be utilized?
                 ─ Cash
                 ─ Check
                 ─ Credit card
                 ─ Price bartering

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The 9 Laws of Pricing Sensitivity 1
           In their book, "The Strategy and Tactics of Pricing", Thomas Nagle and Reed Holden
outline 9 laws or factors that influence a buyer's price sensitivity with respect to a given

Law Number One: Reference Price Effect
Buyer‟s price sensitivity for a given product increases the higher the product‟s price relative to
perceived alternatives. Perceived alternatives
can vary by buyer segment, by occasion, and
other factors.

Law Number Two:                           Difficult
comparison Effect
Buyers are less sensitive to the price of a
known / more reputable product when they
have difficulty comparing it to potential
Law Number Three: Switching
Costs Effect
The higher the product-specific investment a
buyer must make to switch suppliers, the less
price sensitive that buyer is when choosing
between alternatives.

Law Number                    Four:       Price        -
Quality Effect
Buyers are less sensitive to price the more
that higher prices signal higher quality.
Products for which this effect is particularly
relevant include: image products, exclusive
products, and products with minimal cues for

Law Number Five: Expenditure Effect
Buyers are more price sensitive when the expense accounts for a large percentage of buyers‟
available income or budget.

    Information source:

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Law Number Six: End Benefit Effect
The effect refers to the relationship a given purchase has to a larger overall benefit, and is
divided into two parts:
   Derived demand: The more sensitive
    buyers are to the price of the end benefit,
    the more sensitive they will be to the
    prices of those products that contribute to
    that benefit.
   Price proportion cost: The price
    proportion cost refers to the percent of the
    total cost of the end benefit accounted for
    by a given component that helps to
    produce the end benefit (e.g., think CPU
    and PCs). The smaller the given
    components share of the total cost of the
    end benefit, the less sensitive buyers will
    be to the component's price.

Law Number Seven: Shared -
Cost Effect
The smaller the portion of the purchase price
buyers must pay for themselves, the sensitive
to pricing they will be.

Law Number Eight: Fairness
Buyers are more receptive to the price of a product when the price is outside the range they view
as “fair” or “reasonable” given the purchase context.

Law Number Nine: The Framing Effect
Buyers are more sensitive to pricing when they perceive the price as a loss rather than a forgone
gain, and they have greater price sensitivity when the price is paid separately rather than as part
of a bundle.

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Pricing Definitions
       The method of deciding what a company will receive in
exchange for its products. Pricing factors are:
               Manufacturing cost
               Market place competition
               Market condition
               Quality of product

Effective Price
       The price the company receives after accounting for:
               Discounts
               Promotions
               Other incentives

The Price/Quality Relationship
       The perception by most consumers who believe that something
with a high price tag is the sign of high quality. The belief in this
relationship is most important with complex products that are hard to
test, and with experiential products that cannot be tested until used
(like most services). The greater the uncertainty involving a product,
the more consumers rely on the price/quality hypothesis; and the more
of a premium they are prepared to pay. The classic example of this is
the pricing of the snack cake Twinkies, which were perceived as low
quality when the price was lowered. Note, however, that excessive
reliance on the price/quantity relationship by consumers may lead to
the raising of prices on all products and services, even those of low
quality, which in turn causes the price/quality relationship to no
longer apply.

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Premium Pricing
           Also referred to as prestige pricing, it is the strategy of
consistently pricing at, or near, the high end of the possible price range
to help attract status-conscious consumers. A few examples of
companies that utilize premium pricing in the marketplace include Rolex
and Bentley. Consumers will buy a premium priced product because:

       1. They believe the high price is an indication of good quality;

       2. They believe it to be a sign of self worth - "They are worth it" - It
          authenticates their success and status - It is a signal to others that
          they are a member of an exclusive group;

       3. They require flawless performance in this application - The cost
          of product malfunction is too high to buy anything but the best as
          in the example of purchasing a heart pacemaker.

Goldilocks Pricing2
           This term commonly describes the practice of giving a “gold
plated” version of a product at a premium price to make the next-lower
priced option appear to be more reasonably priced as in the example of
encouraging consumers to see business-class airline seats as a good
value for their money by offering an even higher priced first-class

           Another example would be a third-class railway carriage in
Victorian England are said to have been built without windows, not so
much to punish third-class customers (for which there was not economic
incentive) as to motivate those who could afford it to purchase second-
class seats to pay for them instead of taking the cheaper option. This is
also known as a potential result of price discrimination.

           The name comes from the story of Goldilocks. Goldilocks chose
neither the hottest nor the coldest porridge; she chose the porridge that

    Information source:

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was "just right". More technically, this kind of pricing exploits the general cognitive bias of
aversion to extremes. This practice is known academically as "framing". By providing three
options (i.e. small, medium, and large; first, business, and coach classes) you can manipulate the
consumer into choosing the middle choice and thus, the middle choice should
yield the most profit to the seller, since it is the most chosen option.

Demand Based Pricing
       Any pricing structure that uses consumer demand based on perceived
value as the central element. These include:

                Bundle pricing
                Geo
                Penetration pricing
                Premium pricing
                Price discrimination
                Price lining
                Price points,
                Price skimming
                Psychological pricing
                Value based pricing
                Yield management

       Pricing factors are:

                manufacturing cost
                market place
                competition
                market condition
                quality of product
Multidimensional Pricing
       When a product or service is priced using multiple numbers. In this

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practice, price no longer is a single monetary amount such as in the sticker price of a car. Instead
it consists of various dimensions:

               down payment

               monthly payments

               number of payments

       Research shows that this method can significantly influence a consumers' ability to
understand and process pricing information.

Common Pricing Mistakes
       Many companies make regular pricing mistakes. Bernstein's article "Supplier Pricing
Mistakes" outlines several which include:

               Cost-Up pricing
               Inadequate systems for tracking competitor selling prices and market share
               Paying sales reps on dollar volume vs. addition of profitability measures
               Price increases poorly executed
               Weak controls on discounting
               Worldwide price inconsistencies

Pricing Tactics
       Micromarketing is the practice of tailoring small, specialized products and brands also
known as micro brands. Their promotions are designed to suite the needs and wants of much
smaller segments within a market. It is a kind of market customization that involves pricing
customer or product combinations at the store or consumer level.

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Description: A document explaining pricing strategies and the ways an organization or small business can go about doing it. This report includes: learn how to improve performance through Breakeven analysis, what pricing should do, the questions associated with pricing, the 9 laws of pricing strategies, and many more
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