Pricing Strategies

Dr. Suresh Malodia

Outline

Introduction Pricing strategies and process Reactions to price changes Price wars

Introduction

We need to set price when we have a

Need to decide what position you want

new product, or when we enter a new market with an existing product How?
your product to be in (see quality-price relationshipnext slide)

Price-Quality Strategies

Philip Kotler identified 9 price-quality

strategies
High Price Low Price

High Quality Premium

Over Charging

High Value
Mid Value

Super Value
Good Value

Low Quality

False Rip-off Economy Economy

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Pricing Process

1. Set Pricing Objectives (see next slide) 2. Analyze demand 3. Draw conclusions from competitive
intelligence 4. Select pricing strategy appropriate to the political, social, legal and economical environment 5. Determine specific prices
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Possible Pricing Objectives

Profit objectives e.g.

Volume objectives e.g.

Targeted profit return

Other objectives e.g.

Dollar or unit sales growth Market share growth Match competitors price Non-price competition
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Demand Analysis Measure the impact of price change on

total revenue Predicts unit sales volume and total revenue for various price levels Different customers have different price sensitivities and needs

Impact of Cost on Pricing Strategy

Fixed and variable costs

rate-of-return pricing Variable-cost pricing

Full-Cost Pricing Markup pricing, break-even pricing and

3 types of relationships

Ratio of fixed costs to variable costs Economies of scales Cost structure

Discussion: Impact of Ethics on Pricing

How should you price if your product is

a life-saving drug? What are the ethical considerations?

Customers have no choice Need to pay for the research When cheaper options doesnt work Competition decides

Information Needed for Price Change

Customers ability & willingness to buy;

customer lifestyle; benefits sought; characteristics of the product e.g.

When the kopi tiams, local coffee shops in

Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grassroot reaction was stormy When Starbucks Coffee and Spinellis raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit 10

Information Needed for Price Change (contd)

Need to know everything about the

competitors

How would competitors react to our price

change? (see following slide) In obtaining competitors information, remember the value of the information

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New-Product Pricing Strategies 1. Skimming pricing

2. Penetration pricing

Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products in the ASPAC region Charging a low price when entering the market to capture market share Used when competitors are closing in with 12 similar or better products

New-Product Pricing Strategies (contd)

3. Intermediate pricing

Pricing somewhere in between the skimming strategy and the penetration strategy

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Pricing Strategies for Established Products

Three strategic alternatives: Maintain the price if you are the leader e.g.

In 1999, Shell in Singapore maintained its price when

other petrol companies engaged in a price war until towards the end of the engagement

Reduce the price e.g. Increase the price

SIA regularly reduce its airfare in anticipation of the

developing market situations

during inflation, or if demand is expected to increase

or if you wish to harvest e.g. in Indonesia
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Price-Flexibility Strategy

One-price policysetting one fixed

Geographic Location, Time of delivery, or The complexity of the product

price for all markets Flexible-price policysetting different prices in different markets based on:

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How much flexibility in price?

Depends on the Demand-Cost gap and

the influence of competition, social, legal and ethical considerations Example: Life-saving drugs

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Product-Line Pricing

When pricing products in different

lines, must take cross-elasticities of demand across the set of products into consideration The idea is to maximize the profits of the entire organization rather than that of a single product or a single line
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Leasing Strategy

Leasing is more common for

industrial goods e.g.

Singapore Airlines sold many of their

There is a growing trend toward

leasing consumer goods as well

aircraft and lease them back for their operations

e.g. Leasing of office equipment

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Reactions to Price Change

Customers are more sensitive to

price changes if the products cost a lot and/or are bought frequently Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitors likely reaction
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When a Market Leader is Being Attacked on Price

Options available:

Maintain price Raise perceived quality Match competitors price Increase price and improve quality
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