Pricing Strategies

Session 1
(Introduction to Strategic Pricing)
Course Coverage
1) Introduction to Strategic Pricing
2) Economic Value Creation
3) Price Response Estimation
4) Price Structure
5) Value Communication
6) Pricing Policy & Behavioral Pricing
7) Channel Pricing
8) Pricing new Products, Life Cycle Pricing
9) Managing Competitive Dynamics
10) Final presentations of the project
Evaluation
Case Analysis &
Assignment (10) QUIZ (10) Class End Term (20)
Participation (10)

Total
50
Things I am carrying/ Wearing
Today – and Things I consumed
and will consume today
Class Activity: Demonstration of Price
Do we notice price?

How long do we remember the price?

How do we negotiate price?

Points to ponder …
• Start with a low price to win the first order- increase the
price on repeats
• Price is a policy- costs are a fact
• There is a set of rules, which provides the best pricing
strategy
• Only large companies can control prices
• Manufacturers control the price consumer customers
pay
Price is the only activity marketers
engage in-
that produces revenue for the firm.
Managing price properly means thoroughly
understanding costs as well as customers
Different Pricing Strategies
 market
skimming

contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
Penetration Pricing
market
skimming

contribution
value pricing
pricing

penetration loss leader

pricing Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
Penetration Pricing
• Prices 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
Market Skimming
market
skimming
contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
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, innovations and First to Market
products etc.
Value Pricing
market
skimming
value
contribution
pricing pricing –
based on
perceived value

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
Value Pricing
• Price set in accordance with
customer perceptions about the
value of the product/service
• Examples include status
products/exclusive products /art
pieces

Companies may be able to set prices according to

perceived value.

Copyright: iStock.com
Loss Leader
market
skimming

contribution
value pricing
pricing

loss
penetration
pricing
leader –
Pricing sold at cost or
below to attract
Strategies buyers

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
Loss Leader
• Goods/services deliberately sold below cost to encourage sales
elsewhere
• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at R30
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
Psychological Pricing
market
skimming

contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing
pricing eg R19.99

predatory competitor
pricing pricing
Psychological Pricing
• Used to play on consumer perceptions
• Classic example - R9.99 instead of R10.99!
• Links with value pricing – high value goods priced according to what
consumers THINK should be the price
Competitor Pricing(Going Rate)
market
skimming

contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing
pricing
Competitor Pricing (Going Rate)

• In case of a 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
• In this strategy, we are compelled to 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
Predatory Pricing
market
skimming

contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing
pricing
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
• Flooding the market with cheap (often imported)
goods
• Anti-competitive and illegal if it can be proved
Contribution Pricing
market
skimming

contribution value pricing

pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing pricing

predatory competitor
pricing pricing
Contribution Pricing
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a ‘contribution’ to
the fixed costs/overheads
• Similar in principle to cost-plus pricing
• Every product sold gives back a contribution towards covering the
running costs of the business
• Break-even analysis might be useful in such circumstances
Cost-Plus Pricing
market
skimming

contribution
value pricing
pricing

penetration
loss leader
pricing
Pricing
Strategies

cost-plus psychological
pricing
pricing

predatory competitor
pricing pricing
Cost-Plus Pricing
• The cost of the product + mark-up = selling price.
• You can do this by using a fixed percentage (150%, 200%) or a fixed
markup (R10, R50, R500)
• The advantage of this method is that you are able to calculate your
expected profit level very easily.
• The disadvantage is that it may be less, or more, than customers are
willing to pay and, most importantly, some hidden costs may be
forgotten and so the actual profit is less than you think (or even a
loss)
Magic of Price
Original Price New Price
(increase 5%)
Sales Revenue $10,000,000 $10,500,000
(1 million units @$10)
Direct Costs(Labor, $6,000,000 $6,000,000
materials, etc) (@$6 per
unit)
Administrative Costs $3,000,000 $3,000,000
(Overhead)
Profit $1,000,000 $1,500,000

A small movement in price can result in very large benefits to the firm

A five percent increase in price results is a 50% increase in profit from $1 million
to $1.5 million
Magic of Price
Original Price New Price
(increase 5%)
Sales Revenue $10,000,000 $10,500,000
(1 million units @$10)
Direct Costs(Labor, $6,000,000 $6,000,000
materials, etc) (@$6 per
unit)
Administrative Costs $3,000,000 $3,000,000
(Overhead)
Profit $1,000,000 $1,500,000

A small movement in price can result in very large benefits to the firm

A five percent increase in price results is a 50% increase in profit from $1 million
to $1.5 million
What are the flaws in the example?
• It boldly assumes that the firm will sell one million
units at the higher price.
• Basic economics teaches us that demand curve slope
downwards.
• In b2b however the demand curve will be more like a
step wise curve
• This indicates that there are ranges of prices at which
the demand will not change.
Influence of Elasticity
Price Elasticity:
• Price elasticity of demand (PED) is defined as the
measure of responsiveness in the quantity demanded
for a commodity as a result of change in price of the
same commodity.
• e.g. A 4% rise in price would lead to sales falling by
something more than 4%
• Revenue would fall
• e.g. A 9% fall in price would lead to a rise in sales of
something more than 9%
• Revenue would rise
Pricing

Price
Price

Quantity Quantity

Standard Demand Curve Stepped Demand Curve

What Value Means to Business Customers
Core
Benefits
Add on
Customer
Value Price

Acquisition
Sacrifices
costs
Operation
costs
Impacting Profits
𝜋 = 𝑄. 𝑃 − 𝑉 − 𝐹
Last Quarter
Where
∏=profit Price P $25.00
Q= quantity sold Volume Q 80,000
P= price Variable Cost V $10.00
Fixed Cost F $1,000,000.00
V=variable cost
Profitability ∏ $200,000.00
F= Fixed cost

Class work : Calculate the impact of 1% improvement for next quarter for each
of the parameters separately
Profit Levers
Last Quarter 1 % improvement for next quarter
In variable In fixed cost In Volume In Price
cost
Price P $25.00 $25.25
Volume Q 80,000 80800
Variable Cost V $10.00 $9.90
Fixed Cost F $1,000,000.00 $990,000.00
Profitability ∏ $200,000.00 $208,000.00 $210,000.00 $212,000.00 $220,000.00
Change in $8,000.00 $10,000.00 $12,000.00 $20,000.00
Profitability
% of Profit 4% 5% 6% 10%
Improvement
Summarize the inferences that
you draw from the calculations:
In the context of pricing
Managerial Insight
 If the Marketing team is clever
enough to determine the range
where customers are not price
sensitive to a difference between
$10 and $10.50, he or she would
realize the increased revenue from
changing the price
Why customers agree on “premium” for a
product?
 What is the Right Price?
Right Price is not a single number, but a range of
potential points that benefits both the
customers and the firm
The ART of Pricing
• Refers to the ability to influence consumer price acceptance, adapt
pricing structures to shift the competitive playing field, and align
pricing strategy to the competitive strategy, marketing strategy and
industrial policy.
“Pricing is almost never about
the number. Its about the
model”
Pricing practicum
• Choose a real problem (Your group will be assigned one problem)
• Compare the existing pricing for that service/product with its
competitors
• Identify the gaps
• Suggest a new price for the service/product
• Suggestion should be backed with market research, statistics and
analysis
Feedback and Questions to
Mridulasm@gmail.com
Mridula.Mishra@espial-edge.com