A Practical Guide to Successful Pricing Strategies

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A Practical Guide to Successful Pricing Strategies

author

Phillip Mayer BSc (Econ) FIC MIoEE NLPdip (NobleProg Ltd)

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Domestics ⌘

Introductions ⌘

• Who are you?
• What do you do?
• What would you like to get from today?
• What is your market situation?
• What are you trying to achieve?
• Which is your preferred strategy and why?

Pricing of goods / services ⌘

1. Exploring the variety of pricing strategies and identifying which is most relevant to you
2. Managing pricing within product life cycle
3. Developing tactics that support pricing objectives
4. How to avoid price wars?
5. Price and Profit: the dangers of discounting
6. Price adapting and manipulating. Ways to make a price seem low
7. Price flexibility: key factors and ways of calculation
8. Choosing the right pricing strategy for your products and services on the local marke

International Pricing Strategies ⌘

1. Understanding pricing in your specific markets from an international perspective
2. Differences in pricing the consumer goods on the international market.
3. Regional examples: Middle East, Eastern and Central Europe, Asia, North America.
4. Actual pricing situations in your markets. Pricing strategies relevant to you and your competitors.
5. Choosing the right strategy for your products and services across international markets

Penetration Pricing ⌘

1. Price set to ‘penetrate the market’
2. ‘Low’ price to secure high volumes
3. Typical in mass market products – chocolate bars, food stuffs, household goods, etc.
4. Suitable for products with long anticipated life cycles
5. May be useful if launching into a new market

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.
• Many are predicting a firesale in laptops as supply exceeds demand.

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.

Loss Leader ⌘

1. Goods/services deliberately sold below cost to encourage sales elsewhere
2. Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things
3. Purchases of other items more than covers ‘loss’ on item sold
4. e.g. ‘Free’ mobile phone when taking on contract package

Psychological Pricing ⌘

1. Used to play on consumer perceptions
2. Classic example - £9.99 instead of £10.99!
3. Links with value pricing – high value goods priced according to what consumers THINK should be the price

Going Rate (Price Leadership) ⌘

1. 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
2. May follow pricing leads of rivals especially where those rivals have a clear dominance of market share
3. Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets

Tender Pricing ⌘

1. Many contracts awarded on a tender basis
2. Firm (or firms) submit their price for carrying out the work
3. Purchaser then chooses which represents best value
4. Mostly done in secret

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

Destroyer/Predatory Pricing ⌘

1. Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants
2. Anti-competitive and illegal if it can be proved

Absorption/Full Cost Pricing ⌘

1. Full Cost Pricing – attempting to set price to cover both fixed and variable costs
2. Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production

Marginal Cost Pricing ⌘

1. Marginal cost – the cost of producing ONE extra or ONE fewer item of production
2. MC pricing – allows flexibility
3. Particularly relevant in transport where fixed costs may be relatively high
4. Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost Pricing - Example ⌘

• Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*
• Number of seats = 160, average price = £93.75
• MC of each passenger = 2000/160 = £12.50
• If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all!

*All figures are estimates only

Contribution Pricing ⌘

1. Contribution = Selling Price – Variable (direct costs)
2. Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs
3. Similar in principle to marginal cost pricing
4. Break-even analysis might be useful in such circumstances

Target Pricing ⌘

1. Setting price to ‘target’ a specified profit level
2. Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
3. Mark-up = Profit/Cost x 100

Cost-Plus Pricing

1. Calculation of the average cost (AC) plus a mark up
2. AC = Total Cost/Output

Summary ⌘

• What did you get out of today?
• What is your market situation?
• What are you trying to achieve?
• Which is your preferred strategy and why?
• Next steps ...

Useful Links and Sources ⌘

1. www.bized.co.uk
2. Price Wars - Wikipedia
3. Pricing Strategies - Wikipedia
4. Product lifecycle management (PLM) - Wikipedia
5. Revenue Management - Wikipedia
6. Costing and Pricing - Cobweb

Any questions? ⌘

Questions & Answers