Factors Affecting Pricing Decisions

Pricing in Different Types of Markets

Pure Competition: Many buyers and sellers where each has little effect on the going market price Monopolistic Competition: Many buyers and sellers who trade over a range of prices

Oligopolistic Competition: Few sellers who are sensitive to each others pricing/marketing strategies

Pure Monopoly: Market consists of a single seller

Major Considerations in Setting Price

Cost-Plus Pricing
Adding a standard markup to the cost of the product. Popular because:
Sellers more certain about cost than demand Simplifies pricing When all sellers use, prices are similar and competition is minimized Some feel it is more fair to both buyers and sellers

Value-Based Pricing

Uses buyers perceptions of value, not the sellers cost, as the key to pricing.

Competition-Based Pricing
Going-Rate Pricing:
Firm bases its price largely on competitors prices, with less attention paid to its own costs or to demand.

Sealed-Bid Pricing:
Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

New-Product Pricing Strategies

MarketSkimming Set a high price for a new product to skim revenues layer by layer from the market. Company makes fewer, but more profitable sales. When to use:
Products quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price.

New-Product Pricing Strategies

Market Penetration Set a low initial price in order to penetrate the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share.

When to use:
Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary.

Optional- and Captive-Product Pricing

Optional-Product
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

Captive-Product
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

Pricing Strategies
By-Product Pricing: Setting a price for by-products in order to make the main products price more competitive (e.g., sawdust)

Product Bundle Pricing:

Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access).

Discounts and Allowances

Discounts

Allowances

Cash Quantity Seasonal

Trade-In Promotional

Segmented Pricing
Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types:
Customer-segment Product-form Location pricing Time pricing

Psychological Pricing
Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product.

Promotional Pricing
Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.

Approaches:
Loss Leaders Special-Event Pricing Cash Rebates Discounts Low-Interest Financing Longer Warranties Free Maintenance

Initiating Price Changes

Price Cuts
Excess Capacity Falling Market Share Dominate Market Through Lower Costs

Price Increases
Cost Inflation Overdemand: Cannot Supply All Customers Needs

Assessing and Responding to Competitor Price Changes

Pricing a New Product

A new product may simply be either another brand name added to the existing ones or an altogether new product. Pricing a new brand for which there are many substitutes available in the market is not as big a problem as pricing a new product for which close substitutes are not available. In pricing a new product without close substitutes, however, problems arise because, for lack of information, there is some degree of uncertainty. Thus, pricing policy in respect of anew product depends on whether or not close substitutes are available. Generally speaking two kinds of pricing strategies are suggested, viz., (1) Skimming price policy, (2) Penetration price policy. Skimming price policy: This method is adopted where close substitutes of a new product are not available. This pricing strategy is intended to skim the cream of the market i.e, consumers surplus, by setting a high initial price, three or four times the ex-factory price, and a subsequent lowering of prices in a series a reduction, especially in

Case of consumers durables. The initial high price would generally be accompanied by heavy sales promoting expenditure. The post-skimming strategy includes the decisions regarding the time and size of price reduction. The appropriate occasion for price reduction is the time of saturation of the top level demand or when a strong competition is apprehended. Penetration price policy: In contrast to skimming price policy, the penetration price policy involves a reverse strategy. This pricing policy is adopted generally in the case of new products for which substitutes are available. This policy requires fixing a lower initial price designed to penetrate the market as quickly as possible and is intended to maximize the profits in the long run. Therefore, they fix a lower price initially. As the product catches the market, price is gradually raised. The choice between the strategic price policies depends on 1. The rate of market growth. 2. The rate of erosion of distinctiveness. 3. The cost-structure of producers.