Pricing Strategies & Programs

Profits Before and After a Price

Increase
Consumer Psychology and Pricing

Reference Prices

Price-quality inferences

Price Cues
 Price Cues

• “Left to right” pricing (Rs.299 vs. Rs.300)

• Odd number discount perceptions
• “Sale” written next to price
 The Framing Effect
• Station A : $1.60 per gallon ,
$0.10 discount for cash

• Station B : $ 1.50 per gallon,

$0.10 surcharge for credit card

Station A is preferred as people place more

weight on losses rather than on equal size gains.
 When to Use Price Cues

• Customers purchase
item infrequently
• Customers are new
• Product designs vary
over time
• Prices vary
seasonally
• Quality or sizes vary
across stores
 Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Step 1: Selecting the Pricing Objective

• Survival
• Maximum current profit
• Maximum market
share
• Maximum market
skimming
• Product-quality
leadership
Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand
Inelastic and Elastic Demand
 Step 3: Estimating Costs

• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at different levels
of production
Cost/Unit as a Function of
Accumulated Production
 Break-Even Chart

Break even volume = Fixed Cost

Contribution per unit

Contribution = Selling Price – Variable Cost

 Step 5: Selecting a Pricing Strategy

Source: www.bized.ac.uk
 Penetration Pricing

Source: www.bized.ac.uk
 Market Skimming

Source: www.bized.ac.uk
 Value Pricing

Source: www.bized.ac.uk
 Loss Leader

Source: www.bized.ac.uk
 Psychological Pricing

Source: www.bized.ac.uk
 Going Rate (Price Leadership)

Source: www.bized.ac.uk
 Tender Pricing

Source: www.bized.ac.uk
 Price Discrimination

Source: www.bized.ac.uk
 Destroyer Pricing/Predatory Pricing

Source: www.bized.ac.uk
 Target Pricing

Source: www.bized.ac.uk
 Cost-Plus Pricing

Source: www.bized.ac.uk
 Influence of Elasticity

Source: www.bized.ac.uk
Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions
Other forms of Pricing
• Differentiated Pricing
– Customer-segment
pricing
– Channel/ Location
pricing
– Time pricing
• Yield Pricing
• Flat Rate/Usage Based
Pricing
• Two Part Pricing
• Bundling
 Recap
• Dominoes introduces a pizza range priced at
Rs.35
• Pepsi and coke reduce price to Rs.8 per bottle
• iPhone’s pricing based on tie-up with AT&T in the
US.
• Pricing strategy of Nokia N series.
• Purvankara Apartment at Rs.2999 psft.
• HAL’s pricing for developing Light Combat
Aircrafts for export to Srilanka.
• BCCI’s pricing strategy for IPL franchise
 Step 6: Selecting the Final Price

• Impact of other
marketing activities
• Company pricing
policies
• Gain-and-risk sharing
pricing
• Impact of price on other
parties
 Price-Adaptation Strategies
Discounts/ Allowances
• Cash discount
• Quantity discount
• Functional discount
• Seasonal discount
• Allowance
Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and
service contracts
• Psychological
discounting
Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts