pricing strategies by abhinav

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    Pricing Strategies

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    Rate of return pricing

    Determination of return on capital employed

    Suitable instead of adding a percentage on

    cost of profit

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    Pareto analysis

    It is based on 80 :20 rule observed by vilfredo pareto,an italian economist

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    Penetration Pricing

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    Usefulness of pareto analysis

    Priortise problems,goals and objectives

    Identify root cause

    Select & define key quality impovement program

    Select key customer relation & service programSelect key employee relation improvement program

    select & define key performance improvementprogram

    Maximise research & product devolopment time

    Verify operating procedure & manufacturing processProduct or service sales & distribution

    Allocate physical,financial & human resourses

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    Application of pareto analysis

    Pricing of a product

    Customer profitability

    Stock control Application in activity based costing

    Quality control

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    Pricing under different market

    structure

    Pure competition

    Monopoly

    oligopoly Monopolistic competition

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    Penetration Pricing Price 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 lifecycles

    May be useful if launching into a new market

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    Market Skimming

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    Market Skimming High price, Low volumes

    Skim the profit from the market

    Suitable for products that have

    short life cycles or which willface competition at some pointin the future (e.g. after a patentruns out)

    Examples include: Playstation,jewellery, digital technology,

    new DVDs, etc.

    Many are predicting a firesale in laptops

    as supply exceeds demand.

    Copyright: iStock.com

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    Value Pricing

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    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 toperceived value.

    Copyright: iStock.com

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    Loss Leader

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    Loss Leader Goods/services deliberately sold below cost to

    encourage sales elsewhere

    Typical in supermarkets, e.g. at Christmas, sellingbottles of gin at 3 in the hope that people will beattracted 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

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    Psychological Pricing

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    Psychological Pricing Used to play on consumer perceptions

    Classic example - 9.99 instead of 10.99!

    Links with value pricing high value goodspriced according to what consumers THINKshould be the price

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    Going Rate (Price Leadership)

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    GoingR

    ate (Price Leadership) In case of price leader, rivals have difficulty in competing

    on price too high and they lose market share, too lowand the price leader would match price and force smaller

    rival out of market May follow pricing leads of rivals especially where those

    rivals have a clear dominance of market share

    Where competition is limited, going rate pricing may beapplicable banks, petrol, supermarkets, electrical goods

    find very similar prices in all outlets

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    Tender Pricing

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    Tender Pricing Many contracts awarded on a tender basis

    Firm (or firms) submit their price for carrying out thework

    Purchaser then chooses which represents best value Mostly done in secret

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    Price Discrimination

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    Price Discrimination Charging a different price

    for the same good/servicein different markets

    Requires each market tobe impenetrable

    Requires different priceelasticity of demand ineach market

    Prices for rail travel differ for the same journey at

    different times of the day

    Copyright: iStock.com

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    Destroyer Pricing/Predatory Pricing

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    Price discrimination basis

    On the basis of customer

    On the basis of product version

    On the basis of place

    On the basis of time

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    Destroyer/Predatory Pricing Deliberate price cutting or offer of free

    gifts/products to force rivals (normally smaller

    and weaker) out of business or prevent newentrants

    Anti-competitive and illegal if it can be proved

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    Competitive pricing

    Going rate pricing

    Sealed bid pricing

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    Absorption/Full Cost Pricing

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    Absorption/Full Cost Pricing Full Cost Pricing attempting to set price to

    cover both fixed and variable costs

    Absorption Cost Pricing Price set to

    absorb some of the fixed costs of

    production

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    Marginal Cost Pricing

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    Marginal Cost Pricing Marginal cost the cost of producing ONE extra or ONE

    fewer item of production

    MC pricing allows flexibility Particularly relevant in transport where fixed costs may be

    relatively high

    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

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    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

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    Contribution Pricing

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    Contribution Pricing Contribution = Selling Price Variable (direct costs)

    Prices set to ensure coverage of variable costs and

    a contribution to the fixed costs Similar in principle to marginal cost pricing

    Break-even analysis might be useful in such

    circumstances

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    Pricing Strategies

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    Target Pricing

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    Target Pricing Setting price to target a specified profit

    level

    Estimates of the cost and potential revenue

    at different prices, and thus the break-even

    have to be made, to determine the mark-up

    Mark-up = Profit/Cost x 100

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    Cost-Plus Pricing

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    Cost-Plus Pricing Calculation of the average cost (AC) plus a

    mark up

    AC = Total Cost/Output

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    Influence of Elasticity

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    Influence of Elasticity Any pricing decision must be mindful of the

    impact of price elasticity

    The degree of price elasticity impacts on the levelof sales and hence revenue

    Elasticity focuses on proportionate (percentage)

    changes

    PED = % Change in Quantity demanded/%

    Change in Price

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    Influence of Elasticity Price Inelastic:

    % change in Q < % change in P

    e.g. a 5% increase in price would be met by a fallin sales of something less than 5%

    Revenue would rise

    A 7% reduction in price would lead to a rise in

    sales of something less than 7% Revenue would fall

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    Influence of Elasticity Price Elastic:

    % change in quantity demanded > % change inprice

    e.g. A 4% rise in price would lead to sales fallingby something more than 4%

    Revenue would fall

    A 9% fall in price would lead to a rise in sales ofsomething more than 9%

    Revenue would rise

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    Incremental pricing