pricing strategies by abhinav
TRANSCRIPT
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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