1. Definition of Price
- The sum of all values customers give up to gain a product/service’s benefits.
- The only revenue-generating element in the marketing mix; others represent costs.
2. New-Product Pricing Strategies
Market Skimming Pricing
- Description: Set a high initial price to “skim” revenue layers from the market.
- Conditions:
- Product quality/image justifies the price.
- Buyers desire the product at that price.
- Low-volume production costs don’t negate the high price advantage.
- Competitors cannot easily undercut the price.
Market Penetration Pricing
- Description: Set a low initial price to attract buyers quickly.
- Conditions:
- Market is price-sensitive.
- Costs decrease with higher sales volume.
- Low prices deter competition.
3. Product-Mix Pricing Strategies
| Strategy | Description | Example |
|---|
| Product Line Pricing | Price differences reflect perceived quality. | Shampoo variants (basic vs. premium). |
| Optional Product Pricing | Charge for accessories/options. | Sports rims for cars. |
| Captive Product Pricing | Main product priced low; complementary products high. | Printers and ink cartridges. |
| Two-part Pricing | Fixed fee + variable usage fee for services. | Gym memberships + personal training. |
| By-Product Pricing | Sell by-products at minimal profit. | Sawdust from lumber production. |
| Bundle Pricing | Discounted bundles of products. | ”Buy 1 bottle for 15.” |
4. Price Adjustment Strategies
Discounts & Allowances
- Cash Discounts: For early payment.
- Quantity Discounts: For bulk purchases.
- Trade-in Allowances: For old products.
Segmented Pricing
- Charge different prices by customer, product form, location, or time (e.g., airline tickets).
Psychological Pricing
- Use reference prices (e.g., 10).
- Tactics: Loss leaders, rebates, special-event pricing.
- Risks: Price wars or deal-prone customers.
Geographical Pricing
- FOB: Customer pays freight.
- Uniform Delivery: Same price nationwide.
- Zone Pricing: Prices vary by region.
- Freight Absorption: Seller covers shipping costs.
Dynamic/International Pricing
- Adjust prices based on real-time demand or country-specific factors (e.g., economic conditions).
5. Price Changes
Price Cuts
- Reasons: Excess capacity or to gain market share.
- Buyer Perceptions: Product is outdated or has quality issues.
Price Increases
- Reasons: Inflation or high demand.
- Buyer Perceptions: Product is “hot” or company is greedy.
6. Pricing Strategies Matrix
| High Quality | Low Quality |
|---|
| High Price | Premium | Skimming |
| Low Price | Economy | Penetration |
Tool to align price with product quality and market positioning.
7. Factors Affecting Pricing Decisions
Internal Factors
- Organizational Structure: Who sets prices.
- Product Differentiation: Features, design.
- Cost: Break-even point, lifecycle stage.
- Objectives: Survival, profit maximization, market share.
External Factors
- Demand, competition, economic conditions, government regulations.
8. Pricing Objectives
- Survival: Short-term focus during crises.
- Profit Maximization: Prioritize current profits.
- Market Share: Penetration pricing (e.g., FMCG).
- Market Skimming: High initial prices (e.g., electronics).
- Quality Leadership: Premium pricing (e.g., BMW, Starbucks).
9. Steps to Set Pricing Policy
- Select pricing objective.
- Determine demand.
- Estimate costs.
- Analyze competitors.
- Choose a pricing method.
- Set the final price.