Pricing Strategies

Factors Affecting Price Setting

• Pricing Objectives– profit

– competition

– market share

• Cost– ratio of fixed costs to variable costs

– economies of scale available to the firm

– cost structure of a firm relative to its competitors

• Competition

• Demand

Classification of Price Strategies

• Differential Pricing– same brand sold at different prices to consumers

• Competitive Pricing– prices are set to exploit competitive position

• Product Line Pricing– related brands are price to exploit mutual dependencies

Differential Pricing Strategies

• Second Market Discounting– a firm sells its product in a secondary market at a discount

• Periodic Discounting– hold price during “prime period” and discount to take advantage of

price sensitive customers

• Random Discounting (i.e., sales)– rely on uninformed consumer to pay regular price, yet take

advantage of those that search for the lowest price

Competitive Pricing Strategies

• Penetration Pricing– pricing as low as possible to take control of the market and keep competition out

• Experience Curve Pricing– exploiting experience in manufacturing, marketing, etc. and economies of scale

in pricing

• Price Signaling– use price to signal quality

• Geographic Pricing– basing price on geographic area

• FOB• zone pricing• uniform delivered pricing• freight absorption pricing

Product Line Pricing Strategies

• Price Bundling– pricing two or more products as a bundle at a price better than the aggregate prices of the

items in the bundle

• Premium Pricing– pricing different versions of the product at different prices to exploit consumer

heterogeneity in demand

• Image Pricing – a firm brings out an identical version of its current product with a different name (or

model number) and a higher price

• Complementary– pricing such that the loss in the sales of one product is covered by the profit from the sale

of a relate product

• captive pricing

• two-part pricing

• loss leader pricing

Government Regulation

• Price Fixing

• Deceptive Pricing

• Price Discrimination

• Promotional Pricing