PRICING STRATEGY 2003

8/7/2019 PRICING STRATEGY 2003

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New Product Launch Strategies

Rapid Skimming Slow Skimming

Rapid Penetration Slow Penetration

High

High

Low

Low

Pric e

Promotion



Pricing Existing Products



Factors influencing pricingdecisions

• Company’s price level sends signalabout the quality of its products

• Low price may invite price war whilehigh price without sufficient featuresinvite bad publicity

• Distribution channels also plays mainrole in pricing



• Price- quality relationship

• Consumer use price as an indicator of quality wheremeasurement of quality is not possible.

• If product is priced higher the judgment of thecustomer is that the quality of product must behigher. E.g. Giffen paradox

• Product line pricing

• Some companies prefer to extend their product linerather than reduce price

• They launch cut price fighter brand to compete withlow price rivals.

• This as an advantage of maintaining image and

profits margins of existing brands



• Explicability

• The company should be able to justify the price it ischarging if its on higher side

•

Company have to send cues to consumers about highquality of product

• Competition

• Company should be able to anticipate reaction of competitors to its pricing policies and moves

• All competitors are not same their approaches andreaction to pricing moves are different

• 1st level of competitors offer technically similar product

• 2nd level of competition is dissimilar product servingthe same problem in same way

• 3rd level of competition would come from product

serving the same problem in dissimilar way



• Negotiating margins

• Here customer expect price reduction

• Price paid is differ from list price

• Its known as order-size disc., competitive disc., fastpayment disc. Promotional allowance

• Negotiating margins should be built which allowsprice to fall but still profitable transaction.

•

Effect on distributors and retailers• When products are sold through channels, list price

must reflect the margins required by them.

• But sometimes some retailers can sell productbelow list price and manage with lower margins to

face competition.



• Political factors

• Here price is not having any connection withmanufacturing cost , political pressure may act toforce down price.

• Earning high margins (skimming)

• Pioneer are able to charge high price due to lackof alternatives to customers.

• Here entry of competitors will force pioneer to

reduce its price.• Charging low price (penetration)

• It may not help company’s cause at initial stage

• Because customer associate price with its quality

• But if company retain its position for long timethan the customers belief about quality priceequation will start changing

• Companies who are charging high price will getaffected by this .



Consumption & Pricing

• Consumption of the offering isimportant to retain customers

• Customers feel compelled to useproducts that they have paid

• Consumption is driven by perceivedcost rather than actual cost

• Example:- Health Club Membership,software business.



Price Sensitivity

• Determine the latitude that companywill have in increasing its price

Reasons of Price sensitivity

Bearing the cost as opposed to athird party

The cost of the item represents asubstantial percentage of acustomer’s total expenditure



Reasons of Price sensitivity

Able to judge quality without usingprice as an indicator

Easily shop around & assess the

relative performance & price of alternatives

Take the time he needs to locate &

assess alternativesSwitch from one supplier to another

without incurring additional costs



INITIATING PRICE

CHANGES



CIRCUMSTANCES UNDER WHICHPRICE CAN BE RAISED

• CONSUMER PERCEPTION- HIGHER PRICE HIGHERVALUE.

•

COMPANIES GO WITH THE FLOW WHEN ACOMPANY INITIATES TO RAISE PRICES.

• EXCESS DEMAND

• PRICE HARVESTING



CIRCUMSTANCES UNDER WHICHPRICE CAN BE CUT

• CONSUMERS STOP BUYING.

• WHEN COSTS ARE CUT DOWN.

• EXCESS CAPACITY.

• INORDER TO INCREASE MARKET SHARE



PROACTIVE PRICE CUT

• PREEMPT COMPETITIVE ENTRY INTOA MARKET.

• WHEN THERE IS NO POTENTIAL INTHE MARKET.



TACTICS OF PRICE CHANGE

• SUBSTANTIAL INCREASE IN PRICE TO RAISETHE VISIBILITY OF PRICE RISE.

• SUBSTANTIAL DECREASE IN PRICE TO

ATTRACT CUSTOMRES.• INCREASING DU CPRICE BY SMALL AMOUNTS

IN STAGES.

• REDUCING PRICE WHEN AMOUNT NECESSARY

TO STIMULATEBSALES IS UNCLEAR.• .



• PRICE UNBUNDLING

• MAINTAINING LIST PRICE AND OFFERING

DISCOUNTS TO CUSTOMERS.

• DECREASING PRICE WITHOUT DIRECT FALL INPRICE.

• INTRODUCING A LOWER PRICE FIGHTER BRAND.



ESTIMATING COMPETITORREACTION

• A PRICE RISE THAT NO COMPETITORFOLLOWS.

• A COMPANY’S REACTION TO ANOTHERCOMPANY’S PRICE MOVES.



REACTING TO COMPETITORS PRICECHANGE

• WHEN TO FOLLOW A COMPETITORS PRICEMOVES?

-RISE IN PRICE DUE GENERAL RISING COST,

EXCESS DEMAND, CUSTOMERS ARE PRICESENSITIVE.

-WHEN BRAND IMAGE IS CONSISTENT.

- WHEN COMPANIES OBJECTIVE IS TO HOLDOR HARVEST.



• WHEN TO IGNORE COMPETITORS PRICE MOVES?

-WHEN COSTS ARE STABLE, EXCESS SUPPLY

BECAUSE THE IT WILL MAKE THE INITITATORLESS COMPETITIVE.



Price war

• When faced with a competitor who has

reduced prices, most companies choose to

retaliate with price cuts.



Companies have other options without

decreasing the price

• May reveal its strategic intention to its

competitor without responding to price cut

• May choose to compete strictly on non price

based measures

• The company may selectively response to such

price cut to avoid the price cut

• Company may enter into the competition



Best practices

• A company should offers three versions of the

product for earning higher profits the product

placed in the mid range between the high and

low end versions usually attracts the maximumsales.

• Prices should reflect the value that the

customer place on the product this will lead tomaximization of profit for the company



• During new product launch or while entering

new market company should experiment with

prices to arrive at optimal price.

• Bundle pricing can be done to increase profit

complementary products or greater volume of

the same product can be bundled together



• Price swings change demand levels whichincreases production and distribution cost.

• Price reduction will bring in new customers but

will reduce purchase from current customer.• The price structure should reflect the concern of

decision maker of buying organization themarketer cannot afford to follow one price policy.



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PRICING STRATEGY 2003

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