Pricing Decision

• Price


  The monetary value assigned to a good, service, or resource in the market, representing the amount agreed upon between a buyer and a seller for the exchange of ownership or use
• Price


  • It is that which is given in return for a product in a commercial exchange
• Pricing decisions


  Have a direct impact on the profitability of a business
• Pricing decisions


  • Involve considering production costs, competitors' prices, and the perceived value of the product or service in the eyes of customers
• Premium pricing


  Positions a product as high-quality or exclusive
• Lower pricing


  Positions a product as budget-friendly
• Pricing


  • Can be a source of competitive advantage
  • Firms can align their price to the price of competitors or set the price below the going price to undermine a competitor
• Aggressive pricing strategies


  Such as penetration pricing, may be used to gain market share
• Premium pricing


  May be employed to capture a smaller but more profitable segment
• Non-profit organizations


  Often price their products with the aim of covering the cost of production and any other operating costs involved
• Firms using the status quo objective

  Will price their products to meet the customer's expectations or to maintain their public image
• Firms using the survival objective


  Will price their products so that they will cover their costs in order to preserve their life in the market
• Demand


  The willingness and ability of a person to purchase a particular product or service at a particular price at a particular period of time
• As price increases


  Quantity demanded will decrease
• If the firm wants to increase demand

  They must decrease the price of the product
• Price Elasticity of Demand (PED)


  Measures the responsiveness of a change in quantity demanded due to a change in price of the product
• Determinants of Price Elasticity of Demand

  • The degree of necessity
  • Level or proportion of income spent on the product
  • Number and closeness of substitutes
  • Income
  • Cost of production
  • Consumer preference or perception
  • Government policy
  • Lifecycle stage
• Cost-plus pricing


  A pricing strategy where a business determines the selling price of a product by adding a markup to the cost of production
• Cost-plus pricing


  • Advantages: Simplicity, Cost coverage

  Disadvantages: Ignores market conditions, Profit margin dependency
• Competition-based pricing


  A pricing strategy where a business sets the prices of its products or services based on the prices charged by its competitors
• Competition-based pricing


  • Advantages: Market relevance, Meets customer expectations

  Disadvantages: May lead to lower profit margins
• Steps in Competition-Based Pricing

  1. Identify key competitors in the market

  2. Monitor and analyze the prices set by these competitors for similar or comparable products

  3. Set prices for your own products based on this competitive benchmark
• Competition-Based Pricing


  • In the smartphone industry, companies often engage in competition-based pricing. If a leading competitor releases a new model with advanced features and sets the price at $800, other competitors may adjust their prices accordingly.
• Advantages of Competition-Based Pricing

  • Market Relevance: By aligning prices with competitors, a business ensures that its pricing is relevant and competitive in the marketplace
  • Customer Expectations: Customers often compare prices when making purchasing decisions. Being in line with competitors helps meet customer expectations
• Disadvantages of Competition-Based Pricing

  • Profit Margins: Relying solely on competitor prices may lead to lower profit margins, especially if competitors engage in price wars
  • Ignoring Value: It may not account for differences in product quality, brand reputation, or unique value propositions that could justify higher prices
• Penetration Pricing


  A pricing strategy in which a business sets a relatively low initial price for a product or service with the goal of quickly gaining a significant market share
• Technique for Penetration Pricing

  1. The company sets a low introductory price for the new product or service

  2. The goal is to quickly enter the market and capture a significant share by offering a compelling price

  3. Penetration pricing is effective in attracting early adopters and price-sensitive customers

  4. The strategy helps in building brand awareness and generating positive word-of-mouth

  5. After gaining a foothold in the market, the company may consider gradually increasing prices
• Penetration Pricing


  • An e-commerce platform introduces a new service for faster and more affordable product deliveries. To encourage sellers to join and customers to use the service, the platform initially offers discounted or free shipping.
• Advantages of Penetration Pricing

  • Rapid Market Entry: Allows for quick market entry and establishment
  • Competitive Advantage: Attracts price-sensitive customers and competes effectively
  • Volume Sales: Generates high sales volumes, compensating for lower initial profit margins
• Disadvantages of Penetration Pricing

  • Profitability Challenges: Lower initial prices may result in narrower profit margins
  • Customer Expectations: Customers may resist price increases, having become accustomed to lower prices
• Price Skimming


  A pricing strategy in which a company sets a high initial price for a new product or service and then gradually lowers the price over time
• Technique for Price Skimming

  1. Introduce the new product or service with a relatively high initial price

  2. The focus is on attracting early adopters and customers who are willing to pay a premium for the latest innovation

  3. By setting a high initial price, the company aims to maximize profit margins on sales to early adopters who place a higher value on being among the first to use the product

  4. Over time, as the product becomes more established and market demand changes, the company gradually lowers the price to attract a broader customer base
• Price Skimming


  • A tech company introduces a new line of smartphones with cutting-edge features and advanced technology. The initial price is set at $1,000, targeting early adopters and tech enthusiasts willing to pay a premium for the latest technology. Over the next six months, the company gradually reduces the price to $800, $700, and so on, to appeal to a wider audience as the product matures in the market.
• Advantages of Price Skimming

  • Maximizes Early Profits: Capitalizes on the willingness of early adopters to pay a premium
  • Perceived Value: Creates a perception of high value and exclusivity
  • Recovers Development Costs: Helps in recovering research and development costs quickly
• Disadvantages of Price Skimming

  • Limited Market Access: Initially, the product may only be accessible to a niche market
  • Potential Backlash: Early adopters might feel dissatisfied if prices drop significantly
  • Competition Intensity: Competitors may enter the market with lower-priced alternatives
• Perceived Value Pricing


  A pricing strategy that involves setting the price of a product or service based on the perceived value it provides to the customer
• Technique for Perceived Value Pricing

  1. Perceived value pricing starts with understanding the customer's perception of the value offered by the product or service. Perception is based on factors such as; brand image, quality, features, benefits, customer service, brand reputation and exclusivity.

  2. Based on the factors influencing perceived value, the company sets a price that reflects the value customers are expected to receive.

  3. Marketing and communication strategies play a crucial role in conveying the value proposition to customers. This includes highlighting key features, emphasizing quality, and building a brand image that aligns with the intended perceived value.
• Perceived Value Pricing


  • A luxury watch brand launches a new model with advanced features, exceptional craftsmanship, and a limited edition design. The brand emphasizes the watch's precision, high-quality materials, unique design, and the exclusivity of owning a limited edition piece. The price is set at $5,000, reflecting the perceived value associated with the brand, craftsmanship, and exclusivity.
• Advantages of Perceived Value Pricing

  • Maximizes Revenue: Customers are willing to pay a premium for products they perceive as valuable.
  • Brand Loyalty: Establishes a strong connection between the brand and customers who appreciate the perceived value.
  • Flexibility: Allows for adjusting prices based on changes in perceived value over time.
• Disadvantages of Perceived Value Pricing

  • Subjectivity: Perceived value is subjective and may vary among different customer segments.
  • Communication Challenges: Effectively communicating the value proposition requires a well-executed marketing strategy.
  • Competitive Pressure: In competitive markets, competitors' actions can impact perceived value.