Description
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 life cycles
May be useful if launching into a new market
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products –
chocolate bars, ood stus, household
goods, etc!
• Suitable or products with long
anticipated lie cycles
• "ay be useul i launching into a new
market
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arket Skimming
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arket Skimming
• #igh price, Low volumes
• Skim the proit rom the
market
• Suitable or products that
have short lie cycles or
which will ace
competition at some
point in the uture $e!g!
ater a patent runs out%
• &'amples include(
Playstation, )ewellery,
digital technology, new
*+*s, etc!
"any are predicting a iresale in
laptops as supply e'ceeds
demand!
,opyright( iStock!com
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
+alue Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
+alue Pricing
• Price set in
accordance with
customer
perceptions about
the value o the
product-service
• &'amples include
status
products-e'clusive
products
,ompanies may be able to set prices
according to perceived value!
,opyright( iStock!com
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
• .oods-services deliberately sold below
cost to encourage sales elsewhere
• Typical in supermarkets, e!g! at
,hristmas, selling bottles o gin at /0 in
the hope that people will be attracted to
the store and buy other things
• Purchases o other items more than
covers ‘loss’ on item sold
• e!g! ‘1ree’ mobile phone when taking on
contract package
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
• 2sed to play on consumer
perceptions
• ,lassic e'ample 3 /4!44 instead o
/56!447
• Links with value pricing – high
value goods priced according to
what consumers T#89: should be
the price
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
.oing ;ate $Price Leadership%
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
.oing ;ate $Price Leadership%
• 8n case o price leader, rivals have diiculty in
competing on price – too high and they lose
market share, too low and the price leader
would match price and orce smaller rival out o
market
• "ay ollow pricing leads o rivals especially
where those rivals have a clear dominance o
market share
• nti3competitive and illegal i it can be
proved
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
>bsorption-1ull ,ost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
>bsorption-1ull ,ost Pricing
• 1ull ,ost Pricing – attempting to
set price to cover both i'ed and
variable costs
• >bsorption ,ost Pricing – Price set
to ‘absorb’ some o the i'ed costs
o production
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
• "arginal cost – the cost o producing ?9&
e'tra or ?9& ewer item o production
• ", pricing – allows le'ibility
• Particularly relevant in transport where i'ed
costs may be relatively high
• >llows variable pricing structure – e!g! on a
light rom London to 9ew @ork – providing the
cost o the e'tra passenger is covered, the
price could be varied a good deal to attract
customers and ill the aircrat
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
• &'ample(
>ircrat lying rom Aristol to &dinburgh – Total ,ost $including
normal proit% B /5C,666 o which /50,666 is i'ed costD
9umber o seats B 5E6, average price B /40!FC
", o each passenger B G666-5E6 B /5G!C6
8 light not ull, better to oer passengers chance o lying at
/5G!C6 and ill the seat than not ill it at all7
*All figure are eti!ate o"ly
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ontribution Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ontribution Pricing
• Co"tributio" # $elli"g %rice – &ariable
'direct cot(
• Prices set to ensure coverage o variable
costs and a ‘contribution’ to the i'ed
costs
• Similar in principle to marginal cost
pricing
• Areak3even analysis might be useul in
such circumstances
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
• Setting price to ‘target’ a speciied
proit level
• &stimates o the cost and potential
revenue at dierent prices, and
thus the break3even have to be
made, to determine the mark3up
• "ark3up B Proit-,ost ' 566
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ost3Plus Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ost3Plus Pricing
• ,alculation o the average cost
$>,% plus a mark up
• >, B Total ,ost-?utput
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• >ny pricing decision must be mindul o
the impact o price elasticity
• The degree o price elasticity impacts on
the level o sales and hence revenue
• &lasticity ocuses on proportionate
$percentage% changes
• %)* # + Cha"ge i" ,ua"tity
de!a"ded/+ Cha"ge i" %rice
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• %rice -"elatic:
• H change in I J H change in P
• e.g. a CH increase in price would be
met by a all in sales o something less
than CH
• ;evenue would rise
• > FH reduction in price would lead to a
rise in sales o something less than FH
• ;evenue would all
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• %rice )latic:
• H change in =uantity demanded K H
change in price
• e.g. > LH rise in price would lead to
sales alling by something more than LH
• ;evenue would all
• > 4H all in price would lead to a rise in
sales o something more than 4H
• ;evenue would rise
doc_859299992.ppt
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 life cycles
May be useful if launching into a new market
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Pricing Strategies
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Penetration Pricing
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products –
chocolate bars, ood stus, household
goods, etc!
• Suitable or products with long
anticipated lie cycles
• "ay be useul i launching into a new
market
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arket Skimming
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arket Skimming
• #igh price, Low volumes
• Skim the proit rom the
market
• Suitable or products that
have short lie cycles or
which will ace
competition at some
point in the uture $e!g!
ater a patent runs out%
• &'amples include(
Playstation, )ewellery,
digital technology, new
*+*s, etc!
"any are predicting a iresale in
laptops as supply e'ceeds
demand!
,opyright( iStock!com
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
+alue Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
+alue Pricing
• Price set in
accordance with
customer
perceptions about
the value o the
product-service
• &'amples include
status
products-e'clusive
products
,ompanies may be able to set prices
according to perceived value!
,opyright( iStock!com
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Loss Leader
• .oods-services deliberately sold below
cost to encourage sales elsewhere
• Typical in supermarkets, e!g! at
,hristmas, selling bottles o gin at /0 in
the hope that people will be attracted to
the store and buy other things
• Purchases o other items more than
covers ‘loss’ on item sold
• e!g! ‘1ree’ mobile phone when taking on
contract package
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Psychological Pricing
• 2sed to play on consumer
perceptions
• ,lassic e'ample 3 /4!44 instead o
/56!447
• Links with value pricing – high
value goods priced according to
what consumers T#89: should be
the price
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
.oing ;ate $Price Leadership%
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
.oing ;ate $Price Leadership%
• 8n case o price leader, rivals have diiculty in
competing on price – too high and they lose
market share, too low and the price leader
would match price and orce smaller rival out o
market
• "ay ollow pricing leads o rivals especially
where those rivals have a clear dominance o
market share
• nti3competitive and illegal i it can be
proved
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
>bsorption-1ull ,ost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
>bsorption-1ull ,ost Pricing
• 1ull ,ost Pricing – attempting to
set price to cover both i'ed and
variable costs
• >bsorption ,ost Pricing – Price set
to ‘absorb’ some o the i'ed costs
o production
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
• "arginal cost – the cost o producing ?9&
e'tra or ?9& ewer item o production
• ", pricing – allows le'ibility
• Particularly relevant in transport where i'ed
costs may be relatively high
• >llows variable pricing structure – e!g! on a
light rom London to 9ew @ork – providing the
cost o the e'tra passenger is covered, the
price could be varied a good deal to attract
customers and ill the aircrat
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
"arginal ,ost Pricing
• &'ample(
>ircrat lying rom Aristol to &dinburgh – Total ,ost $including
normal proit% B /5C,666 o which /50,666 is i'ed costD
9umber o seats B 5E6, average price B /40!FC
", o each passenger B G666-5E6 B /5G!C6
8 light not ull, better to oer passengers chance o lying at
/5G!C6 and ill the seat than not ill it at all7
*All figure are eti!ate o"ly
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ontribution Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ontribution Pricing
• Co"tributio" # $elli"g %rice – &ariable
'direct cot(
• Prices set to ensure coverage o variable
costs and a ‘contribution’ to the i'ed
costs
• Similar in principle to marginal cost
pricing
• Areak3even analysis might be useul in
such circumstances
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
Target Pricing
• Setting price to ‘target’ a speciied
proit level
• &stimates o the cost and potential
revenue at dierent prices, and
thus the break3even have to be
made, to determine the mark3up
• "ark3up B Proit-,ost ' 566
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ost3Plus Pricing
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
,ost3Plus Pricing
• ,alculation o the average cost
$>,% plus a mark up
• >, B Total ,ost-?utput
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• >ny pricing decision must be mindul o
the impact o price elasticity
• The degree o price elasticity impacts on
the level o sales and hence revenue
• &lasticity ocuses on proportionate
$percentage% changes
• %)* # + Cha"ge i" ,ua"tity
de!a"ded/+ Cha"ge i" %rice
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• %rice -"elatic:
• H change in I J H change in P
• e.g. a CH increase in price would be
met by a all in sales o something less
than CH
• ;evenue would rise
• > FH reduction in price would lead to a
rise in sales o something less than FH
• ;evenue would all
http://www.bized.ac.uk
Copyright 2006 – Biz/ed
8nluence o &lasticity
• %rice )latic:
• H change in =uantity demanded K H
change in price
• e.g. > LH rise in price would lead to
sales alling by something more than LH
• ;evenue would all
• > 4H all in price would lead to a rise in
sales o something more than 4H
• ;evenue would rise
doc_859299992.ppt