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Pricing Policies

If a firm has the power in its market to set its own price, it can adopt a pricing policy: Market penetration pricing Destroyer pricing Follow-the-leader pricing Skimming

Market penetration pricing Penetration Pricing

- to make it too intimidating for competition to follow, - or to make sure you enter the market in a competitive environment - or as part of a brand building strategy "A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance that will allow the company to later raise its prices. Such a policy is often used when the firm expects competition from similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. The low price must help keep out the competition, and the company must maintain its low price position."

Penetration pricing

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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

Destroyer pricing

Deliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved

Follow-the-leader pricing

A pricing strategy adopted by firms which copy the market leader's prices

Skimming

High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: jewellery, digital technology, new DVDs, etc.

Pricing Methods
1- Cost Based Pricing
cost plus, markup pricing
easy, costs known, minimizes price competition ignores demand elasticity, not profit maximizing

target return of investment


use breakeven analysis to find a price to yield a target ROI use sales volume to derive price?

Pricing Methods
2- Demand Based Pricing
Perceived value

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requires detailed knowledge of buyer behavior and demand elasticity only true profit maximizing strategy ignores costs and competitors

Pricing Methods
3- Competition Based Pricing
going rate pricing

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used when costs difficult to measure competitors lack differential advantage

sealed bid
forces competitors to lowest price

Pricing Methods
4- Select Final Price
psychological pricing
know demand elasticity start high, work toward costs

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discounts
cash, trade, quantity, or seasonal

promotional pricing

Pricing Methods

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5- Value Pricing Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products

Pricing Methods

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6- Loss Leader Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Dashaha, selling selling sarees with 200 rupees of 500 rupees in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers loss on item sold e.g. Free mobile phone when taking on contract package

Pricing Methods

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7- Price Discrimination Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market

Pricing Methods

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8- Destroyer/Predatory Pricing Deliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved