Pricing Strategies-7

By
MS CHIFURA AND MISS MANOKORE
Price determination
SIX-STEP PRICING METHOD
1. Establish marketing objectives e.g. survival (short
term) ,profit maximisation, revenue maximisation,
growth maximisation, market skimming and
product-quality leadership
2.Demand schedule: elastic versus inelastic demand issues
(price line) Percent change in quantity demanded relative
to the percent change in price. Elastic demand is sensitive
to price than inelastic demand.
 Elastic demand greater than 1
 Inelastic demand it is less than -1
3. Cost issues: different levels of product, economies of
scale, fixed/variable, break even issues, marginal
analysis.
a)marginal analysis: What happens to the costs and
revenues as production increases by one unit. This will
determine at which point profit will be maximized. Total
Cost = (AFC+AVC)*QTTY
Continued…
Marginal cost = the extra cost to the firm for
producing one more unit.
Marginal revenue = the extra revenue with the sale of
one additional unit.
MR - MC tells us if it is profitable to produce one more
unit.
Profit maximization at MR = MC
Continued…
4. Competitors pricing
5.Pricing method:
Cost Plus :Guarantees contribution ,simple to
calculate and not optimal
Competition ,par with market ,price war implications
and not optimal
Value optimal and difficult to determine
6. Final price selection: life cycle pricing issues,
segmentation and price changing issues
Pricing Strategies
The discussion above was looking at how
organisations/marketers arrive at a price for their
products
The following section looks at the various strategies
that marketers/organisations may use to get
customers/gain market share
Price skimming
This is a pricing strategy whereby
an organization charges the
highest prices that customer will
pay.
This strategy aims at gaining
maximum revenue at the
introduction of a product before
other players start bringing a
similar product onto the market.
E.g. Apple Products
R22,000
Factors favouring price skimming
There are enough prospective customers willing to
buy the product at the high price.
Demand is expected to be relatively
inelastic/customers are not highly price sensitive
The high price does not attract competitors.
Lowering the price would have only a minor effect on
increasing sales volume and reducing unit costs.
The company does not have the resources to finance the
large capital expenditures necessary for high volume
production with initially low profit margins.
The high price is interpreted as a sign of high quality.
Large cost savings are not expected at high volumes, or
it is difficult to predict the cost savings that would be
achieved at high volume.
Limitations
High prices may not evoke quick sales.
As very few people buy the product, the brand loyalty
of the product may suffer.
In the long run, people may shift their loyalty to low
priced goods.
High profit margins lure competitors selling similar
products.
Due to low demand for the product, economies of
large scale production are not realizable.
Penetration pricing
A penetration pricing strategy
is designed to capture market
share by entering the market
with a low price relative to the
competition to attract buyers.
The idea is that the business
will be able to raise awareness
and get people to try the
product, eg. FastJet
Factors favouring penetration

Demand is expected to be highly elastic; that is,

customers are price sensitive and the quantity
demanded will increase significantly as price declines.
Large decreases in cost are expected as cumulative
volume increases.
The product is of the nature of something that can
gain mass appeal fairly quickly.
There is a threat of impending competition.
Limitations
Discuss the limitations of price penetration strategy
Premium Pricing

Premium pricing strategy

establishes a price higher than
the competitors.
It's a strategy that can be
effectively used when there is
something unique about the
product or when the product is
first to market , eg. Rolex

R66,000
Value based pricing: This entails setting a price based
on the value perceived by customers
Cost based Pricing strategies: According to Kotler and
Keller (2010) This is when a company calculates its cost
and adds a mark-up to come up with a price
Continued…
Competitive pricing: Setting a price based on what the
competition charges.
Competitive pricing is usually followed when products
are homogeneous e.g. oil, gas and telecommunications
Continued…
Psychological Pricing: Psychological pricing strategy
is commonly used by marketers in the prices they
establish for their products. For instance, $99 is
psychologically "less" in the minds of consumers than
$100.
Factors influencing Firm’s Strategy
Choice
Intensity of industry competition: the more intense
the competition the lower the prices in the industry.
Cost leadership strategies become the norm
 Perceived value of your product: how do customer’s
value your product? Apple vs. Samsung
Continued…
Product development cost: the total amount invested
in product develop
Economic trends: Economic factors such as taxation
rate, labour cost, inflation rate, and currency exchange
rate, government’s fiscal and monetary policy influence
adopted product pricing strategy
Continued…

Demographics: customer’s level of education; income

levels customer’s location, etc.
Class of targeted customers: The class of customers
targeted will greatly influence the pricing of your
product.
Continued…

Level of market demand: the greater the demand the

higher the price-Laws of demand and supply