Pricing Strategies

Pricing Strategies are:

Penetration Pricing
-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

Market 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: Playstation, jewellery, digital technology, new DVDs, etc.

Value Pricing
-Price set in accordance with customer perceptions about the value of the product/service
-Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.

Loss Leader

-Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 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

Psychological Pricing
-Used to play on consumer perceptions
-Classic example - £9.99 instead of £10.99!

Going Rate (Price Leadership)
-In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
-May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

Tender Pricing
-Many contracts awarded on a tender basis
-Firm (or firms) submit their price for carrying out the work
-Purchaser then chooses which represents best value
-Mostly done in secret
A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!

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
Prices for rail travel differ for the same journey at different times of the day

Absorption/Full Cost Pricing
Full Cost Pricing – attempting to set price to cover both fixed and variable costs
Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production

Destroyer Pricing/Predatory Pricing
Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

Contribution PricingMarginal Cost Pricing
-Marginal cost – the cost of producing ONE extra or ONE fewer item of production
-MC pricing – allows flexibility
-Particularly relevant in transport where fixed costs may be relatively high

Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all!


Target Pricing
-Contribution = Selling Price – Variable (direct costs)
-Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs
-Similar in principle to marginal cost pricing
-Break-even analysis might be useful in such circumstances

Cost-Plus Pricing
-Setting price to ‘target’ a specified profit level
-Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
-Mark-up = Profit/Cost x 100

Influence of Elasticity
-Calculation of the average cost (AC) plus a mark up
-AC = Total Cost/Output