Pricing Policies and Strategies

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Pricing PoliciesandStrategies
L2
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Pricing Policies

• One-price policy
• Flexible-price policy

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One-price policy

• Used by most retail stores
• Employs price tags and signs
• No deviation permitted
• Simple, no haggle

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Flexible-price Policy

• Negotiated
• Avoided by most retailers due to legal issues
• Expected and used for
• Cars
• Real Estate
• Some furniture
• Fine jewelry
• Products that are sold using credit ratings

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Pricing Policies based on Product life stage

• Skimming Pricing
• Penetration Pricing

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Skimming Pricing

• Introduction stage of product life cycle new
  product
• High price
• Covers initial costs
• Targeted toward trend setters
• Price to be lowered later
• Disadvantages
• Attracts competition
• May price too high

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Penetration Pricing

• Used to penetrate an existing market
• Low price
• Effective for products with elastic demand
  (price-sensitive)
• All marketing must move quickly
• Blocks or out-sells competition for short time
• Disadvantage not effective if product not in
  high demand

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PRICINGStrategies

• Cost-based
• Demand-based
• Competition-based

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1. Cost-Based Pricing

• Markup Pricing
• Cost-Plus Pricing

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Markup Pricing

• Markup difference between price of an item and
  its cost
• Usually expressed as a
• Used for goods acquired for resale
• wholesalers and retailers

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Cost-Plus Pricing

• Used by manufacturers and service businesses
• Used for individual goods and services
• More customer-specific
• All fixed and variable costs are calculated, then
  desired profit added

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PRICINGStrategies

• Cost-based
• Demand-based
• Competition-based

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2. Demand-Based Pricing

• Based on consumer perception of product value
• Effective when product demand is inelastic
• Few or no substitutes
• Necessity
• Effective when demand is based on time and/or
  place
• Matinee theater tickets vs. evening tickets
• Dugout vs. nosebleed seats

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3. Competition-Based Pricing

• Prices based on what the competition does
• Not based on cost or demand

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Competitive Bid Pricing

• Determining the price for a product on the basis
  of bids submitted by competitors
• Most govt agencies required to accept lowest bid
  for desired product
• Companies bid low and take lower profit in order
  to gain contract

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Going-rate Pricing

• Used by most companies in some way
• Used by businesses whose competing products are
  very similar
• Company with highest market share usually sets
  the price
• Competing companies may
• Price below
• Price above
• Price at

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In reality, companies will use a combination of
these 3 strategies not just one
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Cost-based pricing helps determine the price
floor the lowest price it can go to make a
profit (remember
break-even point)
Demand-based pricing helps establish a price
range price floor (cost) to price ceiling
(consumer perceived value)
Competition-based pricing allows company to
determine how the price selected relates to the
competition