- Penetration Pricing
- Market Skimming
- Value Pricing
- Loss Leader
- Pyschological Pricing
- Going rate (Price Leadership)
- Tender Pricing
- Price Discrimination
- Destroyer Pricing/Predatory Pricing
- Influence of Elasticity
- Cost-Plus Pricing
- Contribution Pricing
- Target Pricing
- Marginal Cost Pricing
- Absorption/full cost pricing
Penetration Pricing(Low price- High Volume)
- involves the setting of lower, rather than higher prices in order to achieve a large, if not dominant market share.
- It creates cost control abd cost reduction.
- It discourages the entry of competitors.
- Charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market.
- e.g DVD players: DVD players in the late 1990's and early 2000's - in the late 1990's DVD players sold for $500 and $400 when they first came out, then the price dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many different types of stores.
Value Pricing
- usually during difficult economic conditions
- e.g. Value menus at McDonalds
- selling products/services at a price that will generate little or no profit and in some cases not even cover all associated costs (marketing, overheads, direct costs, etc).
- Microsoft's Xbox video game system, which was sold at a loss of more than $100 per unit to create more potential to profit from the sale of higher-margin video games.
- to get a customer to respond on an emotional, rather than rational basis.
- e.g 99p not £1.01 ‘price point perspective
Going rate (Price Leadership)
- Situation in which a market leader sets the price of a product or service, and competitors feel compelled to match that price.
- e.g. Banks, petrol, electrical goods, supermarkets…
Tender Pricing
- Mostly done in secret
- Firm (or firms) submit their price for carrying out the work
- Purchaser then chooses which represents best value
- charge different prices to different groups of consumers for what is more or less the same good or service! it has become widespread in nearly every market.
- The airlines have become masters at price discrimination as a means of maximising revenue from passengers travelling on the flight networks. Other transport businesses do the same.
Destroyer Pricing/Predatory Pricing
- the practice of a firm selling a product at very low price with the intent of driving competitors out of the market, or create a barrier to entry into the market for potential new competitors.
- difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, difficult to prove due to high legal hurdles designed to protect legitimate price competition.
- Easy Jet believed that British Airways was using destroyer pricing when they introduced the new budget airline Go. Easy Jet argued that British Airways were setting Go™s pricing so low in the hope of forcing existing budget airlines out of business.
- Any pricing decision must be mindful of the impact of price elasticity
- The degree of price elasticity impacts on the level of sales and hence revenue
- Elasticity focuses on proportionate (percentage) changes
If price increase by 10% and demand for CDs fell by 20% then:
PED = -20/10 = -2
Cost-Plus Pricing
- a pricing method commonly used by firms.
- used primarily because it is easy to calculate and requires little information.
- you first calculate the cost of the product, then include an additional amount to represent profit.
- often used on government contracts
Contribution Pricing
- maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs, and on one’s assumptions regarding the relationship between the product’s price and the number of units that can be sold at that price.
- For example, to cover indirect costs of, say, £7000 and you further expect a profit of £3,000 (totalling £10,000) assuming that 100 of each product A, B and C are to be sold, the following contributions can be included in the selling price:
Target 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
Marginal Cost Pricing
- Marginal cost pricing is the principle that the market will, over time, cause goods to be sold at their marginal cost of production.
- In the most general criticism of the theory of marginal cost pricing, economists note that monopoly power may allow a producer to maintain prices above the marginal cost; more specifically, if a good has low elasticity of demand and supply of the product is limited, prices may be considerably higher than marginal cost.
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
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