Department of Management Studies
Indian Institute of Technology Roorkee
TYPES OF PRICING
Examples of some typical pricing
Pricing
Ads on
Basis of
cost per
click
Cost-per-click (CPC) bidding means that you pay for each click on your ads.
Cont. Pricing per part rather than whole product
Pricing songs
rather than
albums by
Apple
Pricing is
largely
reactionary
Types of pricing
• COST BASED
• COMPETITION BASED
• DEMAND BASED (differential pricing): The Differential Pricing is a method of charging different prices for
the same type of a product, and for the same number of quantities from different customers based on
the product form, payment terms, time of delivery, customer segment, etc.
• Product-form pricing
• Time differential pricing
• Quantity differential pricing
• Place differential pricing
• Image pricing
• VALUE BASED
• Price discounting
• Odd pricing
• Penetration pricing
• Bundled pricing
• Prestige pricing
• Segment wise pricing
• Loss leadership pricing
• Bid pricing
Common Pricing Approaches and their Limitations
Cost Based Pricing
simply calculating the costs & adding a mark-up
Competitive pricing
setting a price based on what the competition charges
Pricing
Approaches Value-based pricing
setting a price based on how much the customer believes what
you’re selling is worth
Price skimming
setting a high price & lowering it as the market evolves
Penetration pricing
setting a low price to enter a competitive market & raising it
later
Cost Based Pricing- Limitations
Prices are different from market price
NO efforts to control the cost.
Ignore the importance of customers
Overlooking any cost may result in underpricing
Opportunity cost of the investment not considered
Competition Based Pricing
Competition Based Pricing- Limitations
Risk of losing from margins.
Pricing strategy of competitors may not fit with the company
Not suitable for new firms.
Ignores customers.
Value Based Pricing
Urban Appeal
Shop Decor
Social Interaction
Product Assortment
Premium brand Image
Globally Starbucks focuses on selling the coffee experience and not just a cup of coffee. They have a huge
loyalty despite premium pricing. Starbucks has a policy of encouraging social interaction between patrons
and allows customers to sit in their outlets for long periods without persuading them to buy something
repeatedly.
Smart product moves like the introduction of seasonal drinks allow them to smartly extract value from
their existing customer base. For Starbucks, customers are willing to pay a premium because of their urban
appeal, shop décor, social interaction, product assortment, and premium brand image. Having a coffee at
Starbucks is not just about the drink, it is an experience in itself – it is the place where you discuss your
next million-dollar idea or go on your first date.
Value Based Pricing- Limitations
Difficult to justify the added value for commodities
Perceived value is not always stable
Price is harder to set
Niche market, and tougher market competition
Requires ample research, time, and resources
Not an exact science
Penetration Pricing
launching low-cost products like Vector and Vector Plus initially
High Willing to purchase due to high quality and low prices
Increased their market share and sales volume
sold huge number of razors by pricing them very low
& made profit selling blades at high price
Gillette smartly followed the penetration pricing strategy to lure its customers away from competition in
the starting by launching low cost products like Vector and Vector Plus. They used this technique of setting
a lower price of their product to make customers aware of their product in this segment and also make
them more willing to buy the product due to high quality and lower prices. Through this strategy Gillette
increased their market share and sales volume. Gillette basically generated more revenues using this
strategy – since they sold huge number of razors by pricing them at a very low cost and actually made
profit by selling the blades at a higher price.
Penetration Pricing- Limitations
Competitor with a strong brand, customer not ready to switch
Customers leave as soon as it raises its prices
Perceived Value of low quality
Price war
Branding defense-Competitors may have such strong product or service branding that customers are not
willing to switch to a low-price alternative.
Customer loss-If a company only engages in penetration pricing without also improving its product quality
or customer service, it may find that customers leave as soon as it raises its prices.
Perceived value-If a company reduces prices substantially, it creates a perception among customers that
the product or service is no longer as valuable, which may interfere with any later actions to increase
prices.
Price war-Competitors may respond with even lower prices, so that the company does not gain any market
share
Skimming Pricing
pronounced skimming strategy in 2007 @ $599
Massive price cut to $399 after few months.
Angry customers protested & Apple responded by is
suing $100 gift certificates to these early buyers.
Apple used a pronounced skimming strategy when it launched its revolutionary iPhone in June 2007. The
introductory price was set at $599. After a few months, Apple undertook a massive price cut to $399. What
could have been the reasons for the original high price?
The price of $599 signals high technical competence and quality as well as prestige. And despite that high
price, long lines formed outside the Apple Stores. Another reason could be that Apple wanted to limit
demand in the introductory phase because it had limited production capacity. One can also not rule out
that Apple made a mistake.
The massive price reduction to $399 led to a sharp spike in demand. There is a significant difference
between offering the iPhone at $399 from the start and launching at a higher price, and then cutting it by
$200 after a few months. Prospect theory says that the discount brings the buyer additional positive utility
The flipside is that some of the customers who purchased the phone for $599 became upset when the
price suddenly dropped. They protested and Apple responded by issuing $100 gift certificates to these
early buyers
Firms executing value based pricing earns 31% higher operating
income than those who are driven by market share goals and
target margins
31%
Value Based
Pricing
Strategic Pricing
Sets a products price based on products
value to the customer.
Objective is profitability by managing much more than price levels.
3 principles involved in pricing strategy
Value Based Proactive Profit driven
(Allen Mulally, Ford)
Value-based means that differences in pricing across customers and changes over time reflect
differences or changes in the value to customers.
Proactive means that companies anticipate disruptive events (for example, negotiations with
customers, a competitive threat, or a technological change) and develop strategies in advance
to deal with them. For example, anticipating that a recession or a new competitive entry will
cause customers to ask for lower prices, a proactive company develops a
Lower priced service option or a loyalty program, enabling it to define the terms and tradeoffs
of the expected interaction, rather than forcing it to react to terms and tradeoffs defined by the
customer or the competitor.
Profit-driven means that the company evaluates its success at price management by what
it earns relative to alternative investments rather than by the revenue it generates relative
to its competitors. For example, when Alan Mulally took charge as Ford Motor Company’s
CEO in 2006, he declared that henceforth Ford would focus on selling cars profitably, even
if that meant that Ford would become a smaller company. He cut Ford’s 96 models to 20
and sold off its unprofitable Jaguar and Land Rover brands. When the recession appeared
in late 2008, he quickly and relentlessly cut production—ending the long-standing policy
at all the
Big Three U.S. auto manufacturers to increase customer and dealer incentives to maintain
production as long as possible. Although Ford initially gave up market share, it was in the
end the only one of the Big Three to avoid bankruptcy.
