Pricing methods, strategies and tactics

Subject Outline

1. How important is price?

Pricing is part of the marketing mix, and it is fundamental to a firm’s revenues and gross profit margin. Pricing is affected by various factors:

  • Customer sensitivity to price

A company has to find the psychologically right price range between a price set too low and a price set too high. The price depends on the features and the quality of a product; it depends on the income and desire of customers as well.

  • Level of competitive activity

In a competitive market customers have more choice. Brands differentiate the products. The price for branded goods can be set higher to reinforce the brand’s value. The same comes true for the market structure of monopoly. Monopolist businesses are able to charge higher prices.

  • Availability of the product

Shortage forces prices up and removes barriers to price (e.g. art world)

2. Price determines business revenue

Sales revenue equals price multiplied by numbers of products or services sold. If the price is not right businesses could lose customers and earn less revenue. Firms lose revenues when the price is too low.

3. How do businesses decide what price to charge

Pricing means finding a balance between being competitive and being profitable.

There are two basic decisions: pricing a new product and managing pricing throughout the product life cycle. Proper pricing requires market research, competitive research, analysis of sales patterns, and costs of sales staff.

4. Pricing methods

  • Cost-plus-approach

The price is set in dividing the total costs by the number of units, and then adding a mark-up

  • Contribution pricing

Variable costs + contribution

  • Competitive pricing

Prices are set in relation to competitors’ prices – either pricing at the prevailing market price or pricing at a discount to the market leader.

  • Price discrimination

Pricing by market segments – e.g. rail travel, business travelers, peak times

5. Flexibility is the best method

Flexibility means using a combination of the different methods. Pricing depends on the product and on the market as well.

6. Pricing strategies

  • Strategies for new products

Skimming and penetration are useful strategies – skimming for innovative products, penetration for similar products to gain a high market share.

  • Strategies for existing products
    • Price leaders (strong brands)
    • Price takers (at the market level)
    • Predatory pricing (undercutting)

7. Pricing tactics

  • Loss leader – encourages customers to buy other products or complimentary products
  • Psychological pricing –  19,99 instead of  20,00.
  • Special offer pricing
  • Discounting – early payment, quantity purchase, seasonal, travel business

8. Pricing an evaluation

The downward pressure on prices has never been so great as today. There has been an economic crisis, a slowdown in consumer spending and a vastly increasing power of purchasers. Furthermore the Internet makes it easier to compare prices, and the low labor costs in China have also driven down the prices.

Source: Marcousé, Ian: Business Studies, Hodder & Stoughton, 2003.

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