Pricing 1

Pricing Strategies
Outline
Introduction Pricing strategies and process Reactions to price changes Impact on discounting Price wars Yield management
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Introduction
We need to set price when we have a

Need to decide what position you want
new product, or when we enter a new market with an existing product How?
your product to be in (see quality-price relationshipnext slide)
Price-Quality Strategies
Philip Kotler identified 9 price-quality

strategies
High Price Low Price
High Quality Premium

Over Charging
High Value
Mid Value
Super Value
Good Value
Low Quality
False Rip-off Economy Economy

4
Pricing Process
1. Set Pricing Objectives (see next slide) 2. Analyze demand 3. Draw conclusions from competitive
intelligence 4. Select pricing strategy appropriate to the political, social, legal and economical environment 5. Determine specific prices
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Possible Pricing Objectives
Profit objectives e.g.
Volume objectives e.g.
Targeted profit return
Other objectives e.g.
Dollar or unit sales growth Market share growth Match competitors price Non-price competition
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Demand Analysis Measure the impact of price change on

total revenue Predicts unit sales volume and total revenue for various price levels Different customers have different price sensitivities and needs
Impact of Cost on Pricing Strategy
Fixed and variable costs

rate-of-return pricing Variable-cost pricing
Full-Cost Pricing Markup pricing, break-even pricing and
3 types of relationships
Ratio of fixed costs to variable costs Economies of scales Cost structure
Discussion: Impact of Ethics on Pricing
How should you price if your product is

a life-saving drug? What are the ethical considerations?
Customers have no choice Need to pay for the research When cheaper options doesnt work Competition decides
Information Needed for Price Change
Customers ability & willingness to buy;

customer lifestyle; benefits sought; characteristics of the product e.g.
When the kopi tiams, local coffee shops in
Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grassroot reaction was stormy When Starbucks Coffee and Spinellis raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit 10
Information Needed for Price Change (contd)
Need to know everything about the

competitors
How would competitors react to our price

change? (see following slide) In obtaining competitors information, remember the value of the information
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New-Product Pricing Strategies 1. Skimming pricing
2. Penetration pricing
Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products in the ASPAC region Charging a low price when entering the market to capture market share Used when competitors are closing in with 12 similar or better products
New-Product Pricing Strategies (contd)
3. Intermediate pricing
Pricing somewhere in between the skimming strategy and the penetration strategy
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Pricing Strategies for Established Products

Three strategic alternatives: Maintain the price if you are the leader e.g.
In 1999, Shell in Singapore maintained its price when

other petrol companies engaged in a price war until towards the end of the engagement
Reduce the price e.g. Increase the price
SIA regularly reduce its airfare in anticipation of the

developing market situations
during inflation, or if demand is expected to increase

or if you wish to harvest e.g. in Indonesia
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Price-Flexibility Strategy
One-price policysetting one fixed

Geographic Location, Time of delivery, or The complexity of the product
price for all markets Flexible-price policysetting different prices in different markets based on:
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How much flexibility in price?
Depends on the Demand-Cost gap and

the influence of competition, social, legal and ethical considerations Example: Life-saving drugs
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Product-Line Pricing
When pricing products in different
lines, must take cross-elasticities of demand across the set of products into consideration The idea is to maximize the profits of the entire organization rather than that of a single product or a single line
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Leasing Strategy
Leasing is more common for

industrial goods e.g.
Singapore Airlines sold many of their
There is a growing trend toward

leasing consumer goods as well
aircraft and lease them back for their operations
e.g. Leasing of office equipment
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Reactions to Price Change
Customers are more sensitive to
price changes if the products cost a lot and/or are bought frequently Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitors likely reaction
19
Responding to Competitors Price Change If competitors lower price for

homogenous products
Try augmenting the product If it doesnt work or if it is not likely to
work, then meet the price cut head-on
20
Responding to Competitors Price Change (contd)
If competitors raise price
In a homogeneous market, follow if you
think the whole market is likely to follow In a non-homogeneous market, evaluate The reason for the competitor price change If the price increase is temporary The effect on your market share & profit The likely response(s) from the other competitors 21
When a Market Leader is Being Attacked on Price

Options available:
Maintain price Raise perceived quality Match competitors price Increase price and improve quality
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Impact of Discounting on Brand Equity
Why discount? Problems emerging with discounts The value equation (V=Q/P)
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Price War
Price wars are frequent in industries where Cost differentiation opportunities exists Capital is intensive and products are homogeneous Examples: Airfares, ISP, Petrol, & Loans e.g.
The Home Loan price war in Singapore in
Sept 2000 involving OUB, UOB, DBS among others

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Yield Management
What is it? Yield management goals Industries that benefited from yield
management Common variables
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Pricing Strategies

We need to set price when we have a

Philip Kotler identified 9 price-quality

High Quality Premium

False Rip-off Economy Economy

Possible Pricing Objectives

Profit objectives e.g.

Volume objectives e.g.

Targeted profit return

Other objectives e.g.

Demand Analysis Measure the impact of price change on

Impact of Cost on Pricing Strategy

Fixed and variable costs

Full-Cost Pricing Markup pricing, break-even pricing and

Ratio of fixed costs to variable costs Economies of scales Cost structure

Discussion: Impact of Ethics on Pricing

How should you price if your product is

Information Needed for Price Change

Customers ability & willingness to buy;

When the kopi tiams, local coffee shops in

Information Needed for Price Change (contd)

Need to know everything about the

How would competitors react to our price

New-Product Pricing Strategies 1. Skimming pricing

New-Product Pricing Strategies (contd)

Pricing Strategies for Established Products

In 1999, Shell in Singapore maintained its price when

Reduce the price e.g. Increase the price

SIA regularly reduce its airfare in anticipation of the

during inflation, or if demand is expected to increase

One-price policysetting one fixed

How much flexibility in price?

Depends on the Demand-Cost gap and

When pricing products in different

Leasing is more common for

Singapore Airlines sold many of their

There is a growing trend toward

aircraft and lease them back for their operations

e.g. Leasing of office equipment

Reactions to Price Change

Customers are more sensitive to

Responding to Competitors Price Change If competitors lower price for

Try augmenting the product If it doesnt work or if it is not likely to

work, then meet the price cut head-on

Responding to Competitors Price Change (contd)

If competitors raise price

In a homogeneous market, follow if you

When a Market Leader is Being Attacked on Price

Impact of Discounting on Brand Equity

The Home Loan price war in Singapore in

Sept 2000 involving OUB, UOB, DBS among others

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