Pricing Strategies
Cost based (company), competitor based (intermediate value), customer based (sense
of products value)
profit
increase as price increases;
increase as fixed or variable costs decrease
profit driver
price elasticity
a measure of the sensitivity of demand to changes in price;
inelastic: demand not affected much by price drop/increase
elastic: demand is affected by price drop/increase;
If E > 1, as in the left plot, demand is said to be elastic. Price and revenue go in
opposite directions: With a price drop, revenues shoot up; with a price increase,
revenues fall off.
If 0 ≤ E < 1, as in the right plot, demand is inelastic. Revenue follows price in the same
direction: If price goes up, revenue goes up; if price goes down, so do revenues.
If E = 1 , demand is said to be unitary. Prices goes up or down, but revenues remain
about the same.
, low pricing comes from:
1. Cost-plus pricing: mark-up above average cost
2. Loss leaders: sell below cost to bring in customers who will purchase other products
3. The strategy of "market penetration": price low to attract volume:
a) Early in the product life cycle to generate buzz and demand
b) Late in the product life cycle to milk profits before the brand dies
4. Nearly predatory: price low enough to discourage competitors
cost-plus pricing
unit cost/1-X%
where X% is the intended return
if fixed costs high -> maximize sales volume (to spread fixed costs over as many units
as possible)
if variable costs are high -> maximize per-unit margins
break-even point
BE = Fixed costs/(price - variable costs) or
BE = (Fixed costs + target profit)/(Price - Variable costs)
break even linear function
scanner data
data derived from items that are scanned at the cash register when you check out with
your loyalty card
decrease price:
if PS is large, discount was effective in stimulating sales
High price points:
1. Determine customers' willingness-to-pay, then price right below that sensitivity point
2. The strategy of "market skimming": price high for margins, not worrying about volume
(often used early in the life cycle of a high-end brand to heighten its sense of exclusivity)
3. Prestige or status pricing: price high for image appeal
4. Price high due to real quality differences or true rarity
Mid-point price:
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