SALAZAR COLLEGES OF SCIENCE AND INSTITUTE OF TECHNOLOGY

Madridejos Campus
College of Business Administration
Subject: Pricing Strategy
Instructor: Mr. Junar S. Desucatan, MBA

Module 1-PRINCIPLES OF PRICING

Pricing Principle # 1. Penetration – Oriented Pricing:
Penetration pricing policy starts with a low price to capture the market. As the low price attracts more
and more customers, sales increase, production increases and economies in production can be secured.
This enables to reduce the price further j and when the product is established in the market, price is in-
creased. Toilet products, fancy products follow this principle.

Pricing Principle # 2. Skim-the-Cream Pricing:

Skim-the-cream pricing principle starts with increased price to take away the cream of the market in
initial stages. The price is than progressively reduced as the product grows old. Drugs, synthetic
products, nylon etc. follow the principle.
The above two notable principles of pricing have their merits and demerits.
The penetration pricing policy keeps off competition and gives the firm a strong hold on the market. It
earns reputation in a short period. Steadily the price is increased and profit margin goes on increasing
with the increase in sales. But the demerit of such pricing principle is that it becomes difficult to recount
the developmental costs.

The advantages of the skim-the-cream pricing are:

(a) It helps in recouping the initial developmental cost
(b) It promotes short term profits maximization
(c) High price creates impression that the product is of superior quality
(d) Demand is kept within productive capacity
(e) Competition cannot easily enter into the market, and
(f) Flexibility with the hedging quality against possible mistake in pricing is additional advantages.
As against these advantages, we may say that high price keeps the buyers away, competition is also
eliminated, image of the company may suffer and finally the attempt to earn short term maximization of
profit may cause premature death of the product.

Pricing Principle # 3. Market Pricing (Price-in-Line):

Market pricing is considered desirable when free competition exists in the market. This pricing principle
can be adopted if the degree of product differentiation is minimum. In the marketing system where
branding-packaging, advertising, credit sales, sales promotion etc. prevail, sellers adopt means of
competition other than pricing to capture the market. Price as a tool of competition loses its
importance.
Pricing Principle # 4. Market plus Pricing:
Market plus pricing follows the principle of pricing at a higher level provided there is free competition in
the market and the product is of special type, quality and prestige. Packing, branding becomes more
significant and high price does not stand in the way of better sales.

Pricing Principle # 5. Market minus Pricing:

Market minus pricing generally is the principle of pricing where goods are sold through chain stores,
super markets. Prices are lower than the market price; so it is market minus pricing.

Pricing Principle # 6. Full Line Pricing:

Full lane pricing principle fixes price in such a way that one product induces selling of other products.
Low price is fixed in case of a few products and high price is charged for other products, the result being
the increase in sales and profit.

Pricing Principle # 7. Loss-Leader Pricing:

Loss-leader pricing principle is applicable for pricing of goods of various types. The price of a product is
reduced to attract customers and to induce them to buy others where the price is not fixed at a lower
level.

Pricing Principle # 8. Ethical Pricing:

Ethical pricing principle has been introduced to discharge social responsibility of business. Customers’
dissatisfaction and grievances are taken into consideration and price is fixed accordingly.

Pricing Principle # 9. Minimization of Loss Pricing:

Minimization of loss pricing is resorted to during depression period in capital intensive industries. Price
is fixed below the total cost which means loss to the firm. But even with loss the business does not stop
producing- Certain expenses fixed in nature have to be incurred whether production is on or not. So,
production remains though in low key to make recovery of some of the fixed expenses.

Pricing Principle # 10. Prestige Pricing:

Prestige pricing is the principle of fixing the price of a certain product at a high level though other
products are not priced in that way. This attracts customers and suspicion does not arise in their minds
as to the quality of other goods. There are indeed to buy such goods.

Pricing Principle # 11. Mark Up Pricing:

Mark up pricing follows the principle of adding additional amount with the total amount of desired
receivable from the sale of goods at such enhanced price and then a slight higher price is charged cyan
above amount.
In mark up pricing, there is no certainty that all the goods will be sold at primary price so fixed, there
may be reduction of price, and goods may be damaged. So, in order to compensate this, mark up pricing
is fixed at higher level.

Pricing Principle # 12. Return on Investment Pricing:

Return on investment pricing principle is to consider the reasonable return on investment for products.

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Module 2-GENERAL PRICING STRATEGIES

Cost-Based Pricing
Just as it sounds, cost-based pricing identifies the overall fixed, variable, and indirect costs of production
and prices that product accordingly.
This pricing strategy focuses on measuring all of the costs involved in producing a given product, and
pricing that product according to those costs.
Cost-based pricing is a fairly straight-forward concept, where the organization understands the
operation costs of producing a given good and prices that good as close to this cost level as possible. It is
often referred to as cost-plus pricing, as the firm (unless it is a non-profit organization) must retain some
value or profit from the sale.

Demand-Based Pricing
Demand-based pricing is any pricing method that uses consumer demand—based on perceived value—
as the central element. Demand-based pricing, also known as customer-based pricing, is any pricing
method that uses consumer demand—based on perceived value—as the central element. These
include: price skimming, price discrimination, psychological pricing, bundle pricing, penetration pricing,
and value-based pricing.
Pricing factors are manufacturing cost, market place, competition, market condition, and quality of the
product.

1. Price Skimming
Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or
service at first, then lowers the price over time. In other words, price skimming is when a firm charges
the highest initial price that customers will pay. As the demand of the first customers is satisfied, the
firm lowers the price to attract another, more price-sensitive segment.
The objective of a price skimming strategy is to capture the consumer surplus. It allows the firm to
recover its sunk costs quickly before competition steps in and lowers the market price. If this is done
successfully, then theoretically no customer will pay less for the product than the maximum they are
willing to pay. In practice, it is almost impossible for a firm to capture all of this surplus.

2. Price Discrimination
Price discrimination exists when sales of identical goods or services are transacted at different prices
from the same provider. Product heterogeneity , market frictions, or high fixed costs (which make
marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to
different consumers, even in fully competitive retail or industrial markets. Price discrimination also
occurs when the same price is charged to customers that have different supply costs. Price
discrimination requires market segmentation and some means to discourage discount customers from
becoming resellers and, by extension, competitors. This usually entails using one or more means of
preventing any resale, keeping the different price groups separate, making price comparisons difficult,
or restricting pricing information.

3. Psychological Pricing
Psychological pricing is a marketing practice based on the theory that certain prices have a psychological
impact. The retail prices are often expressed as “odd prices”: a little less than a round number, e.g.
$19.99. The theory is this drives demand greater than would be expected if consumers were perfectly
rational. Bundle pricing is a marketing strategy that involves offering several products for sale as one
combined product. This strategy is very common in the software business, in the cable television
industry, and in the fastfood industry in which multiple items are combined into a complete meal. A
bundle of products is sometimes referred to as a package deal, a compilation, or an anthology.

4. Penetration Pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than
the eventual market price, to attract new customers. The strategy works on the expectation that
customers will switch to the new brand because of the lower price. Penetration pricing is most
commonly associated with a marketing objective of increasing market share or sales volume, rather than
to make profit in the short term. The main disadvantage with penetration pricing is that it establishes
long term price expectations for the product as well as image preconceptions for the brand and
company. This makes it difficult to eventually raise prices.

5. Value-based Pricing
Value-based pricing sets prices primarily, but not exclusively, on the value, perceived or estimated, to
the customer rather than on the cost of the product or historical prices. Value-based-pricing is most
successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g.
drinks at open air festival at a hot summer day), or for indispensable add-ons (e.g. printer cartridges,
headsets for cell phones). By definition, long term prices based on value-based pricing are always higher
or equal to the prices derived from cost-based pricing.

Other Demand-based Pricing:

Competitor-Based Pricing
Organizations that sell products or services may look at what price a product is generally being sold at
and set that as a target for the sales price.
 Determining the price of a product or service can be approached many different ways,
from consumer willingness to pay to pursuing the lowest possible cost for the consumer.
 Competitor -based pricing is the strategic approach in which a company tries to match (or
perhaps better) the price point set by key competitors within the industry.
 Competitor-based pricing is particularly useful for new entrants, who are trying to
achieve the efficiency and low price of more mature and established competitors.
 Competitor-based pricing can be inappropriate in markets with limited competition, as it
could essentially lead to price fixing

 Price fixing: An illegal agreement between participants on the same side in a market to
buy or sell a product, service, or commodity only at a fixed price, or maintain the market
conditions such that the price is maintained at a given level by controlling supply and
demand.

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Whalley, Andrew, Strategic Marketing (2010)