Pricing Methods

Unit – 9
Dr. Lokesha. A
Week 12 Price & Output decisions under
Imperfect Competition
Quadrant 1 1. Watch the eLearning content on “L8: Price & Output decisions under
e-Content Imperfect Competition” before the live session.
2. Read the e-LM on “Unit 8: Price & Output decisions under Imperfect
Competition”
Quadrant 2 1. Revise the “L8: Price & Output decisions under Imperfect Competition”
e-Tutorial recording of the live Session
2. Attend the live session #8 on “Price & Output decisions under Imperfect
Competition”
Quadrant 3 1. Take the formative assessment for “L 8: Price & Output decisions under
e-Assessment Imperfect Competition”
2. After the live session, repeat the formative assessment for “L8: Price &
Output decisions under Imperfect Competition” for self-assessment
3. Attempt solving the Practice MCQs & Case Study #8 on “Price & Output
decisions under Imperfect Competition”
Quadrant 4 1. Participate in collaborative learning by discussing the Practice MCQs &
Discussions Case Study #8
 Unit – 9
Pricing Methods
• Topics:
• Objectives of pricing policy,
• Factors involved in pricing policy,
• Types of pricing- export pricing, transfer pricing, multi-product
pricing, predatory pricing, skimming pricing, penetration pricing,
product line pricing, loss leader pricing, premium pricing, optimal
product pricing, odd/even pricing
 Pricing Methods
• A pricing strategy is an approach taken by businesses to decide how much to
charge for their goods and services. The interaction between margin, price, and
selling level is given specific consideration while pricing products. Therefore,
it’s important and complicated to design a proper pricing plan that ensures
business success.
• The price is a component that affects a company’s revenue significantly. It forms
the key variable in the company’s financial modeling and affects its income,
profits, and investments in the long term.
• A pricing policy is a company's approach to determining the price at which it
offers a good or service to the market. Pricing policies help companies make sure
they remain profitable and give them the flexibility to price separate products
differently.
Objectives of Pricing Methods
• Achieving a Target Return on Investments
• Price Stability
• Achieving Market Share and sales maximization
• Prevention of Competition and survival
• Increased Profits
General considerations involved in the
formulation of Pricing policy
Kind of Market Structure

Goal of Profit and Sales

General considerations
involved in the formulation of Long range Welfare of the Firm
Pricing policy

Flexibility

Government Policy
Types of pricing- Export Pricing
• Price fixed for the export products or services which the exporter
intends to sell in the overseas market is called export pricing. Export
price of a given product is determined by many factors like profit,
market share, survival etc..
Objectives of Export Pricing
• Survival
• Maximum Sales Growth
• Maximum Current Profit
• Establishing Leadership
Importance of Export Pricing
• Consumers are extremely sensitive about quality and price of the product. If the price is not
properly set, success of the firm in the international market becomes doubtful.
• The volume of sales and market demand depends on pricing policy.
• Competitive capacity in foreign market depends on the price fixed.
• It decides the success and failure of export efforts.
• Export pricing builds goodwill in the market.
• Export pricing helps in capturing foreign market.
• Develops brand image and product differentiation.
• Pricing helps in penetration of market by keeping them low initially and gradually raising
them.
• Pricing not only helps in increasing profit and raising revenue, but also in enhancing
market share of the product.
Transfer Pricing
• Transfer pricing is an accounting practice that represents the price that
one division in a company charges another division for goods and
services provided.
• Transfer pricing allows for the establishment of prices for the goods
and services exchanged between subsidiaries, affiliation, or
commonly controlled companies that are part of the same larger
enterprise.
Keys of Transfer Pricing
• Transfer pricing accounting occurs when goods or services are exchanged between divisions
of the same company.
• A transfer price is based on market prices in charging another division, subsidiary, or holding
company for services rendered.
• Companies use transfer pricing to reduce the overall tax burden of the parent company.
• Companies charge a higher price to divisions in high-tax countries (reducing profit) while
charging a lower price (increasing profits) for divisions in low-tax countries.
• The IRS states that transfer pricing should be the same between intercompany transactions as
it would have been had the company done the transaction outside the company.
Multi-Product Pricing
• Multi-Product Pricing works by making small, scientific, up/down price adjustments across all the products in
a portfolio. The average price of the portfolio should remain about the same – this will ensure customers don't
see a change in the value-for-price offered by your brand or store.
• he price theory or microeconomic models of price determination are based on the assumption that a the firm
produces a single, homogeneous product.
• In actual practice, however, production of a single homogeneous product by a firm is an exception rather
than a rule. Almost all firms have more than one product in their line of production.
• Even the most specialized firms produce a commodity in multiple models, styles and sizes, each so much
differentiated from the other that each model or size of the product may be considered a different product.
• For example, the various models of refrigerators, TV sets, radios, and car models produced by the same
company may be treated as different products for at least pricing purpose.
• The major problem in pricing multiple products is that each product has a separate demand curve. But, since
all of them are produced under one organization by interchangeable production facilities, they have only one
inseparable marginal, cost curve.
•
Predatory pricing
• Predatory pricing is the illegal business practice of setting prices for a product
unrealistically low in order to eliminate the competition.
• Predatory pricing violates antitrust laws, as its goal is to create a monopoly.
However, the practice can be difficult to prosecute. Defendants may argue that
lowering prices is a normal business practice in a competitive market rather
than a deliberate attempt to undermine the marketplace.
• Predatory pricing doesn’t always work, since the predator is losing revenue as
well as the competition. The predator must raise prices eventually. At that
point, new competitors will emerge.
Keys of Predatory pricing
• In a predatory pricing scheme, prices are set unrealistically low in
order to eliminate competitors and create a monopoly.
• Consumers benefit from lower prices in the short term but suffer in
the long term as the successful predator has eliminated choice and is
free to raise prices.
• Predatory pricing has been difficult to prove in court.
Skimming Pricing
• Price skimming is a product pricing strategy by which a firm charges
the highest initial price that customers will pay and then lowers it
over time.
• As the demand of the first customers is satisfied and competition
enters the market, the firm lowers the price to attract another, more
price-sensitive segment of the population.
• The skimming strategy gets its name from "skimming" successive
layers of cream, or customer segments, as prices are lowered over
time.
Keys of Skimming Pricing
• Price skimming is a product pricing strategy by which a firm charges
the highest initial price that customers will pay and then lowers it over
time.
• As the demand of the first customers is satisfied and competition
enters the market, the firm lowers the price to attract another, more
price-sensitive segment of the population.
• This approach contrasts with the penetration pricing model, which
focuses on releasing a lower-priced product to grab as much market
share as possible.
Penetration pricing
• Penetration pricing is a marketing strategy used by businesses to attract customers to a
new product or service by offering a lower price during its initial offering. The lower
price helps a new product or service penetrate the market and attract customers away
from competitors. Market penetration pricing relies on the strategy of using low prices
initially to make a wide number of customers aware of a new product.
• The goal of a price penetration strategy is to entice customers to try a new product and
build market share with the hope of keeping the new customers once prices rise back to
normal levels. Penetration pricing examples include an online news website offering one
month free for a subscription-based service or a bank offering a free checking account for
six months.
Keys of Penetration pricing
• Penetration pricing is a strategy used by businesses to attract
customers to a new product or service by offering a lower price
initially.
• The lower price helps a new product or service penetrate the market and
attract customers away from competitors.
• Elastic goods are the best types of goods for penetration pricing as small
changes in price often lead to large changes in demand.
• Penetration pricing comes with the risk that new customers may
choose the brand initially, but once prices increase, switch to a
competitor.
• Companies often entice customers with unprofitable strategies (i.e.
offering a new cell phone) in exchange for a long-term agreement (i.e.
a multi-year service plan).
Product Line Pricing
• Product line pricing involves the separation of goods and services into cost
categories in order to create various perceived quality levels in the minds
of consumers. You might also hear product line pricing referred to as price
lining, but they refer to the same practice.
• The simple definition is that a product line is a group of related products,
differentiating by features and price. Setting products at different price
points allows the would-be customer to orient themselves towards the one
most likely to fit their needs and spending capabilities.
Loss leader pricing
• Loss leader pricing is a marketing strategy that prices products lower
than the cost to produce them in order to attract new customers or to
sell additional products to customers. Companies typically use loss
leader pricing when they are entering new markets or attempting to
increase market share.
How to use loss leader pricing in your
business
• Excess inventory
• Consumables and replacement parts
• complementary or Product page recommandations
• Business analytics
Premium Pricing
• Premium pricing is a strategy that involves tactically pricing your
company's product higher than your immediate competition. The
purpose of pricing your product at a premium is to cultivate a sense of
your product's market being just that bit higher in quality than the rest.
Pros and cons of premium pricing
• Premium pricing pros
• Higher profit margins
• Improves brand perception & value
• Build a moat around your brand
• Premium pricing cons
• Dependence on price inelasticity
• Limits market opportunity
• Reduces price competitiveness
Optimal Product Pricing
• The optimal price is that price point at which the total profit of the seller is
maximized. When the price is too low, the seller is moving a large number
of units but is not earning the highest possible aggregate profit.
• The optimal price is the price at which a seller can make the most profit.
In other words, the price point at which the seller’s total profit is
maximized. We can refer to the optimal price as the profit maximizing
price. The optimal price refers to both products and services.
How do you find the optimal price point best
suited
• Product Cost
• Benchmarking
• Perceived Value
Odd/Even pricing

• Odd-even pricing is a pricing strategy involving the last digit of a

product or service price. Prices ending in an odd number, such as
$1.99 or $78.25, use an odd pricing strategy, whereas prices ending in
an even number, such as $200.00 or 18.50, use an even strategy.
• Advantages
• Motivates impulse buys
• Encourages larger purchases

• Disadvantages
• Damaged LTV (loan-to-value ratio) and perception
• Incorrect perception of value
Week 13 Pricing Methods
Quadrant 1 1. Watch the eLearning content on “L 9: Pricing Methods”
e-Content before the live session.
2. Read the e-LM on “Unit 9: Pricing Methods”
Quadrant 2 1. Revise the “L8: Price & Output decisions under Imperfect
e-Tutorial Competition” recording of the live Session
2. Attend the live session #9 on “Pricing Methods”
Quadrant 3 1. Take the formative assessment for “L9: Pricing Methods”
e-Assessment 2. After the live session, repeat the formative assessment for
“Pricing Methods” for self-assessment
3. Attempt solving the Practice MCQs & Case Study #9 on
“Pricing Methods”
4. Attempt Continuous Assessment - 3
Quadrant 4 1. Participate in collaborative learning by discussing the Practice
Discussions MCQs & Case Study #9