Pricing considerations and

Strategies
 What Is a Price?
• Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a product
or service.
 Objectives of pricing
1. Profit Maximization
The primary goal for many businesses is to maximize profits. Companies often set
prices to ensure they cover costs and achieve a profit margin that aligns with their
financial objectives. This could involve setting high prices for premium products or
services or employing cost-based pricing strategies to ensure profitability.
2. Market Penetration
This objective focuses on gaining a significant market share quickly. Businesses may set
low prices initially to attract customers and build brand recognition, even if it means
sacrificing short-term profits. The idea is to capture a large customer base, which can
eventually lead to increased sales volume and profits over time.
3. Market Skimming
Market skimming is the opposite of penetration pricing. In this case, a company sets a
high price initially for a new or innovative product, targeting customers who are willing
to pay a premium. Over time, the price may be gradually reduced as competition
increases or the product matures. The goal is to maximize revenue from early
adopters.
 Objectives of pricing
4. Competitive Positioning
Pricing can be used to establish a company’s position relative to competitors.
Companies may set prices higher than competitors to signal superior quality or may
undercut competitors to attract price-sensitive customers. The objective is to create
a competitive edge in the marketplace.
5. Cost Recovery
This objective focuses on covering the costs of production and operation. It’s
particularly important for businesses in industries with high initial investment or high
fixed costs. A company might price products to break even or cover costs before
aiming for profits.
6. Product Line Pricing
When a company offers a range of products, pricing can be used to differentiate
between various products in the same line. The objective here is to set prices that
reflect differences in features, quality, or brand value. It allows customers to select
the product that best fits their budget while maximizing revenue for the company.
 Objectives of pricing
7. Customer Perception and Value
Businesses often set prices based on the perceived value of a product or service.
Here, the objective is to align the price with how much customers believe the
offering is worth, which is especially common in industries like luxury goods or
technology. Pricing is used to convey quality, prestige, or exclusivity.
8. Price Discrimination
Price discrimination involves charging different prices to different customer
segments for the same product or service. The objective could be to capture more
consumer surplus or cater to varying willingness to pay among different groups,
such as students, seniors, or business customers.
9. Sales and Revenue Maximization
In some cases, businesses may focus on increasing sales volume rather than
maximizing profit per unit. The objective is to generate higher revenue by increasing
the quantity sold, often through discounts, seasonal promotions, or bundling
products.
 Objectives of pricing
10. Psychological Pricing
This strategy focuses on pricing techniques that influence customers’ perception of
price. For instance, prices are often set at $9.99 instead of $10.00, as consumers
tend to perceive the former as significantly cheaper. This objective aims to maximize
sales by leveraging consumer behavior psychology.
11. Price Stability
In some industries, particularly those with price volatility, maintaining stable prices
may be an important objective. Stability in pricing can create trust and predictability
for customers, ensuring continued loyalty and minimizing the effects of market
fluctuations.
12. Social or Ethical Pricing
Some companies, particularly non-profits or businesses with a strong social mission,
may adopt pricing strategies that focus on providing affordable products or services
to disadvantaged groups. The goal is to ensure access to essential goods or services,
even if it means operating at a loss or with lower margins.
 Pricing Process
1. Define Pricing Objectives
Before setting a price, a business must clearly define its pricing objectives. These could vary
depending on the company’s goals and market conditions. Common pricing objectives include:
• Maximizing profit
• Gaining market share
• Ensuring long-term sustainability
• Competitive positioning
• Maintaining price stability
• Aligning with customer value perception
2. Assess the Market and Competitive Environment
Businesses need to understand the market dynamics, including customer behavior, competitor
pricing strategies, and market trends. This stage often involves:
• Market Research: Gathering information about consumer preferences, purchasing power, and
demand elasticity.
• Competitor Analysis: Analyzing competitor prices and their strengths and weaknesses in the
market.
• Economic Factors: Considering external factors such as inflation, recession, or changes in supply
and demand that might impact pricing.
 Pricing Process
3. Determine Costs
A company needs to understand its costs to ensure it can cover production and
operational expenses while achieving the desired profit margin. Costs can include:
• Fixed Costs: Costs that do not change with production levels (e.g., rent, salaries).
• Variable Costs: Costs that change depending on the level of production (e.g., raw
materials, labor).
• Total Cost: The sum of fixed and variable costs for producing and selling a product.
4. Analyze Customer Value Perception
Pricing is not just about costs but also about how customers perceive the value of the
product or service. This involves understanding:
• Customer Needs and Preferences: What features, benefits, and quality levels are most
important to your target customers?
• Willingness to Pay: Assessing the maximum price customers are willing to pay based on
perceived value.
• Price Sensitivity: Understanding how sensitive your customers are to changes in price
(price elasticity of demand).
 Pricing Process
5. Choose a Pricing Strategy
Based on the objectives, market research, cost structure, and customer value perception,
businesses must choose an appropriate pricing strategy. Common pricing strategies include:
• Cost-plus Pricing: Setting the price by adding a markup to the cost of production.
• Penetration Pricing: Setting a low price initially to attract customers and gain market share.
• Skimming Pricing: Setting a high price initially and lowering it over time as competition increases.
• Competitive Pricing: Setting the price based on competitors’ pricing.
• Psychological Pricing: Pricing products to appear more attractive (e.g., $9.99 instead of $10.00).
• Value-based Pricing: Setting a price based on the perceived value to customers, rather than cost.
6. Set the Price
After analyzing all the factors, the company establishes the final price for the product or service.
This stage involves deciding:
• List Price: The standard price at which the product will be sold.
• Discounts and Allowances: Any promotional discounts, seasonal pricing, or volume discounts.
• Price Tiers: If applicable, creating different price levels for different segments or product variants.
 Pricing Process
7. Test the Price (Optional)
In some cases, companies might test the price before rolling it
out on a large scale. This can involve:
• A/B Testing: Offering different prices to different customer groups
to determine the most effective pricing.
• Market Testing: Introducing the product in a limited market to
gauge consumer reactions and sales performance.
8. Implement the Pricing Strategy
Once the price has been set and tested, the business proceeds
with implementing the pricing strategy. This involves:
• Pricing Communication: Clearly communicating the price to
customers through marketing materials, websites, and sales teams.
 Pricing Process
9. Monitor and Adjust
Pricing is not static; it requires ongoing monitoring and adjustments. Businesses
should track:
• Sales Performance: Analyzing how the price impacts sales volume and revenue.
• Customer Feedback: Gathering insights on customer satisfaction and price
perceptions.
• Competitive Changes: Adjusting pricing strategies based on competitors’ actions.
• Market Conditions: Responding to economic shifts, new trends, or external factors
that might affect pricing.
• Profit Margins: Ensuring the price covers costs and delivers the desired profit margin.
10. Review and Refine the Pricing Strategy
Over time, companies should review their pricing strategies to ensure they align
with business objectives, customer expectations, and market conditions. Periodic
adjustments may be necessary to stay competitive or respond to new market
conditions.
 Adapting the price: Concept of geographical pricing,
promotional pricing, discriminatory pricing

Adapting the price is an important strategy for

businesses to meet varying customer needs,
market conditions, and competitive pressures.
Three common approaches for adapting pricing
are geographical pricing, promotional pricing,
and discriminatory pricing. Each strategy allows
businesses to adjust their pricing structures
based on different factors such as location,
timing, or customer segment.
 Adapting the price: Concept of geographical pricing,
promotional pricing, discriminatory pricing
1. Geographical Pricing
Geographical pricing involves setting different prices for the same product or service based on
the customer's location. This approach accounts for factors such as shipping costs, local economic
conditions, taxes, and competition in different regions. Geographical pricing can help businesses
manage costs and increase competitiveness in specific markets.
Types of Geographical Pricing:
• Zone Pricing: The market is divided into different zones, and the price varies depending on
the zone. Customers closer to the product’s origin or production site may pay a lower price
compared to those farther away.
• Freight-Absorption Pricing: In this strategy, the seller absorbs part or all of the shipping costs,
adjusting the price to ensure that customers are not discouraged by additional freight
charges.
• Uniform Delivered Pricing: The same price is charged for a product regardless of where the
customer is located, with the seller incorporating shipping costs into the price.
• Base Point Pricing: A pricing system where the price is set based on a base point (such as a
city or location), and the cost to ship to other areas is added based on distance from that
base point.
Example: A company selling furniture might charge customers in remote locations more because
of the higher cost of delivery, while customers in the same city as the warehouse pay a lower
price.
 Adapting the price: Concept of geographical pricing,
promotional pricing, discriminatory pricing
2. Promotional Pricing
Promotional pricing refers to temporary pricing strategies used to attract customers
and boost short-term sales. It often involves offering discounts, deals, or limited-time
offers that create a sense of urgency or value for customers. Promotional pricing is
commonly used for product launches, seasonal sales, clearances, or to attract attention
to a new product or service.
Types of Promotional Pricing:
• Discounts: Offering a direct reduction in the price, such as a percentage off or a
fixed amount off the regular price (e.g., "20% off" or "Buy One, Get One Free").
• Bundling: Offering a package deal where multiple products or services are sold
together at a lower price than if bought individually.
• Seasonal Pricing: Offering discounts during specific seasons or holidays to drive
sales (e.g., end-of-year sales or back-to-school promotions).
• Flash Sales: A time-limited sale, often promoted through online platforms, to
encourage quick purchasing decisions.
• Coupons or Rebates: Offering customers a coupon or rebate that they can redeem
to get a discount or cash back.
Example: A clothing store may offer a "Buy 1, Get 1 Free" promotion for a limited
period to increase foot traffic and sales volume.
 Adapting the price: Concept of geographical pricing,
promotional pricing, discriminatory pricing
3. Discriminatory Pricing
Discriminatory pricing, also known as price discrimination, occurs when a company charges different prices for the
same product or service based on specific customer characteristics or purchasing circumstances. The goal is to
capture consumer surplus, where businesses can charge different prices based on factors like willingness to pay,
customer segment, or the timing of the purchase. Price discrimination can help businesses maximize revenue by
adjusting prices to different market segments.
Types of Price Discrimination:
• First-Degree Price Discrimination (Personalized Pricing): The seller charges each customer the maximum price
they are willing to pay. This type of pricing requires detailed customer information and is often used in one-on-
one transactions.
• Example: A car dealership may negotiate a different price with each customer based on their budget and
willingness to pay.
• Second-Degree Price Discrimination (Product Versioning): The price varies based on the quantity purchased or
the product version chosen. Customers are offered different pricing options for different versions or amounts of
a product.
• Example: A software company may offer a basic version of their product at a lower price and a premium
version with additional features at a higher price.
• Third-Degree Price Discrimination (Group Pricing): Different customer segments are charged different prices
based on their characteristics or behavior. Common criteria include age, location, or membership status.
• Example: Offering discounts to students or senior citizens or charging different prices for domestic and
international customers.
Example: Airlines use discriminatory pricing by charging higher prices for business class seats, offering discounted
fares for students, or charging different prices based on booking timing (e.g., early bird discounts or last-minute high
rates).
 Adapting the price: Concept of geographical pricing,
promotional pricing, discriminatory pricing

Key Differences:
• Geographical Pricing focuses on adjusting prices
based on the customer’s location or delivery region.
• Promotional Pricing is used for temporary price
reductions or offers to drive short-term sales or
awareness.
• Discriminatory Pricing adjusts prices based on
specific customer attributes or behaviors to
maximize revenue from different customer groups.
 Pricing Strategies and their Application

1. Cost-Plus Pricing
Definition: Setting the price by adding a fixed markup to the
cost of producing the product or service.
Application:
• Often used in manufacturing or retail.
• Works well when the business has clear cost structures and
predictable margins.
• Common in industries with low competition or for custom
products where pricing based on cost is straightforward.
Example: A company sells a product that costs $50 to produce
and applies a 30% markup, resulting in a selling price of $65.
 Pricing Strategies and their Application

2. Penetration Pricing
Definition: Setting a low initial price to attract customers and
gain market share quickly, with plans to raise prices later.
Application:
• Effective for new products or services entering the market.
• Used in competitive markets to attract price-sensitive customers.
• Common in subscription services or tech industries.
Example: A new streaming service offers its subscriptions at $5
per month to build a customer base, with plans to increase
prices after customer loyalty is established.
 Pricing Strategies and their Application

3. Price Skimming
Definition: Setting a high initial price to capitalize on early
adopters and then gradually lowering the price over time.
Application:
• Used for innovative or unique products with little to no competition
at launch.
• Common in technology (smartphones, software) or luxury products.
• Helps recover research and development costs quickly.
Example: A tech company launches a new smartphone at
$1,000 and gradually reduces the price over the course of a year
to attract more price-sensitive buyers.
 Pricing Strategies and their Application

4. Psychological Pricing
Definition: Setting prices that have a psychological impact,
such as pricing a product at $9.99 instead of $10 to make it
seem cheaper.
Application:
• Used in retail, e-commerce, and consumer goods.
• Works well for products with high competition where small price
differences can influence buying decisions.
• Often used in conjunction with discount pricing to further
influence consumer perception.
Example: A retailer prices a shirt at $19.99 instead of $20 to
appeal to customers' perception of a better deal.
 Pricing Strategies and their Application
5. Dynamic Pricing
Definition: Adjusting prices in real-time based on market demand,
competitor pricing, time of day, or other variables.
Application:
• Common in industries like airlines, hotels, ride-sharing, and e-
commerce.
• Used to optimize revenue by responding to supply and demand
fluctuations.
• Requires sophisticated technology and data analytics to monitor and
adjust prices.
Example: An airline adjusts flight ticket prices based on how far in
advance the purchase is made, demand for specific routes, and
competitor prices.
 Pricing Strategies and their Application

6. Bundling
Definition: Offering a set of products or services together at a
reduced price compared to purchasing each item individually.
Application:
• Used to increase the average order value and encourage
customers to purchase more.
• Common in industries like software (e.g., office suites), food
(meal combos), and electronics (e.g., accessories bundled with
devices).
Example: A fast food chain offers a burger, fries, and drink as a
combo deal for $7, instead of selling each item separately for
$3.50, $2.50, and $2.50 respectively.
 Pricing Strategies and their Application
7. Freemium Pricing
Definition: Offering basic products or services for free while
charging for premium features or advanced services.
Application:
• Common in digital and software industries (e.g., apps, cloud services).
• Helps attract a large user base quickly and convert a percentage of
them into paying customers.
• The free version must offer sufficient value to entice users, while the
premium version offers more advanced features.
Example: A music streaming service offers a free tier with ads and
a premium tier without ads and additional features for $9.99 per
month.
 Pricing Strategies and their Application
8. Value-Based Pricing
Definition: Setting prices based on the perceived value to the
customer rather than the cost to produce the product or service.
Application:
• Used when the product provides a clear and unique value to the
customer, such as in luxury goods or innovative technologies.
• Can be used when a business has a strong brand or customer loyalty.
Example: A designer handbag brand may price its product at a
premium based on the brand's perceived value and the status it
conveys, rather than the actual cost to manufacture the handbag.
 Pricing Strategies and their Application

9. Geographical Pricing
Definition: Setting different prices for the same product or
service depending on the geographic location of the customer.
Application:
• Used when different markets have varying levels of demand,
costs, or competitive environments.
• Common in international trade, where companies must account
for local economic conditions, taxes, tariffs, and shipping costs.
Example: A software company charges higher prices for its
product in developed countries like the U.S. compared to
emerging markets due to differences in purchasing power.
 Pricing Strategies and their Application
10. Hourly or Project-Based Pricing
Definition: Charging customers based on the amount of time spent
on a service (hourly) or a fixed price for a complete project (project-
based).
Application:
• Common in service industries like consulting, legal services, and
freelance work.
• Works when the amount of work required is difficult to estimate upfront
or varies.
• Can be ideal for professional services that require flexibility.
Example: A freelance graphic designer charges clients $50 per hour
for design work or provides a fixed price of $500 for a website design
project.