Pricing Strategies Part 1.pptx

Strategies for Pricing: Part 1: Qualitative/Fixed BMI3C - 2.14 Discuss What factors should you consider in setting a price? I am learning to… Price products strategically. Learning Goals Success Criteria I will be successful when I can… Choose which of the 7 strategies from today to use on spe...

Strategies for Pricing: Part 1: Qualitative/Fixed BMI3C - 2.14 Discuss What factors should you consider in setting a price? I am learning to… Price products strategically. Learning Goals Success Criteria I will be successful when I can… Choose which of the 7 strategies from today to use on specific video case studies. Arrive at an actual price for a product, given today’s strategies. FIRST: The One that Doesn’t Fit Anywhere Else... #1 Psychological Pricing Psychological Pricing CHANGING A PRICE TO TAKE ADVANTAGE OF CONSUMER PERCEPTIONS This can be applied to ANY of the other pricing strategies. EXAMPLE = Charging $9.99 instead of $10.00. EXAMPLE = Charging $4.98/litre for gas instead of $5.00. WHY? consumers perceive “odd” prices to be lower than “even” ones. James Jia - “Sometimes we charge customers $553 instead of $550 because less round numbers make them think that it was arrived at scientifically; Category A: The strategy that uses the same price as the competition #2 Going Rate Pricing Going Rate - - - AKA: Follow-the- competition USING THE SAME PRICE AS COMPETITORS DO. Sometimes price is sensitive – too high and you’ll lose market share; too low and the price leader would match price (in which case there’s no point in lowering it). Sometimes the best if... There is a clear price leader who controls the game. Where competition is limited E.g., banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets Going Rate - EX) Example: You enter the chocolate bar market and sell it at the same price as the other chocolate bars. OPTION #1: Lower Price = You know that if you try to compete with Hershey, they will simply undercut you. (so, bad option) OPTION #2: Higher Price = Information suggests that consumers are very price sensitive (so, bad option) CATEGORY B: HIGHER price strategies #3 Value Pricing Value Pricing LONG-TERM HIGH PRICE DUE TO HIGH PERCEIVED VALUE Value Pricing Example - As a result of advertisements, your market research indicates that customers perceive your chocolate bar to be superior to the other brands. Not only that, increasing the price will only decrease your volume of sales by a small and worthwhile margin. OPTION 1: Use a Lower Price OPTION 2: Use the Same Price OPTION 3: Use a Higher (Value) Price #4 Skimming or Milking Skimming or Milking SHORT-TERM HIGH PRICE TO “MILK” THE MARKET FOR A PERIOD OF POPULARITY. Sales Volume is low; not because there aren’t a huge number of buyers, but rather because skimming only lasts a short period of time. WHY SKIM? Because the product has a short life cycle; either because: The competition is bound to eventually catch up (e.g., cell phones) It is a short-term trend (e.g., Avengers Endgame t-shirts right after release) Skimming or Milking & Value Strategy DISCUSS: List 3 products of different types that the people in your group have purchased that you believe used a skimming strategy. List 3 products of different types that the people in your group have paid a higher price for as a result of a value strategy. CATEGORY C: LOWER Price Strategies #5 Penetration Pricing Penetration Pricing TRYING TO PENETRATE A NEW MARKET TO GAIN MARKET SHARE BY CHARGING A LOW PRICE; OFTEN ONE THAT IS APPROXIMATELY EQUAL TO COSTS. Usually only attempted when entering very competitive markets. The goal is to undermine the established leaders; trying to get consumers to try your new product. The risk is that competitors will respond by also reducing their prices. EXAMPLE - The chips market is very competitive. In order to try to gain market share, we’ll put our new product on the shelf at the #6 Barrier Pricing Barrier Pricing REDUCE PRICES TO REMOVE OR DETER NEW ENTRANTS Aggressive strategy to protect established position. Works best in price-sensitive markets. This works because (unlike new entrants) established players have: Economies of scale - The ability to pay a lower unit cost as a result of: Manufacturing/buying in bulk, therefore each unit covers more of the fixed costs Do Destroyer/Predatory Pricing Exist? Destroyer/Predatory Pricing - Using barrier pricing first (lowering prices to deter or remove competitors) but then after you’ve cornered the market increasing the prices. Often illegal because it encourages monopolies. Therefore, the difference between barrier and destroyer/predatory is that with the latter you ALSO add the action of increases prices again once the competitors are gone. However, this economist has a different take on it: #7 Loss Leading Loss Leading PRICING A PRODUCT BELOW COST; THEREFORE, SELLING IT AT A LOSS Three reasons why a firm may loss lead: 1.Loss leading on one product (e.g., gas) in order to attract customers for other products (e.g., buying higher margin products once they’re in the store). 2.As an extreme form of penetration pricing; e.g., to aggressively enter a market and gain share of customers. 3.As an extreme form of barrier pricing; e.g., the chemical Loss Leading Continued Problems of Loss Leading: Obviously #1, you’re losing money on each unit you sell. These losses can add up. When you’re done, it may be difficult to raise the prices back up. If another firm starts a price war while you’re loss I am learning to… Learning Goals Success Criteria Price products strategically. I will be successful when I can… Arrive at an actual price for a product, given today’s strategies. Team Price Decisions Case Studies Refer to document posted to Google Classroom for cases and comprehension worksheet!