Page 192 - DMGT408DMGT203_Marketing Management

Unit 8: Pricing: Understanding and Capturing Customer Value

in terms of tangible and intangible attributes, and brand image. This allows a company to set Notes
different price than its competitors. In most successful cases, the nature of competition is likely
to be based on non-price factors.
Under perfect competition there are very large number of sellers and buyers perceiving all
products in a category as the same. All sellers set their prices at going market price as buyers are
unwilling to pay more than the going market price. Sellers have no flexibility in price setting.

Self Assessment

State whether the following statements are true or false:
8. Cost of production is an internal factor that affects pricing decisions.
9. Increase in tax rate is an external factor that affects prices of a product.

10. A non-regulated monopoly can set prices at any level it determines to be appropriate.

8.4 Pricing Strategies

A pricing strategy is a course of action framed to affect and guide price determination decisions.
These strategies help realising pricing objectives and answer different aspects of how will price
be used as a variable in the marketing mix, such as new product introductions, competitive
situations, government pricing regulations, economic conditions, or implementation of pricing
objectives. More than one pricing strategy may be selected to address the needs of different
markets or to take advantage of opportunities in certain markets.
There are many different strategies companies adopt for accomplishing pricing objectives. Some
of the important ones and often used are discussed here.

8.4.1 New Product Pricing

The base price of a new product is easily adjusted in the absence of price control by government.
A pioneer can set the base price high to recover product development costs quickly. While
setting the base price, the company also considers how quick will be the entry of competition in
the market, what would be the strength of entry campaign, and what impact this will have on
primary demand. If the company concludes that competitors will enter with heavy campaign,
with limited effect on primary demand, then the company may opt for penetration pricing
policy and set a low base price to discourage competitors’ entry.
Price skimming refers to charging the highest possible price that a sufficient number of most
desirous customers for the product will pay. This approach offers the most flexibility to a
pioneer in the product’s introduction stage because the demand tends to be inelastic during
most of this period due to the absence of competitors. Skimming approach generates much
needed cash flows to offset high cost of product development. Most companies, who introduce
successful pioneering products, usually adopt price-skimming approach.
Price skimming can generate quick returns to cover up the product’s research and development
costs. This strategy restricts product’s market penetration because only the most desirous
customers buy the product. Possibility of earning large margins encourages competitors to
enter the market.

Example: When DVD players were first introduced, their prices were extremely high
because it was a unique product made only by one company. Now that competitors have caught
onto the idea, the prices have dropped dramatically yet they still make a reasonable profit.

LOVELY PROFESSIONAL UNIVERSITY 185