Page 193 - DMGT408DMGT203_Marketing Management

Marketing Management/Essentials of Marketing

Notes Penetration pricing approach requires the price to be set less than the competing brands and
aims at market penetration to capture large market share quickly. Companies adopt this strategy
when the demand tends to be elastic. Sometimes companies use penetration pricing to rapidly
capture a large market share.

Example: The first two or three editions of a monthly magazine may be offered at a
lower cost, say, ` 20, but after this the magazine price increases to, say, ` 50. Because most people
will have found interest in the first editions of the magazine, they are inspired to continue
buying the magazine in the future.

Increased demand makes it necessary to produce more and this decreases per unit production
costs. Low unit production cost puts the marketer in a position of advantage to further decrease
the price, and thereby make it difficult for aspiring new competitors to enter the market.
Besides, a low unit price is likely to be less attractive to competitors because the lower per unit
price results in lower per unit profits. With this approach it becomes difficult to raise price
subsequently. Some marketers initially skim the market and later set a penetration price. A lower
price makes the market less attractive to potential new entrants.

8.4.2 Price Adaptation

The organization needs to recognize price adaptation which is a complex issue. Whilst it is a
powerful marketing took, it can be controversial in nature. As such, careful consideration is
needed to develop effective adaptation strategies. Given that segmentation is the basis of much
marketing strategy, it is reasonable to expect segmentation to strongly influence pricing. Prices
may be adapted to meet the needs of various customer groups.

Example: Student discounts, off-peak travellers, those buying in bulk, etc.
However, care must be taken, as those paying full price may perceive adaptive pricing negatively.
They could perceive themselves as subsidizing other segments.

Example: Some banks have been criticized for providing mortgage discounts only to
new customers.

Price adaptation often extends into discount policy. The creative use of discount can be major
marketing tool. Discounts can stimulate demand and can be applied both directly (e.g., a price
reduction) and indirectly (e.g., interest free credit, extended payment terms, optional extras
provided at no additional charge).
The final area of price adaptation is in response to competitors’ actions. It is more likely that
organizations will follow competitors’ price cuts when there is excess supply within a market,
or when customer loyalty is deemed to be weak. Price increases are likely to be matched when
there is excess demand, or industry costs are rising.

8.4.3 Psychological Pricing

Psychological pricing approach is suitable when consumer purchases are based more on feelings
or emotional factors rather than rational, such as love, affection, prestige, and self-image etc.
Price sometimes serves as a surrogate indicator of quality. Technological advancements are
making product differentiation difficult and many companies attempt to differentiate their
offers based on non-functional product attributes, such as image and lifestyle etc. Psychological
pricing is not appropriate for industrial products.

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