Pricing Strategies: Cost, Product Mix, and Competitive Analysis

Pricing Strategies: Supply and Competition Factors

Pricing Strategies Based on Supply

Cost-Based Pricing and Production Orientation

• Focuses only on company costs and desired profit margin.
• Associated risks: Production orientation and marketing myopia.

Product Mix Pricing Strategies

Setting prices across an entire product line or related products:

• Product Line Pricing: Setting prices across an entire product line.
• Optional Product Pricing: Pricing optional or accessory products sold with the main product.
• Captive Product Pricing: Pricing products that must be used with the main product (e.g., printer ink or razor blades).
• By-Product Pricing: Pricing low-value by-products to efficiently dispose of them.
• Product Bundle Pricing: Pricing bundles of products sold together.

New-Product Pricing Strategies

• Market-Skimming Pricing: Setting a high initial price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. The company makes fewer but more profitable sales. Best suited for innovative products with legal protection (patents).
• Market-Penetration Pricing: Setting a low initial price for a new product to attract a large number of buyers and gain a large market share. Requires very elastic demand and the potential to achieve a larger market share in an expanding market.

Pricing Strategies Based on Competition

Setting prices based on competitors’ strategies, prices, costs, and market offerings.

Competitive Situations and Perceived Value

Four possible competitive situations, related to perceived value and intensity of competition (Rasines, 1997):

1. Monopolistic Competition: Many sellers and buyers with differentiated products. Characterized by perfect mobility of resources and a certain autonomy on pricing, conditioned by the degree of differentiation.
2. Undifferentiated Oligopoly: Interdependence of a few competitors with similar products. This situation can lead to a price war.
3. Perfect Competition: Many buyers and sellers where the product is homogeneous and has many substitutes.
4. Differentiated Monopoly or Oligopoly: Weak intensity of competition and a high perceived value. Often leads to Maintenance/Leadership in Price, where a company maintains high profitability in a stable market.

Price Reduction and Discounted Pricing

Price reductions are used to stimulate demand in other segments or to manage product surplus.

Key Conditions for Successful Price Reduction

• Ability to cope with a possible price war.
• Ability to extend product demand to targeted segments.
• Maintaining image control regarding the discount offered to consumers.
• Competitors with higher costs cannot react quickly.
• Ability to maintain the low price relative to the profits forecast.
• Warning: Dumping (selling below cost) may be reported and subject to legal action.