Pricing Decisions and Strategies
Foundations
Price is the only mix element that generates revenue. Candidates must know the three pricing approaches: cost-based (cost-plus, markup, target-return), demand-based (perceived value, value pricing) and competition-based (going-rate, sealed-bid). Understand price elasticity: elastic demand responds strongly to price change; inelastic does not. Determinants include substitutes, necessity, proportion of income and switching costs.
Strategy vocabulary
- Skimming - high initial price, recovers development cost, suits innovators.
- Penetration - low price to build share quickly, suits elastic demand and scale economies.
- Psychological pricing - odd-even, prestige, reference prices.
- Promotional pricing - loss leaders, special-event, cash rebates, low-interest finance.
- Product-bundle and captive-product pricing (razor and blades).
- Geographical pricing - FOB origin, uniform delivered, zone, basing-point.
- Price discrimination - different prices to different segments for the same product.
Understand price adjustments over the life cycle and how competitors react.
Traps in questions
- Confusing skimming with penetration when the scenario mentions "recover R&D quickly" - that is skimming.
- Assuming cost-plus maximises profit; it ignores demand and competition.
- Calling any discount price discrimination; it must be segment-based and legally defensible.
- Forgetting that penetration pricing requires capacity to meet demand.
- Mixing captive-product (razor/blades) with bundling (package deal).
Worked example
A software firm has high fixed costs, near-zero marginal cost and inelastic early adopters. Skimming at launch, then reducing price as the mass market enters, matches both cost recovery and elasticity shifts.
Rule of thumb
Ask: what is the demand curve, what is the competitor's likely response, and which cost floor must not be breached? Then choose the strategy.