Module 12 Pricing Decisions By: Dr Shahinaz Abdellatif Objectives of the Session 1. To understand the price setting process 2.To examine cost oriented, competition oriented and customer oriented pricing methods The Price-setting Decision Process Set strategic pricing objective Influences and constraints SBU and marketing strategies Target market characteristics Product characteristics Competitor characteristics Company strengths and weaknesses Environmental influences Economic trends Legal restrictions Estimate demand and price elasticity demand Determine costs and their relationships to volume Examine competitors’ prices and cost Select a method for calculating price Set a price level Adapt price structure to meet variations in demand and cost across geographic territories, market segments, etc. Strategic Pricing Objectives 1. Maximise sales growth – penetration pricing 2. Maintain differentiation 3. Maximise current profit – skimming 4. Subsidising pricing 1- Maximise sales growth & Penetration When a firm is an early entrant into a new product-market with the potential for substantial growth, its objective may be to maximise its product’s rate of sales growth (in units). This suggests it should set a relatively low price to attract as many new customers as quickly as possible and to capture a large share of the total market before it becomes crowded with competitors. This low-priced strategy is called penetration pricing. Penetration Pricing Penetration pricing is appropriate when, in addition to a large market: 1. Target customers are relatively sensitive to price. 2. The firm’s costs are low compared to competitors’ and the SBU is pursuing a low-cost strategy. 3. Production and distribution costs per unit are likely to fall substantially with increasing volume. 4. Low prices may discourage potential competitors from entering the market. 2- Maintain Quality or Service Differentiation When a firm has a strong competitive position b