Types of pricing programs
M.Selva nandhini
Assistant Prof. of Commerce
Types of pricing programs
• Three basic pricing programs
– Penetration
– Parity
– Premium
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Types of pricing programs: Penetration
Penetration pricing is using a low price to
increase demand for a product/brand.
• Can either :
– stimulate primary demand by increasing
number of buyers
– increase market share by acquiring new
customers from competitors (selective
demand)
• Either market demand or company
demand should be elastic for this to work.
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Types of pricing programs: Penetration
• Conditions favouring penetration pricing
– Market demand is elastic
– Market demand is elastic and the competitors
cannot match the price
– The firm also sells high margin complementary
products
– A large number of potential competitors exist
– Economies of scale exist
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Types of pricing programs: Penetration
• Primary objective of penetration pricing is
to:
– Build primary demand when market demand is
elastic or
– Acquire new customers by undercutting
competition when market demand is inelastic
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Types of pricing programs: Parity
• 2 Parity pricing is setting prices near or at competitive
levels
• Downplay the role of price in buying decision.
• Use other programs to implement marketing strategy
• Used when
– company demand is elastic, and industry demand is inelastic
– Most competitors will match any price cut
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Types of pricing programs: Parity
• Conditions favouring parity pricing
– Market demand is inelastic and company
demand is elastic
– The firm has no cost advantage over
competitors
– Pricing objective is to meet competition
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Types of pricing programs: Premium
3 Premium pricing is setting price above
competitive levels
• Successful when the firm is able to
differentiate product by quality, features or
service.
• Price sends a message of high quality to
consumers.
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Types of pricing programs: Premium
• Conditions favouring premium pricing
– Company demand is inelastic
– The firm has no excess capacity
– There are strong barriers to entry
– Gains from economies of scale are minor
– Pricing objective is to attract new customers on
quality
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Pricing programs for a line of substitutes
• Increase in price of one product will result in
an increase in demand for others and vice
versa
– Positive cross elasticity of demand
• Pricing a product to distinguish it from rest
of the products in the line
– Different products serve different segments
– Have major differences in functions or benefits
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Pricing programs for a line of substitutes
Continued
• Psychological concepts
• Reference price
– Acceptable range of prices in mind of consumers.
• Anchoring
– Buyers evaluate price in the context of a reference
range of prices
– Anchoring is putting in a new price stimulus to
change reference points buyers use to assess price
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Pricing programs for a set of complements
 Managers can take advantage of complements in two
ways
 Leader pricing ( aka loss leader)
 Set a low price to a leader product which will increase the sales of
complement products.
 Revenue/profits overall are increased
 Loss leader product work if a large number of substitutes and a
high degree of price elasticity exist.
 Price bundling
 Marketing two or more products together for a special price
 When product relationships are strong effect of price bundling is
greater
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Pricing programs for a set of
complements Continued
• Two ways of mixed price bundling
• Mixed leader
– Lead product is discounted on condition that
the second product is purchased.
• Mixed joint
– Two or more products are offered at a single
package price which is lower than the sum of
the individual prices.
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Additional pricing considerations
– Political and legal environment
– International considerations
– Price elements of other marketing
programs
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