1. Skimming Pricing Strategy (Gillette Mach3)

   • price initially set very high and reduced over time

2. Penetration Pricing Strategy (Nintendo)

   • price is initially set low to gain a foothold in the market

3. Intermediate Pricing Strategy

   • between the two extremes; most prevalent

When to Use Skimming Pricing

Appropriate when:

1. Demand is likely to be price inelastic

2. There are different price-market segments

3. The offering is unique enough to be protected from competition by patent, copyright, or trade secret

4. Production or marketing costs are unknown

5. A capacity constraint in producing the product or providing the service exists

6. An organization wants to generate funds quickly

7. There is a realistic perceived value in the product or service

When to Use Penetration Pricing

Appropriate when:

1. Demand is likely to be price elastic

2. The offering is not unique or protected by patents, copyrights, or trade secrets

3. Competitors are expected to enter market quickly

4. There are no distinct and separate price-market segments

5. There is a possibility of large savings in production and marketing costs if a large sales volume can be generated

6. The organization’s major objective is to obtain a large market share

Pricing and Competitive Interaction

Competitive Interaction refers to the sequential action and reaction of rival companies in setting and changing prices for their offering(s) and assessing likely outcomes, such as sales, unit volume, and profit for each company and an entire market.

Advice for managers to avoid nearsightedness of not looking beyond the initial pricing decision:

1. Managers are advised to focus less on short-term outcomes and attend more to longer-term consequences of actions

2. Managers are advised to step into the shoes of rival managers or companies and answer a number of questions…

Pricing and Competitive Interaction

1. What are competitors’ goals and objectives? How are they different from our goals and objectives?

2. What assumptions has the competitor made about itself, our company and offerings, and the marketplace? Are these assumptions different from ours?

3. What strengths does the competitor believe it has and what are its weaknesses? What might the competitor believe our strengths and weaknesses to be?

A Price War involves successive price cutting by competitors to increase or maintain their unit sales or market share. Happens when:

*Managers lower price to improve market share, unit sales, and profit

*Competitors match the lower price

*Expected share, sales, and profit gain from initial price cut are lost

To avoid a price war, managers should consider price cutting only when:

1. The company has a cost or technological advantage over its competitors

2. Primary demand for a product class will grow if prices are lowered

3. The price cut is confined to specific products or customers and not across-the-board

Conclusion

For many consumers, price seems to change with a one-way ratchet set to "up." However, economists argue that price is actually set by market forces, balancing supply and demand in order to optimize output with minimal waste. Although it may seem that prices are set randomly, economists explain that price determination is a rational process calculated in a straightforward manner.

The final sale price of a good or service can be affected by factors other than supply or demand. For example, the government may impose special taxes that are added to the list price at the time of sale. Some states set mandatory minimum prices for controlled products like alcohol. Governments also monitor retailers for signs of collusion and price-fixing. For example, if there are two sellers of milk in a small town, they could agree to both charge the same high price for the milk in order to increase their profits. However, this practice is illegal under federal law and, if found guilty, the retailers could face substantial penalties.

Control questions:

1. Can you give the definition of price?

2. Give more information about variable-cost pricing.

3. What do you know about pricing and competitive interaction?

4. Give the information about markup pricing.

5. What do you know about pricing considerations?

Literature

1. English for economists and managers: textbook/ O. V. Ulyanov, S. V. Grishin; yurginskiy technological Institute. – Tomsk: Publishing house of Tomsk Polytechnic University-theta, 2011. – 111 p.

2. Besanko D.A, Brauetugam R.R, Gibbs M.J Microeconomics,2011, Chicago

3. Griffiths A, Wall S.Economics for business and management,2011, England

4. Varian H.R. Intermediate microeconomics,2010, University of California at Berkeley

5. Boyd, W. Harper. Marketing Management.- Boston, 2010