Welcome to this module about pricing strategies and implications. My name is Li Chenguang and I am a researcher with the Agribusiness and Rural Development Group at University College Dublin in Ireland. This module is divided into three lessons, which will explain the basic pricing strategies, psychological pricing tactics, and retailers pricing behaviors with implication to farmers welfare. Let's start with lesson 1. After completing the lesson, you should be able to explain the key pricing considerations, know the basic pricing strategies, and have some knowledge on alternative pricing strategies implemented by companies. What is price? The answer seems obvious. It is the number printed on the price tag you may say. But how is that number decided by companies in order to attract enough consumer demand and ensure company's profit, with the knowledge that other companies may offer similar competing products? That is not an easy decision. In terms of a reasonable price range, the price accompany charges often fall somewhere between two extremes. One that is too low to generate a profit and one that is too high to have any consumer demand. The so called price floor relates to the cost of the product and the price ceiling relates to consumers perceive the values of the product. There are other internal and external considerations that also affect pricing strategies employed by a company. For example, how much does it cost to buy raw material? What are the company's marketing objectives in the short run and in the long run? What prices are competitors charging? How well the overall economic situations, for example recession, affect consumers price sensitivity etc. All those questions need to be considered. There are three basic pricing strategies, which are consumer value-based pricing, cost based pricing and competition based pricing. The economic recession of 2008 to 2009 has caused a lasting impact to consumer attitudes toward price and quality. Accordingly many companies have changed their pricing approaches to match with the changing economic conditions and consumer needs. Existing brands may be a great designed to offer more quality for a given price. In many cases, companies introduce cheaper versions of a brand name products, or smaller packaging sold at a cheaper price. Costs, set the floor for the price, that a company can charge. Based on the cost for producing, distributing and selling the product, some companies add a markup to the cost of the product to set their price. This strategy is relatively easier to implement and many people may feel the price charged is fair based on a reasonable margin. But the problem for this type of pricing is that it tends to ignore market demand and competitors prices. For companies that employ competition based pricing, they set prices based on competitor strategies, cost prices and market offerings. But they will need to figure out how consumers perceive the value of their products compared to competitors products. For example, if a company is charging a higher price relative to its competitors, but consumers do not perceive the product as having better quality, the company will either need to reduce its price or maybe use advertising to change consumer perception. If we try to understand the underlying philosophy of the pricing strategies, we can say that, cost base pricing is product driven. The company starts with designing a good product, determining its cost and then set price based on cost and convince consumers of the products value through marketing and promotions. On the other hand, value-based pricing is consumer focused which starts with assessing consumers needs and their value perceptions and to set a target price. Then the company will figure out the cost needed to produce the product. There will be cases when the company finds that, it is impossible to deliver a desired product at a target price. Rather than producing something that is not going to be profitable, it may save a lot of headache and loss not to proceed with the product development. At the end of the day, it is the market and the customers that will decide whether a product price is right. Besides the three basic pricing strategies, there are many alternative pricing strategies. We will introduce three of them often used in the marketplace. They are price discrimination, last leader pricing and product mix pricing. Price discrimination refers to charging different prices to different costumers for the same product. In microeconomics, you may have learned the three degree price discrimination. The first degree price discrimination is charging prices that equal to every consumers reservation price or their highest willingness to pay. This sounds ideal to the company, but it's hard to realize in the real world. The second degree price discrimination refers to the case of charging different prices depending on the quantity consumed. For example, the three for the price for two offered in supermarkets will reward those who buy more. The third degree price discrimination is charging different prices for different market segments. A simple example is the earlybird menu offered by restaurants. They attract people who are more price sensitive, but time flexible. Who are willing to dine during the early or mid afternoon when the restaurants are normally quite empty. When you go shopping at supermarkets sometimes you will find very cheap bananas and the price for milk might be even lower than the price of water. You may wonder, are bananas and milk really so cheap to produce? Not necessarily the case. Sometimes supermarkets use the lost leader pricing strategy to draw consumers to their business and to gain advantage over its competition. Some of these products are placed close to the store entrance to attract attention, some are placed in the far end of the store to make you travel longer once you are in the store. The store may make up its loss from these lost leader items by selling additional goods to customers that are more profitable for the store. Rather than offering one single product, companies often offer a mix of products and charge smart prices. For example, you can buy a printer at a cheap price but somehow the toner is often costly to replace. In this case, the company is using the captive pricing strategy. Another example, fast-food restaurants bundle a burger chips and a soft drink together at a reduced combo price. They are using the so called product bundle pricing. With this slide we conclude the first lesson, Basic Pricing Strategies of module 6 - Pricing strategies and Implications - Thanks for being with me in this lesson. See you in lesson 2 - Psychological pricing.
