Driving volume is a key pricing

objective for many businesses​ –

A business driver is a component, condition, process, resource, or rationale
that is vital for a business to thrive. In other words, it is something that has
a major impact on a business’ performance.

It may also be a situation which would improve a company’s financial

health. For example, a shoe-shop manager may aim to reduce the
percentage of ‘no buys.‘ ‘No buys’ are people who walk in and buy nothing.
The manager’s aim would be a business driver to improve sales.
Businesses should identify their business drivers. Additionally, companies
should try to maximize any that are under their control.

A company’s strategy and goals are dependent on the business drivers it

identifies, and their order of importance.

For an example of a marketer that uses each of the volum oriented

● Sales
● Marketing
● Legislation and government policy
● Litigation
● The price of resources or commodities
● Competitors’ activities
● Customer demand

Tha Pricing Strategy​ ​–

Assignment Submitted By Akash Bawariya GGITS SECTION – A

Pricing strategy refers to method companies use to price their products or
services. Almost all companies, large or small, base the price of their
products and services on production, labor and advertising expenses and
then add on a certain percentage so they can make a profit. There are
several different pricing strategies, such as penetration pricing, price
skimming, discount pricing, product life cycle pricing and even competitive
pricing.

Companies must use effective pricing strategies to sell their products in a

competitive marketplace so they can make a profit. Business managers
need to consider a range of factors, such as prices offered by competitors,
costs for production and distribution, product image positioning in the minds
of consumers, and determining the demographics of potential buyers.

Penetration Pricing Strategy –

A small company that uses penetration pricing typically sets a low price for
its product or service in hopes of building market share, which is the
percentage of sales a company has in the market versus total sales. The
primary objective of penetration pricing is to garner lots of customers with
low prices and then use various marketing strategies to retain them. For
example, a small Internet software distributor may set a low price for its
products and subsequently email customers with additional software
product offers every month. A small company will work hard to serve these
customers to build brand loyalty among them.

Price Skimming Strategy –

Another type of pricing strategy is price skimming, in which a company sets
its prices high to quickly recover expenditures for product production and

Assignment Submitted By Akash Bawariya GGITS SECTION – A

advertising. The key objective of a price skimming strategy is to achieve a
profit quickly. Companies often use price skimming when they lack financial
resources to produce products in volume, according to the article "Pricing
Strategy" at NetMBA.com. Instead, the company will use the quick spurts of
cash to finance additional product production and advertising.

Product Life Cycle Pricing –

All products have a life span, called product life cycle. A product gradually
progresses through different stages in the cycle: introduction, growth,
maturity and decline stages. During the growth stage, when sales are
booming, a small company usually will keep prices higher.

For example, if the company's product is unique or of higher quality than

competitive products, customers will likely pay the higher price. A company
that prices its products high in the growth stage also may have a new
technology that is in high demand.

Competitive-Based Pricing –

There are times when a small company may have to lower its price to meet
the prices of competitors. A competitive-based pricing strategy may be
employed when there is little difference between products in an industry.
For example, when people purchase paper plates or foam cups or a picnic,
they often shop for the lowest price when there is minimal product
differentiation. Consequently, a small paper company may need to price its
products lower or lose potential sales.

Temporary Discount Pricing –

Small companies also may use temporary discounts to increase sales.
Temporary discount pricing strategies include coupons, cents-off sales,

Assignment Submitted By Akash Bawariya GGITS SECTION – A

seasonal price reductions and even volume purchases. For example, a
small clothing manufacturer may offer seasonal price reductions after the
holidays to reduce product inventory. A volume discount may include a
buy-two-get-one-free promotion.

Advantages and Disadvantages of Pricing

Strategies –
On the surface, a product's price seems like a reasonably straightforward
piece of information, communicating how much a customer needs to pay to
bring an item home. But pricing strategies can be complex and
sophisticated, taking into account everything from production costs to
consumer attitudes. The advantages of a pricing policy lies in its ability to
make your product appealing to customers, while also covering your costs.
The disadvantages of pricing strategies come into play when they are not
successful, either by not sufficiently appealing to customers or by not
providing you with the income you need.

Geographical Pricing Advantages and

Disadvantages –
Geographical pricing is the practice of varying price tags based on where
you sell your products. A geographical pricing strategy can grow out of a
need to recoup shipping costs, which tend to grow higher as you send your
offerings further afield. Or, your products may have a higher perceived
value in another region, because of rarity or cache. Sometimes, obstacles
to operating in a certain area may require you to raise prices to break even,
such as working in areas that have prohibitive regulatory structures.
Geographical pricing offers the advantage of allowing you to earn more in
certain situations. This is disadvantageous, because it adds extra layers of

Assignment Submitted By Akash Bawariya GGITS SECTION – A

bookkeeping, because you need to keep track of different prices in different
places.

Competitive Pricing Strategy Advantages –

A competitive pricing strategy positions your product in reference to other

options on the market. You set your price after considering the prices of
comparable products, using the product to send a message about whether
your offering is a better value or of higher quality. Competition-based
pricing advantages and disadvantages include the opportunity to leverage
a simple tool to send a powerful message, and the danger of locking into a
price that makes it hard to break even, as you undersell the competition.

Value Based Pricing Strategies –

Value-based pricing can be part of a competition-based strategy, as you

use price to communicate that your product has features or workmanship
that make it worth more than the competition's offerings. But you can base
price on value, without worrying about what competition charges. If you
offer something unique or uniquely appealing, you may be able to write
your own playbook when it comes to price, as long as you're able to find
the customers who understand that your product is worth more and that
they have the money to pay for it. Alternatively, you can incorporate value
into your price by charging a fair price for a high-quality item. The benefits
of pricing with value in mind are that value is somewhat subjective, so you
can craft a marketing message that supports your price's value claims.

Skimming and Penetration Pricing –

Skimming and market penetration are pricing strategies based on a

product's newness. When a product has cache, fans are willing to pay
more, so that they are among the first to use the product Releasing long

Assignment Submitted By Akash Bawariya GGITS SECTION – A

anticipated products in limited quantities can help add to the buzz that
makes passionate customers happy to pay more. By releasing a product
that has a high price, initially, you can make the most of this initial
enthusiasm. Once consumers have grown accustomed to having the
product on the market and more people own it, you can reduce the price to
entice a more diverse pool of buyers.

​HOW MC'DONALDS USES PRICING STRATEGY

FOR PROFIT MAXIMIZATION

McDonald's raised their beverage prices by an average of 1% across the

U.S, a move that represented the company’s first significant price increase
in 18 months. I failed to notice because the price change didn’t affect
grande or venti (medium and large) brewed coffees and I don’t mess with

Assignment Submitted By Akash Bawariya GGITS SECTION – A

smaller sizes, but anyone who purchases tall size (small) brews saw as
much as a 10 cent increase.The company’s third quarter net income rose
25% to $417.8 million from $333.1 million a year earlier, and green coffee
prices have plummeted, so what gives?
discounting
McDonald's claims the price increase is due to rising labor and non-coffee
commodity costs, but with the significantly lower coffee costs already
improving their profit margins, it seems unlikely this justification is the true
reason for the hike in prices. In addition, the price hike was applied to less
than a third of their beverages and only targets certain regions.
Implementing such a specific and minor price increase when the bottom
line is already in great shape might seem like a greedy tactic, but the
McDonald's approach to pricing is one we can all use to improve our
margins. As we’ve said before, it only takes a 1% increase in prices to raise
profits by an average of 11%.

Tha Most Popular Pricing Strategies McDonald's

Have Used

Premium Pricing Strategy –

To make premium pricing palatable to consumers, companies try to create

an image in which consumers perceive that the products have value and
are worth the higher prices. Besides creating the perception of a higher
quality product, the company needs to synchronize its marketing efforts, its
product packaging and even the decor of the store must support the image
that the product is worth its premium price.

Assignment Submitted By Akash Bawariya GGITS SECTION – A

Penetration Pricing Strategy –

Marketers use penetration pricing to gain market share by offering their

goods and services at prices lower than those of the competitors.
Marketers want to get their products out in the market so that the products
raise consumer awareness and induce buyers to try the products.

Although this lower price strategy may result in losses for the company – at
first – but marketers expect that after achieving a stronger market
penetration that they will raise prices to a more profitable level.

Economy Pricing Strategy –

An economy pricing strategy sets prices at the bare minimum to make a

small profit. Companies minimize their marketing and promotional costs.
The key to a profitable economy pricing program is to sell a high volume of
products and services at low prices. Large companies, such as Walmart,
are able to take advantage of this low-price strategy, but small businesses
will have difficulty selling enough products at low prices to stay in business.

Price Skimming Strategy –

Price Skimming is a strategy of setting prices high by introducing new

products when the market has few competitors. This method enables
businesses to maximize profits before competitors enter the market, when
prices then drop.

Psychological Pricing Strategy –

Assignment Submitted By Akash Bawariya GGITS SECTION – A

Marketers use psychological pricing that encourages
consumer to buy products based on emotions rather than
on common-sense logic. The best example is when a
company prices its product at $199 instead of $200. Even
though the difference is small, consumers perceive $199
as being substantially cheaper. This is known as the
"left-digit effect."

Bundle Pricing Strategy –

Businesses use bundle pricing to sell multiple products together for a lower
price than if they were purchased separately. This is an effective strategy to
move unsold items that are simply taking up space. Bundling also creates
the perception in the mind of the consumer that he's getting a very
attractive value for his money.

Bundle pricing works well for companies that have a line of complimentary
products. For example, a restaurant could offer a free dessert with an
entree on a certain day of the week. Older video games that are reaching
the end of their lives are often sold with a Blu-ray to sweeten the deal.

Companies need to study and develop pricing strategies that are

appropriate for their goods and services. Certain pricing methods work for
introducing new products whereas other strategies are implemented for
mature products that have more competitors in the market​.

Assignment Submitted By Akash Bawariya GGITS SECTION – A

 McDonald's Also Used More Types Of Pricing
Strategies –

Value Based Pricing Can Boost Margins –

For the most part, McDonald's is a master of employing value based pricing
to maximize profits, and they use research and customer analysis to
formulate targeted price increases that capture the greatest amount
consumers are willing to pay without driving them off. Profit maximization is
the process by which a company determines the price and product output
level that generates the most profit. While that may seem obvious to
anyone involved in running a business, it’s rare to see companies using a
value based pricing approach to effectively uncover the maximum amount
a customer base is willing to spend on their products. As such, let’s take a
look at how McDonald's introduces price hikes and see how you can use
their approach to generate higher profits.

An Overview of the McDonald's Pricing Strategy

–

The Right Customers and the Right Market –

While cutting prices is widely accepted as the best way to keep customers
during tough times, the practice is rarely based on a deeper analysis or
testing of an actual customer base. In McDonald's’ case, price increases
throughout the company’s history have already deterred the most price
sensitive customers, leaving a loyal, higher-income consumer base that

Assignment Submitted By Akash Bawariya GGITS SECTION – A

perceives these coffee beverages as an affordable luxury. In order to
compensate for the customers lost to cheaper alternatives like Dunkin
Donuts, McDonald's raises prices to maximize profits from these price
insensitive customers who now depend on their strong gourmet coffee.

Rather than trying to compete with cheaper chains like Dunkin, McDonald's
uses price hikes to separate itself from the pack and reinforce the premium
image of their brand and products. Since their loyal following isn’t
especially price sensitive, McDonald's coffee maintains a fairly inelastic
demand curve, and a small price increase can have a huge positive impact
on their margins without decreasing demand for beverages. In addition,
only certain regions are targeted for each price increase, and prices vary
across the U.S. depending on the current markets in those areas (the most
recent hike affects the Northeast and Sunbelt regions, but Florida and
California prices remain the same).

Product Versioning & Price Communication –

They also apply price increases to specific drinks and sizes rather than the
whole lot. By raising the price of the tall size brewed coffee exclusively,
McDonald's is able to capture consumer surplus from the customers who
find more value in upgrading to grande after witnessing the price of a small
drip with tax climb over the $2 mark. By versioning the product in this way,
the company can enjoy a slightly higher margin from these customers who
were persuaded by the price hike to purchase larger sizes.

McDonald's also expertly communicates their price increases to manipulate

consumer perception. The price hike might be based on an analysis of the
customer’s willingness to pay, but they associate the increase with what
appears to be a fair reason. Using increased commodity costs to justify the

Assignment Submitted By Akash Bawariya GGITS SECTION – A

price as well as statements that aim to make the hike look insignificant
(less than a third of beverages will be affected, for example) help foster an
attitude of acceptance.

Tha Effectiveness and Approachs Of Pricing

Strategy –

The profit maximizing tactics McDonald's implements in their pricing

strategy are vital components of a process anyone can use. Here are some
of the takeaways you can apply to your own business:

1. Study your customer personas –

McDonald's understands that the majority of their customer base is fairly

insensitive to price, and uses small price increases that everyday
consumers barely notice to boost margins. Quantify your buyer personas
and the demand for your product or service will help you choose a price
that captures the maximum amount your customers are willing to pay.

2. Justify the exchange rate for your product​ ​–

Communicating price increases effectively is crucial to a successful price

hike, and managing customer perception is a key part of the McDonald's
strategy. Support your price increases using changes in the market such as
higher commodity costs and ease the pain on the consumer by finding an
attractive way to publicize the new prices. McDonald's said their beverage

Assignment Submitted By Akash Bawariya GGITS SECTION – A

prices were increasing by an average of 1%, but that low average probably
stemmed from including all of their beverages in the equation, including
ones that remained at the same prices. price intelligently

3. Use product differentiation to put your

company in the lead –

You can justify maximizing your profits using the fairest of reasons, but if
the customers don’t value your service the way they value a delicious cup
of coffee, then a decrease in demand is inevitable. Build a service or
product that consumers can’t live without, and you’ll be able to implement
price hikes without turning off your customers.

4. Don’t increase the prices of the products with

the highest margins –

Raise the prices of the products surrounding them. As mentioned earlier,

McDonald's raised the price of the tall size brew exclusively in order to
persuade customers to purchase larger sizes (with slightly higher margins).
Price hikes for your lower margin products can entice customers to
upgrade to more expensive options, especially with respect to products and
services that are tiered based on time usage and features. The goal is to
use the price increases to guide the customer towards your most profitable
product.

Assignment Submitted By Akash Bawariya GGITS SECTION – A

Assignment Submitted By Akash Bawariya GGITS SECTION – A