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C H A P T E R E L E V E N
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
menu
11Pricing Strategy
MarketingManagement
J. Paul Peter
James H. Donnelly, Jr.
7th Edition
SECTION 1
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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1
From the Demand Perspective:Demographic Considerations
1. Number of potential buyers; their age, gender and education
2. Location of potential buyers
3. Position (type of buyer) of potential buyers
1. End user vs org buyer
4. Expected consumption of potential buyers
5. Economic strength of potential buyers
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
1
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11
Psychological Considerations
1. Will potential buyers use price as an indicator of quality?
2. Will potential buyers be favorably attracted by odd pricing?
3. Woo (“Woo?” How about “Will”)potential buyers perceive price as too high relative to the service product gives?
4. Are potential buyers prestige oriented and willing to pay a premium to fill this need?
5. How much will potential buyers be willing to pay for the product?
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
Psychological Pricing
• Prestige pricing
• Odd-even pricing
• Bundle pricing (not really psych)
• Reference pricing– Ex. Walmart ads
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11
Price Elasticity Price elasticity is a measure of consumers’
price sensitivity
Even a crude estimate of price elasticity is useful input in pricing decisions
What will happen to my sales if I change my price?
What will happen if tuition is increased 10%?
e =Percent change in quantity demanded
Percent change in price
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
From the Supply Perspective:The 4 Most Common Pricing Objectives
1. Pricing to achieve a target return on investment
2. Stabilization of price and margin
1. Price maintenance, DRTB pricing
3. Pricing to achieve a target market share
4. Pricing to meet or prevent competition
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
2 Common Retail Strategies1. Everyday Low Pricing (EDLP)
Advantages
Reduces price wars
Reduces advertising
Improves customer service
Reduces stock-outs and improves inventory management
Increases overall profit margins
Sam’s Club pricing strategy
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
2 Common Retail Strategies2. High/Low Pricing
Advantages
Helps segment the market
Creates excitement
Moves merchandise
Emphasizes product quality and store service
Is easier to use
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Pricing StrategyCost-based strategies
Markup pricing – percentage is added to the retailer’s invoice to determine final price
Cost-plus pricing – costs of producing a product plus desired profit are added to achieve price. non-routine job pricing akin to markup pricing
Rate-of-return or target pricing – price is determined by adding desired rate of return on investment to total costs
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Key Product Considerations
1. Perishability – must be priced to sell without costly delays; includes fruit to high fashion
1. Ex. Brazilian fruit markets
2. Distinctiveness – homogeneous goods have easy substitutes and make distinguishing between competitors difficult
3. Life Cycle –
• Skimming policy is when seller charges a high price on a new product.
• Penetration policy is when producer charges a low price for a new product.
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Competitive Considerations
1. Number of competitors
2. Size of competitors
3. Location of competitors
4. Conditions of entry into the industry
5. Degree of vertical integration of competitors
6. Number of products sold by competitors
7. Cost structure of competitors
8. Historical reaction of competitors to price changes
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Governmental Considerations
Price fixing ruled illegal – sellers cannot make any agreements with competitors regarding final price
Deceptive pricing tactics outlawed – claiming high price then selling at lower price
Price discrimination eliminated– can’t charge different customers different prices without justification
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
General Pricing Model
SET PRICING OBJECTIVES
EVALUATE PRODUCT-PRICE RELATIONSHIPS
ESTIMATE COSTS AND OTHER PRICE LIMITATIONS
ANALYZE PROFIT POTENTIAL
SET INITIAL PRICE STRUCTURE
CHANGE PRICE AS NEEDED
FIGURE 11-1
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Pricing Strategy Improvement
1. Base pricing strategies on sound research in order to understand relevant price factors.
2. Continuously monitor pricing decisions because they often help define company image.
3. Remember that consumers have trouble recognizing subtle price differences.
4. Remember that consumers evaluate prices comparatively. They often use a sense of what they think the item should cost as a benchmark.
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1
menu
11
Pricing Strategy Improvement
5. Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits.
6. Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price.
7. Understand the importance of price information and its effects on differentiating products within a product line.
8. Recognize that price elasticity vary – it is easier to lose customers to price increases then gain them from price decreases.
Chapter Eleven
Demographic Considerations
Psychological Considerations
Price Elasticity
Pricing Objectives
EDLP Advantages
High/Low Advantages
Pricing Strategy
Key Product Considerations
Competitive Considerations
Governmental Considerations
General Pricing Model
Pricing Strategy Improvement
The Authors
SECTION 1