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chapter 14
Pricing Strategies and Determination
Harcourt, Inc.
Dr. Rosenbloom
ObjectivesObjectives
Explain pricing factorsExplain pricing factors Compare and contrast cost-based Compare and contrast cost-based
pricing methodspricing methods Identify strategic concerns important Identify strategic concerns important
in pricing decisionsin pricing decisions
Dr. Rosenbloom
ObjectivesObjectives
Evaluate reasons why base prices Evaluate reasons why base prices change over timechange over time
Understand new technology Understand new technology implications for pricing behavior, implications for pricing behavior, especially price customizationespecially price customization
Dr. Rosenbloom
What is Price?What is Price?
Price is the sacrifice that one party Price is the sacrifice that one party pays another to receive something pays another to receive something in exchangein exchange
For our case, price is a monetary For our case, price is a monetary value charged by an organization value charged by an organization for the sales of its productsfor the sales of its products
Dr. Rosenbloom
PricingPricing
The Martin AgencyThe Martin Agency
Fairfield InnsFairfield Inns
Dr. Rosenbloom
PricingPricing
Hal Riney and Hal Riney and PartnersPartners
Alamo Car RentalAlamo Car Rental
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Cost-Plus PricingCost-Plus Pricing Easiest, Often misleadingEasiest, Often misleading A simple allocation of fixed and A simple allocation of fixed and
variable costsvariable costs Standard mark-up - a standard profit Standard mark-up - a standard profit
marginmargin Target return pricing - a standard Target return pricing - a standard
amount of profit per itemamount of profit per item Ignores demand (price sensitivity) and Ignores demand (price sensitivity) and
fails to account for competitionfails to account for competition
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Demand PricingDemand Pricing Based on the elasticity of demandBased on the elasticity of demand
• Higher prices are favored with inelastic– Price increases offset volume losses
• Lower prices are favored with elastic– Volume increases offset price reductions
• Consumers are indifferent with unitary demand
Breakeven analysisBreakeven analysis Demand schedulesDemand schedules
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Demand PricingDemand Pricing Profit-MaximizationProfit-Maximization
• Calculate the profit at each price point on a demand curve and choose the highest
• In other words, which price produces the highest total contribution
• Verified by observing marginal revenue and cost figures
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Demand PricingDemand Pricing Where does demand information Where does demand information
come from?come from?• Analytic modeling• Experiments• Customer surveys• Managerial judgement
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Competitive Strategy Positioning ContinuumCompetitive Strategy Positioning Continuumpriceprice uniqueunique
Low cost focus
Differentiation focus
Strategic Pricing Strategic Pricing ConcernsConcerns
Legal Legal ConcernsConcerns
Ethical Ethical ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Competitive Strategy Positioning ContinuumCompetitive Strategy Positioning Continuumpriceprice uniqueunique
Low cost focus
Differentiation focus
Strategic Pricing Strategic Pricing ConcernsConcerns
Legal Legal ConcernsConcerns
Ethical Ethical ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Competitive Strategy Positioning ContinuumCompetitive Strategy Positioning Continuumpriceprice uniqueunique
Low cost focus
Differentiation focus
Strategic Pricing Strategic Pricing ConcernsConcerns
Legal Legal ConcernsConcerns
Ethical Ethical ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
ObjectivesObjectives Goal-setting/Objective-settingGoal-setting/Objective-setting Pricing to achieve a target ROIPricing to achieve a target ROI Pricing to stabilize price and marginPricing to stabilize price and margin Pricing to reach a target market sharePricing to reach a target market share Pricing to meet or prevent competitionPricing to meet or prevent competition Pricing for profit maximizationPricing for profit maximization Pricing for survivalPricing for survival
Strategic Pricing Strategic Pricing ConcernsConcerns
Legal Legal ConcernsConcerns
Ethical Ethical ConcernsConcerns
Dr. Rosenbloom
Skimming Pricing Strategy
Determining the Base PriceDetermining the Base Price
New product pricingNew product pricing Skimming Vs. PenetrationSkimming Vs. Penetration
Penetration Pricing Strategy
IntroductionGrowth
Maturity Decline
Strategic Strategic Pricing Pricing
ConcernsConcerns
Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
High initial price for quick ROIHigh initial price for quick ROI Inelastic demandInelastic demand Price insensitivity by the marketPrice insensitivity by the market
Skimming Pricing
Strategy
IntroductionGrowth
Maturity Decline
Strategic Strategic Pricing Pricing
ConcernsConcerns
Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Penetration Pricing Strategy
Dr. Rosenbloom
Penetration Pricing
Strategy
Determining the Base PriceDetermining the Base Price
Low initial price with elastic demand Low initial price with elastic demand Volume for lower production costsVolume for lower production costs Imminent competition Imminent competition
IntroductionGrowth
Maturity Decline
Strategic Strategic Pricing Pricing
ConcernsConcerns
Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Skimming Pricing Strategy
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Price-Quality judgementsPrice-Quality judgements Customers uncertain about brand Customers uncertain about brand
quality prior to purchase look to quality prior to purchase look to priceprice
Customers look to price in high Customers look to price in high risk purchasesrisk purchases
Strategic Pricing Strategic Pricing ConcernsConcerns
Legal Legal ConcernsConcerns
Ethical Ethical ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Price FixingPrice Fixing Violation of Sherman Anti-Violation of Sherman Anti-
Trust ActTrust Act Conspiring to restrain tradeConspiring to restrain trade
Strategic Strategic Pricing Pricing
ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Price DiscriminationPrice Discrimination Violation of Robinson-Patman ActViolation of Robinson-Patman Act Illegal only when business to businessIllegal only when business to business
• Exception for cost justification• Exception for competitor price matching• Exception for no apparent harm to
competition
Strategic Strategic Pricing Pricing
ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Resale Price MaintenanceResale Price Maintenance When a manufacturer and retailer agree on When a manufacturer and retailer agree on
a minimum price to be charged to a minimum price to be charged to consumers at retailconsumers at retail• Manufacturers can set suggested prices
(MSRP)• Legal to stop selling to retailers who ignore
MSRP
Strategic Strategic Pricing Pricing
ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Predatory PricingPredatory Pricing Aggressive pricing to drive out Aggressive pricing to drive out
newer, smaller rivalsnewer, smaller rivals After removal of rival, prices are After removal of rival, prices are
raised againraised again
Strategic Strategic Pricing Pricing
ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Exaggerated Comparative Price Exaggerated Comparative Price AdvertisingAdvertising Using comparison prices of dubious Using comparison prices of dubious
validityvalidity Product introduced at artificially Product introduced at artificially
high prices for a short time then high prices for a short time then dropped to a new low long-term dropped to a new low long-term priceprice
Strategic Strategic Pricing Pricing
ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical
ConcernsConcerns
Dr. Rosenbloom
Determining the Base PriceDetermining the Base Price
Price gouging lawsPrice gouging laws ATM fee practicesATM fee practices Raising prices for necessities Raising prices for necessities
in disaster areasin disaster areas
Strategic Pricing Strategic Pricing ConcernsConcerns Legal ConcernsLegal Concerns
Ethical ConcernsEthical Concerns
Dr. Rosenbloom
Adjustments to Base PricesAdjustments to Base Prices
Reasons base prices change over Reasons base prices change over time:time: Variation in objectives over product Variation in objectives over product
life cyclelife cycle• Introductory low prices, higher
decline prices Competitive price movesCompetitive price moves
• Competitive forces dictate modification of pricing
• Rubbermaid, the U.S. Steel Industry
Dr. Rosenbloom
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Reasons base prices change over time:Reasons base prices change over time: Price Flexing - Discounts/AllowancesPrice Flexing - Discounts/Allowances
To Consumer To Trade
Trade-in AllowancesTrade-in Allowances
Cash DiscountsCash Discounts
RebatesRebates
Functional Or TradeFunctional Or Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Dr. Rosenbloom
Trade-in Allowances
Cash Discounts
Rebates
Used to Used to encourage encourage consumers to consumers to upgrade to newer upgrade to newer or more or more expensive expensive products products
To Consumer
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Seasonal or age-Seasonal or age-based discounts based discounts used to encourage used to encourage purchasespurchases
Trade-in Allowances
Cash Discounts
Rebates
To Consumer
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
After the After the purchase payment purchase payment made to the made to the consumer by the consumer by the producerproducer
Trade-in Allowances
Cash Discounts
Rebates
To Consumer
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Compensate the Compensate the trade for functions trade for functions performed:performed:
Buying & Selling Buying & Selling TransportationTransportation Storage Storage FinancingFinancing Risk-takingRisk-taking Providing InformationProviding Information Standardizing & GradingStandardizing & Grading
Functional Or TradeFunctional Or Trade
To Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Permits seasonal Permits seasonal marketers to marketers to maintain steady maintain steady production and to production and to sustain sustain operations in out-operations in out-of-season lullsof-season lulls
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Pric
eP
rice
WinterWinterSpring Spring Summer Summer FallFall
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Induce larger-Induce larger-quantity purchases quantity purchases and to reward and to reward customers for customers for making fewer making fewer purchases but purchases but purchasing in larger purchasing in larger quantitiesquantities
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Encourage prompt Encourage prompt payment from payment from customers. Invoice customers. Invoice includes payment includes payment terms and period of terms and period of time that the cash time that the cash discount is availablediscount is available
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Two percent off the Two percent off the total invoice price if total invoice price if paid within 10 days paid within 10 days of the invoice date. of the invoice date. Otherwise the total Otherwise the total invoice price is due invoice price is due in 30 daysin 30 days
2/10, Net 30
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Used by producers Used by producers to encourage to encourage greater purchases greater purchases or used to induce or used to induce retailers to retailers to provide shelf or provide shelf or display spacedisplay space
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Off-Invoice Off-Invoice AllowancesAllowances
Bill-Back AllowancesBill-Back Allowances
Stocking AllowancesStocking Allowances
To Trade
SeasonalSeasonal
QuantityQuantity
CashCash
Sales PromotionSales Promotion
Functional Or TradeFunctional Or Trade
Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances
Dr. Rosenbloom
Other Forms of Price FlexingOther Forms of Price Flexing
Price shadingPrice shading Salesperson reduces Salesperson reduces
base price because of the base price because of the need to secure a need to secure a large/important clientlarge/important client
Price customizingPrice customizing New technology allows New technology allows
for transaction-by-for transaction-by-transaction transaction customizationcustomization
Dr. Rosenbloom
Other Forms of Price FlexingOther Forms of Price Flexing
Price promotionPrice promotion Sales, incentive pricingSales, incentive pricing Retailers began forward-Retailers began forward-
buying or diverting productbuying or diverting product Every Day Low Pricing Every Day Low Pricing
(EDLP) is reducing the use (EDLP) is reducing the use of price promotionof price promotion
CouponingCouponing Free-standing inserts (in Free-standing inserts (in
newspapers)newspapers) Point of purchasePoint of purchase
Dr. Rosenbloom
Other Forms of Price FlexingOther Forms of Price Flexing
Pricing for different segmentsPricing for different segments Geographic segmentsGeographic segments
• Different prices in different zones Usage segmentsUsage segments
• Different prices for high volume users Demographic segmentsDemographic segments
• Different prices for students, children, etc. Time segmentsTime segments
• On- and off-season rates
Dr. Rosenbloom
Geographic Pricing PoliciesGeographic Pricing Policies
FOBFOB
PricingPricing
FOBFOB
PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
ZoneZone
PricingPricing
ZoneZone
PricingPricing
Basing-PointBasing-Point
PricingPricing
Basing-PointBasing-Point
PricingPricing
Dr. Rosenbloom
Geographic Pricing PoliciesGeographic Pricing Policies
FOBFOB
PricingPricing
FOBFOB
PricingPricingUniform Uniform
Delivered Delivered PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
ZoneZone
PricingPricing
ZoneZone
PricingPricing
Basing-PointBasing-Point
PricingPricing
Basing-PointBasing-Point
PricingPricing
Using freight absorption pricing (FOB - Free Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the On Board) the seller pays or absorbs the transportation chargestransportation charges
Dr. Rosenbloom
Geographic Pricing PoliciesGeographic Pricing Policies
FOBFOB
PricingPricing
FOBFOB
PricingPricingUniform Uniform
Delivered Delivered PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
ZoneZone
PricingPricing
ZoneZone
PricingPricing
Basing-PointBasing-Point
PricingPricing
Basing-PointBasing-Point
PricingPricing
Using zone pricing all consumers in the same Using zone pricing all consumers in the same zone pay the same transportation chargezone pay the same transportation charge
Dr. Rosenbloom
Geographic Pricing PoliciesGeographic Pricing Policies
FOBFOB
PricingPricing
FOBFOB
PricingPricingUniform Uniform
Delivered Delivered PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
ZoneZone
PricingPricing
ZoneZone
PricingPricing
Basing-PointBasing-Point
PricingPricing
Basing-PointBasing-Point
PricingPricing
Using basing-point pricing, all freight costs Using basing-point pricing, all freight costs are priced as if they originated from the same are priced as if they originated from the same basing pointbasing point
Dr. Rosenbloom
Geographic Pricing PoliciesGeographic Pricing Policies
FOBFOB
PricingPricing
FOBFOB
PricingPricingUniform Uniform
Delivered Delivered PricingPricing
Uniform Uniform Delivered Delivered
PricingPricing
ZoneZone
PricingPricing
ZoneZone
PricingPricing
Basing-PointBasing-Point
PricingPricing
Basing-PointBasing-Point
PricingPricing
Using uniform delivered pricing all consumers Using uniform delivered pricing all consumers pay the same transportation charges (average pay the same transportation charges (average shipping expense to all customers)shipping expense to all customers)
Dr. Rosenbloom
PrestigePrestigePricingPricing
Pricing PoliciesPricing Policies
Odd-EvenOdd-Even Pricing Pricing
Loss-LeaderLoss-LeaderPricingPricing
Product LineProduct Line Pricing Pricing
Dr. Rosenbloom
Pricing PoliciesPricing Policies
Odd-EvenOdd-Even Pricing Pricing
Loss-LeaderLoss-LeaderPricingPricing
Product LineProduct Line Pricing Pricing
Pricing at relatively high levels so as to Pricing at relatively high levels so as to convey an image of high quality or convey an image of high quality or exclusivityexclusivity
PrestigePrestigePricingPricing
Dr. Rosenbloom
PrestigePrestigePricingPricing
Odd-EvenOdd-Even Pricing Pricing
Product LineProduct Line Pricing Pricing
Pricing policy which offers products at Pricing policy which offers products at prices below or near cost to attract prices below or near cost to attract consumers from competitors’ storesconsumers from competitors’ stores
Loss-LeaderLoss-LeaderPricingPricing
Pricing PoliciesPricing Policies
Dr. Rosenbloom
PrestigePrestigePricingPricing
Pricing PoliciesPricing Policies
Odd-EvenOdd-Even Pricing Pricing
Loss-LeaderLoss-LeaderPricingPricing
Product LineProduct Line Pricing Pricing
Price lining is producing or marketing multiple Price lining is producing or marketing multiple products at different price pointsproducts at different price points
Bundling is marketing two or more products in a Bundling is marketing two or more products in a single package for a special pricesingle package for a special price
Dr. Rosenbloom
PrestigePrestigePricingPricing
Pricing PoliciesPricing Policies
Loss-LeaderLoss-LeaderPricingPricing
Product LineProduct Line Pricing Pricing
Odd pricing refers to a price ending with an Odd pricing refers to a price ending with an odd number just under a round numberodd number just under a round number
Even pricing is used to convey high qualityEven pricing is used to convey high quality
Odd-EvenOdd-Even Pricing Pricing