Developing Pricing Strategies

7/27/2019 Developing Pricing Strategies

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Emran Malik

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Price

WHAT IS PRICE?

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Price is that which isgiven up in anexchange to acquirea good or service.


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THE IMPORTANCE OF PRICE

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Price allocates resourcesin a free-market economy

To the consumer...Price is the cost

of something

To the seller...Price is revenue


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THE IMPORTANCE OF PRICE TOMARKETING MANAGERS

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PRICING STRATEGY

how does a company decide what price

to charge for its products and services? what is the price anyway? doesnt price vary across situations and over

time?some firms have to decide what to

charge different customers and indifferent situations they must decide whether discounts are to be offered, to whom, when, and for what reason

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THE MEANING OF PRICE

we generally think of price in monetary terms

may be more useful to think of what it costs us to acquire something of value

the costs may be monetary or non-monetary we need to think in terms of time and effort,as well as the monetary costs

the consumer often vows never to go back because its not worth the _______

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THE CUSTOMER WANTS VALUE

price is not always an important factor ininfluencing a sale; the customer wants more

than a low price, may be willing to pay more

the customer considers what he or she gets

for the price paid; the seller must offervalue

price of a product or service communicatesa message to the consumer about quality

what causes them to conclude that they

paid too much or got a great deal?

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THE CONSUMERS VIEW OF PRICE

some consumers are very interested in

getting a low price and pay closeattention to price; they are pricesensitive . But, this is variable andpersonalmany are interested in other elements of

the purchase, including brand, quality,etc. there is a tendency to link quality withpriceconsumers are often prepared to pay more if they expect to get added valueadding value doesnt mean dropping price

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MARKETING MIX

Product Price

PromotionPlace

RevenueProducer

Cost

Cost

Cost


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PRICING

Bargainin

$31.50

$33.50

Price

Forms

FunctionsComponents


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PROFIT MAXIMIZATION

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ProfitMaximization

Setting prices so that totalrevenue is as large as possible

relative to total costs.


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RETURN ON INVESTMENT

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Returnon

Investment

ROI = Net Profit after taxesTotal assets

Net profit after taxes divided bytotal assets.


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CHANGING PRICE ENVIRONMENT

Instant Price Comparisons

Ill pay$235.00

Name Your OwnPrice

Get ProductsFree

Buyers


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$29.99

$19.99

$24.99

CHANGING PRICE ENVIRONMENT

Sellers

Monitor Customers

SelectivePricing

Negotiate Prices


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HOW COMPANIES PRICE

PricingDe artment

Small Business Owner

Product-line Managers

(w/guidance)


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CONSUMER PSYCHOLOGY AND PRICING

Reference Prices

Price-Quality Inferences

Price Endings$1. 99


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A BLACK T-SHIRT

Armani - $275

Gap - $14.90

H&M - $7.90


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Price High Medium L o w

High

Low P r o

d u

c t Q u a l i

t y

Med

PremiumValue

MediumValue

Economy

Overcharging

Rip-Off FalseEconomy

HighValue

Super Value

Good-Value

PRICE - QUALITY STRATEGIES


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Select Final Price

SETTING THE PRICE

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Price Method

Competitor Analysis

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3

4

5

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Estimate Costs

Determine DemandPricing Objective


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Total Costs

Sum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs (Overhead)

Costs that dont vary with sales or

production levels.Executive Salaries

Rent

Variable Costs

Costs that do varydirectly with the

level of production.Raw materials


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SELECTING THE PRICING OBJECTIVE

SurvivalMaximum Current ProfitMaximum Market ShareMaximum Market Skimming

Product-Quality LeadershipOther Objectives


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DEMAND AND SUPPLY

DemandThe quantity of a product that

will be sold in the market at various

prices for a specified period.

Supply

The quantity of a productthat will be offered to the market

by a supplier at various pricesfor a specific period.


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DETERMINING DEMAND

Price sensitivityEstimating demand curves

Price Elasticity of Demand


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Inelastic and Elastic Demand


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ELASTICITY OF DEMAND

ElasticDemand

Consumers buy more or lessof a product when theprice changes

InelasticDemand

An increase or decrease inprice will not significantlyaffect demand

UnitaryElasticity

An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged


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ELASTICITY OF DEMAND

Elasticity ( E ) =Percentage change in quantity

demanded of good A

Percentage change in price of good A

If E is greater than 1, demand is elastic.If E is less than 1, demand is inelastic.If E is equal to 1, demand is unitary.


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FACTORS THAT AFFECT ELASTICITY

Factors

That AffectElasticityof

Demand

Availability of Substitutes

Price relative toPurchasing Power

Product Durability

Products Other Uses


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HOW DEMAND AND SUPPLY ESTABLISHPRICE

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PriceEquilibrium

The price at which demandand supply are equal.

Elasticityof Demand

Consumers responsivenessor sensitivity to changesin price.


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EQUILIBRIUM PRICE

Quantity demanded

S

S

P r i c e

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

D

D

Surplus

Shortage

PriceEquilibrium


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ESTIMATING COSTS

Demand Price Ceiling

Costs

Profit

Price

Price Floor


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ESTIMATING COSTS

Fixed Costs(overhead) Variable Costs Total Costs

Types of costs


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Costs at Varying Levels of Production


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ESTIMATING COSTS

Accumulated Production

Experience Curve(Learning Curve)


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ESTIMATING COSTS

Target Costing

Market researchDesign engineers


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The Experience Curve


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ANALYZING COMPETITORS OFFERS

Worth to Customer

Costs Reaction

Price


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SELECTING A PRICING METHOD

Pricing Methods Markup Target-return Perceived-Value Value Going-rate Auction-type


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MARKUP PRICING

Variable cost per toaster

$10

Fixed costs

$300,000

Expected unit sales

50,000


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TARGET-RETURN PRICING


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FACTORS TO CONSIDER WHEN SETTINGPRICES

break-even= fixed costvolume (price-variable cost)

10-20

Break-Even Analysis and Target Profi t Pr icing


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Target-Return Pricing


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PERCEIVED-VALUE PRICING

Customers perceived -value

Performance $$$ Warranty $

Customer support $ Reputation $$


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VALUE PRICING

P1

P2

C1

C2

Level

of Quality

THOUSANDS OF

LOWPRICES

EVERY DAYthroughout the store

EDLP

High

LowPricing


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GOING-RATE PRICING

Follow the Leader

Commodities


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AUCTION PRICINGEnglish auction

(ascending bids)

Dutch auction(descending bids)

Sealed-bidauction


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DEFINITIONS

Market-Skimming PricingSetting a high pricefor a new product toskim maximumrevenues layer bylayer from segmentswilling to pay thehigh price.


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DEFINITIONS

Market-Penetration Pricing

Setting a low pricefor a new productin order to attract

a large number of buyers and a largemarket share.


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PRODUCT MIX

PRICING STRATEGIES

Product Line PricingSetting price steps between productline items.

Price points


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PRODUCT MIX

PRICING STRATEGIES

Optional-Product PricingPricing optional or accessoryproducts sold with the mainproductSupplemental software,digital cameras, and printerssold with a new PC areexamples

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PRODUCT MIX

PRICING STRATEGIES

Captive-Product PricingPricing products that must beused with the main product

High margins are oftenset for supplies

Services: two-part pricingstrategy

Fixed fee plus avariable usage rate


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PRODUCT MIX

PRICING STRATEGIES

By-ProductPricingPricing of low-valueby-productsto get rid of them


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PRODUCT MIX

PRICING STRATEGIES

Product BundlePricing

Pricing bundles of products sold

together Common in fastfood industry


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Three C s Model for

Price Setting

Ceiling priceCustomers assessment

of unique productfeatures

Orienting point

Competitors prices andprices of substitutes

CostsFloor Price

High Price(No possible

demand at this price)

Low Price(No possible

profit at this price)


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SETTING THE PRICE

Pricing Procedure

Select pr ic ing o bject ive

Determine demand Estimate costs

Analyze competition

Select pricing method Select final price

SurvivalMaximize current profitsMaximize market share

Penetration strategy

Market skimmingSkimming strategy

Product quality leadersPartial cost recovery


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SETTING THE PRICE

Pricing Procedure

Select pricing objectiveDetermin e dem and

Estimate costs Analyze competition


Understand factorsthat affect pricesensitivityEstimate demandcurvesUnderstand priceelasticity of demand

ElasticityInelasticty


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MARKETING STRATEGIES

Product is more distinctiveBuyers are less aware of substitutesBuyers cannot easily compare quality of substitutesThe expenditure is a lower part of buyers totalincomeThe expenditure is small compared to the totalcost

Part of the cost is borne by another partyThe product is used with assets previouslyboughtThe product is assumed to have morequality, prestige, or exclusivenessBuyers cannot store the product

Conditions Under Which Consumers areLess Price Sensitive:


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MARKETING STRATEGIES

There are few or no substitutesBuyers do not readily

notice the higher price

Buyers are slow tochange their buyinghabits and search for

lower pricesBuyers think higher prices are justified

Conditions Under Which Demandis Less Elastic:


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SETTING THE PRICE

Pricing Procedure

Select pricing objectiveDetermine demand Est im ate cos ts

Analyze competition


Types of costs and levelsof production must beconsidered

Accumulated productionleads to cost reductionvia the experience curveDifferentiated marketing

offers create differentcost levels


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SETTING THE PRICE

Key Pricing Terms:Fixed costs: do not vary directly with changes inlevel of production

Variable costs: vary with productionTotal costs: sum of fixed and variable costs agiven level of production

Average cost: cost per unit at a given level of production


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SELECTING THE FINAL PRICE

BrandQualit

y

Impact on others

PricingPolicies

Gain-and-risk-sharing


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SETTING THE PRICE

Pricing Procedure

Select pricing objectiveDetermine demand Estimate costsAn alyze com pet i tion


Firms must analyze thecompetition with respectto:

CostsPricesPossible price reactions

Pricing decisions are

also influenced by qualityof offering relative tocompetition


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SETTING THE PRICE

Pricing Procedure

Select pricing objectiveDetermine demand Estimate costs

Analyze competition

Selec t p r ic ing m ethod Select final price

Price-setting begins withthe three Cs Select method:

Markup pricingTarget-return pricingPerceived-value pricingValue pricing

Going-rate pricing Auction-type pricingGroup pricing


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SETTING THE PRICE

Pricing Procedure

Select pricing objectiveDetermine demand Estimate costs

Analyze competition

Select pricing method Select f in al pr ice

Requires considerationof additional factors:

Psychological pricing

Gain-and-risk-sharingpricingInfluence of other marketing mix variablesCompany pricing policiesImpact of price on other parties


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ADAPTING THE PRICEGeographic

Pricing

Price Discounts

and Allowances

Promo tional Pricing

Differentiated

Pricing


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ADAPTING THE PRICE

Geographical PricingBarter Compensation deal

Buyback arrangementOffset


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PRICE CHANGES

Has excess capacityFaces falling marketshare due to pricecompetitionDesires to be amarket share leader

Initiating Price Cuts is DesirableWhen a Firm:


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PRICE CHANGES

Price Increases areDesirable:

If a firm canincrease profit,faces cost inflation,or faces greater demand than can besupplied.

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ADAPTING THE PRICE

CashdiscountsQuantitydiscountsTrade-inallowances

FunctionaldiscountsSeasonaldiscountsPromotionallowances

Price Discounts and Allowances:


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ADAPTING THE PRICE

Loss-leader pricingSpecial-eventpricing

Cash rebatesLow-interestfinancing

Longer paymenttermsWarranties andservice contracts

Psychologicaldiscounting

Promotional Pricing Tactics:


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ADAPTING THE PRICE

Customer segment pricingProduct-form

pricingImage pricing

ChannelpricingLocation

pricingTime pricing

Discriminatory Pricing Tactics:


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ADAPTING THE PRICE

Price discrimination works when:Market segments show different intensities of demand

Consumers in lower-price segments can notresell to higher-price segmentsCompetitors can not undersell the firm in higher-price segments

Cost of segmenting and policing the market doesnot exceed extra revenue


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ADAPTING THE PRICE

Product-linepricingOptional-featurepricingCaptive-productpricing

Two-part pricingBy-productpricing

Product-bundlepricing

Product-Mix Pricing Tactics:


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DEALING WITH PRICE CHANGES

Competitor Moves

Raising Prices

Cutting Prices


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PRICE CHANGES

Methods of Increasing Price

Eliminating discounts Adding higher-priced units to the productline

Alternatives to Increasing PriceReducing product sizeUsing less expensive materialsUnbundling the product


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PRICE CHANGES

Buyer reactions topricechanges

must beconsidered.


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PRICE CHANGES

Competitors are more likely to

react to price changes under certain conditions.

Number of firms is small

Product is uniformBuyers are well informed


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PRICE CHANGES

Respond To Price Changes Only If:

Market share / profits will be negativelyaffected if nothing is changed.Effective action can be taken:

Reducing priceRaising perceived qualityImproving quality and increasing priceLaunching low- price fighting brand

INITIATING AND RESPONDING


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INITIATING AND RESPONDINGTO PRICE CHANGES

Strategic Options Include:Maintain price and perceived quality;

selectively prune customersRaise price and perceived qualityPartially cut price and raise quality

Fully cut price, maintain perceived qualityMaintain price, reduce perceived qualityIntroduce an economy model



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Key Considerations

Ini t ia t ing pr ice cuts

Initiating price increasesReactions to pricechangesResponding tocompetitors pricechanges

Circumstances leading toprice cuts:

Excess plant capacityDeclining market share

Attempt to dominate themarket via lower costs

Price cutting traps:Price/quality perceptions

Low prices dont createmarket loyaltyCompetition may match or beat price cuts



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Key Considerations

Initiating price cuts

Ini t ia t ing p r ice increases Reactions to pricechangesResponding tocompetitors pricechanges

Circumstances leading toprice increases:

Cost inflationOverdemand

Methods of dealing withoverdemand:

Delayed quotation pricingEscalator clauses

UnbundlingReduction of discounts



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Key Considerations


Initiating price increasesReact ion s to pr ice changes Responding tocompetitors pricechanges

Firms must monitor bothcustomer and competitor reactions

Competitor reactions arecommon when:

Few firms offer the productThe product ishomogeneousBuyers are highly informed



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Key Considerations


Initiating price increasesReactions to pricechangesRespo nd ing to competitors pricechanges

The degree of product homogeneity affects howfirms respond to price

cuts initiated by thecompetitionMarket leaders canrespond to aggressive

price cutting by smaller competitors in severalways



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TO PRICE CHANGES

Maintain price andprofit marginMaintain price, addvalue

Increase price,improve qualityLaunch a low-pricefighter line

Market Leader Responses to Competitor Initiated PriceCuts:

Reduce price

Documents

Developing Pricing Strategies