Pricing Day2

8/9/2019 Pricing Day2

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PRICINGPRICING


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Selecting the pricing objective

Estimating demand Estimating costs

Competitors analysis

Pricing method Select the price

Pricing steps


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1. Selecting the pricing

objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership Partial cost recovery


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Survival objective price=variable

+ some fixed costReasons for this objective:

Overcapacity

Intense competition

Changing consumer wants


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Maximum current profit

Estimate the demand and costsassociated with alternative prices

and select best price which givesthem max. profit or ROI


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Maximum market share

(market penetration pricing)

Set the lowest price assuming thatmarket is price sensitive

Higher sales=lower unit costs orhigh long run profit.


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Maximum market skimming

New technology launch favorssetting high prices to skim market

Conditions: Sufficient buyers with high demand

COP for small volume is not so high

High price does not invite competitors

High price communicates superiorquality


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Product-quality leadership Use price to signal high quality in

an attempt to position the product

as the quality leader.


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Partial cost recovery / full

cost recovery An organization that has other

revenue sources may seek only

partial cost recovery. Eg: educational institutions.

Non profit hospital-full cost

recovery


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2. Determining Demand Price sensitivity

Estimate demand curves

Price elasticity of demand


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Price sensitivityThere is less price sensitivity when- The product is more distinctive

Buyers are less aware of substitutes Buyers cannot easily compare the

quality of substitutes The expenditure is a lower part of

buyers total income


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Ctd Part of the cost is borne by another

party

The product is used in conjunction withassets previously bought

The product is assumed to have morequality, prestige, or exclusiveness, and

Buyers cannot store the product.


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Estimating demand curve statistically analyzing past prices,

quantities sold, and other factors andestablish relationship

conduct price experiments ask buyers to state how many units they

would buy at different proposed prices


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Price elasticity of demand Inelastic demand (no or negligible

change)

Elastic demand (considerablechange)


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Demand is..Less elastic when: There are few or no substitutes or competitors Buyers do not readily notice the higher price Buyers are slow to change their buying habits

and search for lower prices Buyers think the higher prices are justified by

quality differences, normal inflation, and so on.


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Price elasticity of demand magnitude and direction of the

contemplated price change-price

indifference band Long-run price elasticity may differ

from short-run elasticity.


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3. Estimating costs

Types of costs

Accumulated production

Differentiated marketing offers

Target costing


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Types of costs

Fixed or overhead cost

Variable cost

Total costs

Average costs (Totalcost/Production)


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Accumulated production


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Risks in Experience curvepricing

Aggressive pricing may lead tocheaper image

Assuming competitors are weak- company might bring new plants

competitor may innovate and bring

cheaper technology


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Differentiated marketingoffers

Standard cost accounting method

ABC (Activity based costaccounting) method


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Target costing


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4. Analyzing competitorscosts, prices and offers


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5. Selecting the pricingmethod

Three Cs model:

Customers demand schedule

Cost function

Competitors prices


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Price setting methods

Mark - up pricing

Target - return pricing

Perceived - value pricing

Value pricing

Going - rate pricing Auction - type pricing

Group pricing


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Perceived value pricing

Price buyers

Price buyers

Loyal buyers


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6. Selecting the final price

After considering: Psychological pricing

Influence of other marketing mixelements

Company pricing policies

Impact on price on other parties

Documents

Pricing Day2