Pricing Products - Pricing Considerations & Strategies

8/3/2019 Pricing Products - Pricing Considerations & Strategies

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Pricing Products:Pricing Products:

Pricing Considerations &Pricing Considerations &

StrategiesStrategies

Prof. Rushen Chahal


2/23

Factors to Consider When

Setting Prices

Internal Factors

PricingDecisions

External Factors

Price is the Amount of Money Charged for a Product orService.


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Internal Factors Affecting

Pricing Decisions

MarketingObjectives

Marketing-MixStrategy

Costs

OrganizationalConsiderations


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Marketing Objectives that Affect

Pricing Decisions

Marketing

Objectives

Marketing

Objectives

Survival

Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Survival

Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit MaximizationChoose the Price that Produces the

Maximum Current Profit, Cash Flow or ROI.

Current Profit MaximizationChoose the Price that Produces the

Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership

Low as Possible Prices to Become

the Market Share Leader.

Market Share Leadership

Low as Possible Prices to Become

the Market Share Leader.

Product Quality Leadership

High Prices to Cover HigherPerformance Quality and R & D.

Product Quality Leadership

High Prices to Cover HigherPerformance Quality and R & D.


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Marketing Mix Variables that AffectPricing DecisionsMarketing Mix Variables that AffectPricing Decisions

Marketing-MixStrategy

Product Design

Distribution

Promotion

Non-PriceFactors

Companies Will Consider Price Along With All the OtherMarketing-Mix Elements When Developing the MarketingProgram. Price Must be Coordinated With:


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Types of Cost Factors that

Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Fixed Costs(Overhead)

Costs that dontvary with sales orproduction levels.

Executive SalariesRent


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External Factors Affecting PricingDecisionsExternal Factors Affecting PricingDecisions

Market andDemand

Competitors Costs,Prices, and Offers

Other External FactorsEconomic Conditions

Reseller NeedsGovernment Actions

Social Concerns


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Market and Demand Factors that

Affect Pricing Decisions

Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Effect on the Price.

Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers WhoTrade Over a Range of Prices.

Oligopolistic CompetitionFew Sellers Who Are Sensitive to EachOthers Pricing/ Marketing Strategies

Pure MonopolySingle Seller

Pricing in Different Types of Markets


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Price Elasticity of Demand

Price

Quantity Demanded per Period

A. Inelastic Demand -Demand Hardly Changes With

a Small Change in Price.P2

P1

Q1Q2

Pr

ice

Quantity Demanded per Period

P2

P1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.


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Major Considerations inSetting PricesMajor Considerations inSetting Prices

NoPossibleProfit at

This Price

ProductCosts

ConsumerPerceptions

of Value

NoPossible

Demand atThis Price

Competitors Price andOther External &Internal Factors

FactoryExistingProducts

Sellingand

Promoting

ProfitsthroughVolume

HighPrice

LowPrice


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MinimizesPrice

Competition

What is Cost-Plus Pricing and Why

is it Popular?

Perceived

Fairness toBoth Buyersand Sellers

Sellers Are MoreCertain AboutCosts Than

Demand

Adding a Standard Markup to the Cost of the Product.


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Breakeven Analysis or

Target Profit Pricing

2

4

6

8

10

12

200 400 600 800 1,000

Total Revenue

Total Cost

Fixed Cost

Target Profit

($2 million)

Sales Volume in Units (thousands)

Co

stin

Dollars(m

illions)

Tries to Determine the Price at Which a Firm WillBreak Even or Make a Target Profit

0


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Cost-Based Vs. Value-Based Pricing

Product

Cost

Price

Value

Customers

Customer

Value

Price

Cost

Product

Cost-Based Pricing Value-Based Pricing


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Competition-Based Pricing

Setting Prices

Sealed-BidCompany Sets Prices Based onWhat They Think Competitors

Will Charge.

Going-RateCompany Sets Prices Based on What

Competitors Are Charging.

??


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New-Product Pricing StrategiesPrice - Quality Strategies

Premium

Strategy

OverchargingStrategy

Good-Value

Strategy

EconomyStrategy

PricePrice

Higher Lower

Higher

Lower

Quality

Quality


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Setting Initial Product Prices

Market SkimmingMarket Skimming Market PenetrationMarket Penetration

>Setting a High Pricefor a New Productto Skim MaximumRevenues from theTarget Market.

>Results in Fewer,

More ProfitableSales.

> Intels $1,000 Chip

> Setting a Low Price

for a New Product inOrder to Attract aLarge Number ofBuyers.

>Results in a Larger

Market Share.

>Wal-mart


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Product Line PricingProduct Line PricingSetting Price Steps

Between Product Line Itemsi.e. Lawnmowers at $299 & $399

OptionalOptional--Product PricingProduct PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options such as a CD player

CaptiveCaptive--Product PricingProduct PricingPricing Products That Must BeUsed Along With The Main Product

i.e. Razor Blades, Film, Software

ByBy--Product PricingProduct PricingPricing Low-Value By-Products To

Get Rid ofThemi.e. From Chemicals, Lumber Mills, Zoos

ProductProduct--Bundle PricingBundle PricingBundles Of Products Sold

Together at a Reduced Pricei.e. Season Tickets, Computer Makers

Product Mix Pricing Strategies

ProductMixPricing

Strategies


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Price-Adjustment Strategies

Price Adjustment Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Segmented

Adjusting Prices to Allowfor Differences in Customers,

Products, and Locations.

Cash Discount

Quantity Discount

Functional Discount

Seasonal Discount

Customer

Product-Form

Location

Time

Trade-In Allowance Promotional Allowance


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Price-Adjustment Strategies

Adjusting Prices forPsychological Effect.

Price Used as a QualityIndicator.

Reference Prices i.e.Clothing.

Temporarily Reducing Pricesto Increase Short-Run Sales.

i.e. Loss Leaders, forSpecial-Events, Cash Rebates

Psychological Pricing

Promotional Pricing


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Price-Adjustment StrategiesPrice-Adjustment Strategies

Adjusting Prices to Accountfor the Geographical Locationof Customers.

i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, etc.

Adjusting Prices forInternational Markets.

Price Depends on Costs,Consumers, EconomicConditions & Other Factors.

Geographical Pricing

International Pricing


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Initiating and Responding to

Price Changes

InitiatingPrice

Increases

CompetitorReactions

toPrice Changes

InitiatingPrice Cuts

Buyer Reactionsto

PriceChanges

PriceChanges


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Assessing & Responding toCompetitor Price ChangesAssessing & Responding toCompetitor Price Changes

Hold Current Price;Continue to MonitorCompetitors Price.

Reduce Price

Raise PerceivedQuality

Improve Quality& Increase Price

Launch Low-PriceFighting Brand

Has Competitor CutPrice?

Will Lower PriceNegatively Affect Our

Market Share & Profits?

Can/ Should EffectiveAction be Taken?

Yes

No

No

No

Yes

Yes


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Public Policy and PricingPublic Policy and Pricing

DeceptivePricing

PriceFixing

PriceDiscrimination

Public Policy on Pricing Centers on Three PotentiallyDamaging Pricing Practices.

Documents

Pricing Products - Pricing Considerations & Strategies