Prof. Bauer-Ramazani
MARKETINGMARKETING
Pricing StrategiesPricing Strategies
OverviewOverview
Definition of price Prices in BU113 companies Factors that influence the pricing decision Pricing objectives Three major pricing strategies and their
advantages and disadvantages Pricing strategies over the product life cycle Pricing tactics
Price -- Definition
• the amount of money charged for a product or service
• the sum of all the values that consumers exchange for the benefits of having or using the product or service
• Examples of “price?”– Tuition, rent, fare, retainer, toll, salary/wage, dues
Prices -- BU113 Companies
• What objectives did the managers have in mind when they set their prices?
Factors in Setting PriceFactors in Setting Price
Pricing ObjectivesPricing Objectives
Meet Business
Objectives
Volu
me
Sale
s M
axim
izat
ion
Mar
ket S
hare
Profitability
Profit-Maxim
ization
Target Return G
oals
Other Pricing Objectives Status Quo Image Social & Ethical Considerations
Price Strategies for New ProductsPrice Strategies for New ProductsPRICE
PRICE
PRICE
Skimming Penetration
Penetration Pricing
Skimming Pricing
Low price establish product in the market
High price/Prestige pricing appeal to early adopters; recover high R&D costs
Lower price over time
Move inventory, stimulate D, extend product life
Marketing Strategy Over the Product Life Cycle
INTRODUCTION GROWTH MATURITY DECLINEMarketing strategy Market development Increase market Defend market Maintain efficiency inemphasis share share exploiting product
Promotion Mount sales Appeal to Emphasize Reinforce loyal Strategy promotion for mass market brand differences, customers; reduce
product awareness benefits & loyalty promotion costs
Place strategy Distribute through Build intensive Enlarge Be selective in selective outlets network of distribution distribution, trim
outlets network unprofitable outlets
Pricing High price/unique Lower price Price at or below Set price to
strategy product / cover over time competition remain profitable production costs or
reduce toLow price/gain liquidatemarket share
Price-SettingToolsC
ost-O
rient
ed -
Varia
ble/
Fixe
d
Economic—Supply/Demand
Break-even
Analysis
Determining PricesDetermining Prices
Elasticity of DemandElasticity of Demand
measure of the sensitivity of demand to changes in prices
not price sensitive - no real change in demand price sensitive - changes in demand
Inelastic Demand
Q2 Q1 Quantity
PP11
PP22
ElectricityPri
ce
Elastic Demand
QQ22 Quantity
PP11
PP22
Fast food
Q1
Pri
ce
Market-based PricingMarket-based Pricing
Pricing Existing Products/Services - 3 options
Pricing below market prices price wars
EX: airlines, store brand vs. manufacturer’s brand
Dumping
Pricing above prevailing market prices for
similar products
EX: Sony higher price = higher quality?
Pricing at or near market prices
Pricing TacticsPricing Tactics
Price Lining • Price points: Setting a limited number of prices for
certain categories of products
Psychological Pricing
• Odd-even
Discounting • Quantity discounts
• Cash discounts (2/10 net 30)
Web programs: free!
Cost-based Pricing (Cost-Plus)Cost-based Pricing (Cost-Plus)
1. Cover costs costs Material Labor Capital resources Marketing
2.2. Mark-upMark-up Targeted return for shareholders
CostsCosts + mark-up mark-up = = Sales priceSales price
$1.00$1.00 + + $0.50 $0.50 = $1.50 = $1.50 (50% markup)(50% markup)
variable costs
fixed costs
Mark-up Calculation – ExerciseMark-up Calculation – Exercise
1. Price per product
2. Less the cost per product (what you paid the supplier, e.g. total cost paid / # of items purchased)
Price Sales
UpMarkDollar UPMARK %
Breakeven AnalysisBreakeven Analysis
TC = TR
Breakeven Point FormulaBreakeven Point Formula
(Contribution Margin)
cost/unit Variable– Price/unit
Costs Fixed QUANTITY BREAKEVEN
Review
• 5 Factors that influence prices
• Pricing objectives• Pricing strategies at different stages of the
Product Life Cycle (advantages/disadvantages)
• Methods of Determining Prices– Elasticity of demand– Mark-up– Breakeven Analysis