Pricing Strategies

©2000 Prentice Hall


ObjectivesObjectivesObjectivesObjectives

Setting the PriceSetting the Price Adapting the PriceAdapting the Price Initiating & Responding to Price Initiating & Responding to Price

ChangesChanges


PriceHigh Medium Low

High

Low

Pro

du

ct Q

ual

ity

Med

Premium Value

Premium Value

Medium Value

Economy

Overcharging

Rip-OffFalse

Economy

High Value

SuperValue

Good-Value

Price - Quality StrategiesPrice - Quality StrategiesPrice - Quality StrategiesPrice - Quality Strategies


Setting Pricing PolicySetting Pricing Policy

1. Selecting the pricingobjective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’costs, prices, and offers

5. Selecting a pricingmethod

6. Selecting final price


Types of CostsTypes of Costs

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials


The Three C’s ModelThe Three C’s Modelfor Price Settingfor Price Setting

Costs Competitors’prices andprices ofsubstitutes

Customers’assessmentof uniqueproductfeatures

Low Price

No possibleprofit at

this price

High Price

No possibledemand atthis price


Pricing MethodsPricing MethodsPricing MethodsPricing Methods

Markup PricingMarkup Pricing Target Return PricingTarget Return Pricing Perceived Value PricingPerceived Value Pricing Value PricingValue Pricing Going-Rate PricingGoing-Rate Pricing Sealed-Bid PricingSealed-Bid Pricing


Some important pricing definitionsSome important pricing definitionsSome important pricing definitionsSome important pricing definitions

Utility: The attribute Utility: The attribute that makes it capable that makes it capable of want satisfactionof want satisfaction

Value: The worth in Value: The worth in terms of other terms of other productsproducts

Price: The monetary Price: The monetary medium of exchange.medium of exchange.

Value ExampleValue Example:: CaterpillarCaterpillar

Tractor is Tractor is $100,000$100,000 vs. vs. Market Market $90,000$90,000

$90,000 if equal$90,000 if equal 7,000 extra durable7,000 extra durable 6,000 reliability6,000 reliability 5,000 service5,000 service 2,0002,000 warranty warranty $110,000 in benefits -$110,000 in benefits -

$10,000 discount!$10,000 discount!


Promotional PricingPromotional PricingPromotional PricingPromotional Pricing

Loss-leader pricingLoss-leader pricing Special-event pricingSpecial-event pricing Cash rebatesCash rebates Low-interest financingLow-interest financing Longer payment termsLonger payment terms Warranties & service contractsWarranties & service contracts Psychological discountingPsychological discounting


Psychological PricingPsychological Pricing

Most Attractive?Most Attractive?

Better Value?Better Value?

Psychological Psychological reason to price this reason to price this way?way?

A32 oz.

$2.19

B26 oz.

$1.99

Assume Equal Quality


Discriminatory PricingDiscriminatory PricingDiscriminatory PricingDiscriminatory Pricing

Time

Product-form

Customer Segment

Location


Price-Reaction Program for Price-Reaction Program for Meeting a Competitor’s Price CutMeeting a Competitor’s Price Cut

Has competitorcut his price?

NoNoHold our price

at present level;continue to watch

competitor’sprice

Is the pricelikely to

significantlyhurt our sales?

YesYes

Is it likely to bea permanent

price cut?YesYes

By more than 4%Drop price tocompetitor’s

price

By 2-4%Drop price by

half of thecompetitor’s

price cut

How much hashis price been

cut?YesYes

NoNo NoNo

By less than 2%Include a

cents-off couponfor the nextpurchase


ReviewReviewReviewReview

Setting the PriceSetting the Price Adapting the PriceAdapting the Price Initiating & Responding to Price Initiating & Responding to Price

ChangesChanges

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Pricing Strategies