Pricing Considerations and Strategies 9. 9-2 What is a Price? Narrowly, price is the amount of money...

Pricing Considerations and Pricing Considerations and StrategiesStrategies

9

9-2

What is a Price?

• NarrowlyNarrowly, price is the amount of , price is the amount of money charged for a product or money charged for a product or service.service.

• BroadlyBroadly, price is the sum of all the , price is the sum of all the _____ that consumers exchange for _____ that consumers exchange for the benefits of having or using the the benefits of having or using the product or service.product or service.

• Dynamic PricingDynamic Pricing::

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Factors Affecting Pricing Decisions

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Internal Factors Affecting Pricing Decisions

Marketing

Objectives

Survival

Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.

Market Share LeadershipLow as Possible Prices to Become

the Market Share Leader.

High Prices to Cover Higher Performance Quality and R&D.

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Price

Product Design

Distribution

Promotion

NonpricePositions

Target Costing

Internal Factors Affecting Pricing Decisions: Marketing Mix Strategy

9-6

Internal Factors Affecting Pricing Decisions

• Costs:Costs:– Fixed Costs:Fixed Costs:

•Costs that do not vary with production or Costs that do not vary with production or sales level.sales level.

– Variable Costs:Variable Costs:•Costs that vary directly with the level of Costs that vary directly with the level of

production.production.

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Internal Factors Affecting Pricing Decisions

• Organizational Considerations:Organizational Considerations:– Must decide who within the organization Must decide who within the organization

should set prices.should set prices.– This will vary depending on the size and This will vary depending on the size and

type of company.type of company.

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Factors Affecting Pricing Decisions

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External Factors Affecting Pricing Decisions

• The Market and Demand:The Market and Demand:– Costs set the lower limit of prices.Costs set the lower limit of prices.– The market and demand set the upper limit.The market and demand set the upper limit.

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Pricing in Different Types of Markets

Pure Competition:Many buyers and sellers

where each has little effecton the going market price

Monopolistic Competition:Many buyers and sellers

who trade over a range of prices

Oligopolistic Competition:Few sellers who are

sensitive to each other’spricing/marketing strategies

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Demand Curve

A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.

9-12

Major Considerations in Setting Price

9-13

General Pricing Approaches

1.1. Cost-Based PricingCost-Based Pricinga.a. Cost-plus pricingCost-plus pricing

b.b. Break-even pricingBreak-even pricing

2.2. Value-Based PricingValue-Based Pricing

3.3. Competition-Based PricingCompetition-Based Pricing

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Cost-Based PricingCertainty About Costs

Pricing is Simplified

Price Competition Is Minimized

UnexpectedSituational

Factors

Attitudes of

Others

Ethical

Ignores Current

Demand & Competitio

n

Cost-Plus Pricing is an

Approach That Adds a

Standard Markup to the

Cost of the Product

Simplest Pricing Method

Fairer to Buyers & Sellers

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Break-Even Chart

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Value-Based Pricing

• Uses buyers’ perceptions of value, Uses buyers’ perceptions of value, not the seller’s cost, as the key to not the seller’s cost, as the key to pricing.pricing.

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Cost-Based Versus Value-Based Pricing

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Methods for Setting Prices

Going-Rate Company Sets Prices Based on

WhatCompetitors Are Charging

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge??

Competition-Based Pricing

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New-Product Pricing Strategies

Market-SkimmingMarket-Skimming

Set a high price for a Set a high price for a new product to new product to “skim” revenues “skim” revenues layer by layer from layer by layer from the market.the market.

• When to use:When to use:– Product’s quality and Product’s quality and

image must support its image must support its higher price.higher price.

– Costs of smaller volume Costs of smaller volume cannot be so high they cannot be so high they cancel the advantage of cancel the advantage of charging more.charging more.

– Competitors should not Competitors should not be able to enter market be able to enter market easily and undercut the easily and undercut the high price.high price.

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New-Product Pricing Strategies

Market Market PenetrationPenetration

Set a low initial price Set a low initial price in order to in order to “penetrate” the “penetrate” the market quickly and market quickly and deeply.deeply.

• When to use:When to use:– Market must be highly Market must be highly

price sensitive so a low price sensitive so a low price produces more price produces more market growth.market growth.

– Production and Production and distribution costs must distribution costs must fall as sales volume fall as sales volume increases.increases.

– Must keep out Must keep out competition and maintain competition and maintain low price or effects are low price or effects are only temporary.only temporary.

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Product Line Pricing

• Involves setting price Involves setting price steps between various steps between various products in a product products in a product line based on:line based on:– Cost differences Cost differences

between productsbetween products– Customer evaluations of Customer evaluations of

different features different features – Competitors’ pricesCompetitors’ prices

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Optional- and Captive-Product Pricing

•Optional-ProductOptional-Product– Pricing optional or accessory products Pricing optional or accessory products

sold with the main product (e.g., ice sold with the main product (e.g., ice maker with the refrigerator).maker with the refrigerator).

•Captive-ProductCaptive-Product– Pricing products that must be used with Pricing products that must be used with

the main product (e.g., replacement the main product (e.g., replacement cartridges for Gillette razors).cartridges for Gillette razors).

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Pricing Strategies

By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive

Product Bundle Pricing:Combining several products and offering the bundleat a reduced price

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Discounts and Allowances

Cash

Quantity

Functional

Seasonal

Trade-In

Promotional

Discounts Allowances

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Segmented Pricing

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost

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Psychological Pricing

• Considers the psychology Considers the psychology of prices and not simply of prices and not simply the economics.the economics.

• Consumers usually Consumers usually perceive higher-priced perceive higher-priced products as having higher products as having higher quality.quality.

• Consumers use price Consumers use price lessless when they can judge when they can judge quality of a product.quality of a product.

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Promotional Pricing

Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MaintenanceFree Maintenance

DiscountsDiscounts

Loss LeadersLoss Leaders

Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.

Approaches:

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Geographical Pricing

• FOB-origin pricingFOB-origin pricing

• Uniform-delivered Uniform-delivered pricingpricing

• Zone pricingZone pricing

• Basing-point pricingBasing-point pricing

• Freight-absorption Freight-absorption pricingpricing

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International Pricing

• Price depends on Price depends on many factors, many factors, including:including:– Economic conditionsEconomic conditions– Competitive Competitive

situationssituations– Laws and regulationsLaws and regulations– Development of the Development of the

wholesaling and wholesaling and retailing systemretailing system

– CostsCosts

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Why?

Excess Capacity

Falling Market Share

Dominate Market Through Lower

Costs

Initiating Price Changes

Why?

Cost Inflation

Overdemand: Company Can’t

Supply All Customers’ Needs

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Buyers’ Reactions to Price Changes

What would you think if the price of Joy was suddenly cut in half?

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Being Replaced by Newer Models

Being Replaced by Newer Models

Current Models Are Not Selling Well

Current Models Are Not Selling Well

Company is in Financial TroubleCompany is in

Financial Trouble

Price Cuts Are Seen by Buyers As:

Reactions to Price Changes

Number of Firms is Small

Number of Firms is Small

Product is UniformProduct is Uniform

Buyers are Well Informed

Buyers are Well Informed

Competitors Mostly React When:

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Assessing and Responding to Competitor Price Changes

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Public Policy and Pricing

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Price FixingPrice Fixing

Pricing Within Channel LevelsPricing Within Channel Levels

Predatory Pricing

Predatory Pricing

Public Policy Issues in Pricing

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PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

Retail PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

Retail PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that are

not Available To Consumers

(Bait and switch)

DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that are

not Available To Consumers

(Bait and switch)

Pricing Across Channel Levels