ITFT-Pricing stratigies

Pricing Strategies

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Price Determination: An Overview

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Demand Curves

P

Q

D

Quantity

Pri

ce

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Price Elasticity of Demand

% Change in quantity demanded

Price Elasticity of Demand =

% Change in price

• Elastic Demand

• Inelastic Demand

• Cross Elasticity of Demand

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Costs, Volume, and Profits

• Fixed Costs (FC)

• Variable Costs (VC)

• Total Costs (TC)

• Marginal Cost MC)

• Marginal Revenue (MR)

• Total Revenue (TR)

TC = (VC X Q) + FC

Total Revenue = Price X Quantity

Profits = TR - TC

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Price Determination Methods

• Markup Pricing

Price = Unit Cost + Markup

Price = Unit Cost/(1-k)* *k = desired % markup

or

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Price Determination Methods

Break-Even Analysis

Total Revenue

Total Cost

Fixed Cost

BEP

$

Quantity (units)

Loss

Profit

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Price Determination Methods

• Target-Return Pricing

(Desired return X Invested capital) Price = Unit Cost + Expected Unit Sales

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Price Determination Methods

• Target-Cost Pricing 1. Define market segments for new product. 2. Product is designed based on competitive

advantages and disadvantages. 3. Position product in context of overall company

strategy. 4. Fine-tune product based on customer’s

preferences, perceived value and willingness to pay.

5. Estimate various price-responsiveness with simulations.

6. Estimate target costs between optimal price and desired margin.

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Price Determination Methods

• Income-Based Pricing

• Real Estate • Marketable Securities • Businesses

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Prices and Customer Value

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Pricing Strategies

Differential Pricing Second-market discounting Periodic discounting

Competitive Pricing Penetration pricing Price signaling Going-rate pricing

Psychological Pricing Odd-even pricing Customary pricing One-sided claims

Product Line Pricing Bundling Premium pricing Partitional pricing

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B2B Pricing Strategies

• New Product Pricing • Price Skimming

• Penetration Pricing

• Experience Curve Pricing

• Competitive Pricing • Leader Pricing

• Parity Pricing

• Low-Price Supplier

• Price Line Pricing • Complementary Product

Pricing

• Price Bundling

• Customer Value Pricing

• Cost-based Pricing • Cost-plus Pricing

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Adapting Prices: Decreases and Increases

• Price Reduction Traps:

1. Low-quality trap

2. Fragile market share trap

3. Shallow pockets trap

• Acceptable Price Range: • Prices the buyer is willing

to pay.

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Adapting Prices: Reacting to Competitive Price Changes

• Temporary retail price reductions substantially increase store traffic and sales.

• Large-market-share brands are hurt less by price changes from smaller competitors.

• Frequent price dealing lowers consumers’ reference prices, which may hurt brand equity.

• Price changes for high-quality brands affect weaker brands and private-label brands disproportionately.

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Adapting Prices: Price Discounts and Allowances

• Cash Discounts

• Trade Sales Promotion Allowances

• Quantity Discounts

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Adapting Prices: Geographical Pricing

FOB Origin Pricing

Uniform Delivered Price

Zone Pricing

Freight Absorption Pricing

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Competitive Bidding and Negotiated Pricing

• Sealed-bid Pricing

• Reverse Auctions

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Pricing Services

Price is influenced by the nature of the service involved.

The larger the market share, the higher the price that

can be charged.

Managing off-peak demand makes pricing services difficult.

Bundling services into a single package and price is a

common strategy. 4/28/2014

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