Chapter 7 Pricing Strategies

You dont sell through price. You sell the price.

The Learning ObjectivesSetting Pricing PolicyPrice-adjustment StrategiesPrice changes

1.Pricing objectivesSurvivalMaximum current profitMaximum market shareMaximum market skimmingProduct-quality leadership

Setting Pricing Policy1.Selecting the pricingobjective

Types of Costs

Total CostsSum of the Fixed and Variable Costs for a Given Level of Production

Fixed Costs(Overhead)Costs that dontvary with sales or production levels.

Executive SalariesRent

Variable Costs

Costs that do varydirectly with the level of production.

Raw materials

The Three Cs Modelfor Price SettingCostsCompetitorsprices andprices ofsubstitutesCustomersassessmentof uniqueproductfeatures

Some important pricing definitionsUtility: The attribute that makes it capable of want satisfactionValue: The worth in terms of other productsPrice: The monetary medium of exchange.Value Example: CaterpillarTractor is $100,000 vs. Market $90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount!

Examples: new-product pricingMarket-skimming pricingMarket-penetration pricing

Market-skimming pricingSetting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales.

The conditions:A sufficient number of buyers have a high current demand;The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;The high initial price does not attract more competitors to market;The high price communicates the image of a superior product.

Market-penetration pricingSetting a low price for a new product in order to attract a large number of buyers and a large market share.

The conditions:The market is highly price sensitive,and a low price stimulates market growth;Production and distribution costs fall with accumulated production experience;A low price discourages actual and potential competition.

Price sensitivity

Examples: product mix pricingProduct line pricingOptional-product pricingCaptive-product pricingBy-product pricingCash rebatesLow-interest,longer warranties,free maintenance

2.pricing-adjustment strategiesDiscount and allowance pricingSegmented pricingPsychological pricingPromotional pricingGeographical pricing

Discount and allowance pricingCash discountQuantity discountFunctional discountSeasonal discount allowance

Discriminatory Pricing

Psychological PricingMost Attractive?Better Value?Psychological reason to price this way?Assume Equal Quality

Geographical pricingFOB-origin pricingUniform-delivered pricingZone pricingBasing-point pricingFreight-absorption pricing

Promotional PricingLoss-leader pricingSpecial-event pricingCash rebatesLow-interest financingLonger payment termsWarranties & service contractsPsychological discounting

3. Pricing changingInitiating price cutsInitiating price increases

DiscussionPlease explain the reasons for price cuts.Please explain the reasons for price increases.Please describe the advantage and disadvantage of price cuts and increases.

The reasons for price cutsExcess capacityPrice competition

The reasons for price increasesCost inflationoverdemand

Reactions to price changesCustomers reactionsCompetitors reactions

Responding to competitors price changesMaintain priceMaintain price and add valueReduce priceIncrease price and improve qualityLaunch a low-price fighter line

Price-Reaction Program for Meeting a Competitors Price CutHas competitorcut his price?

Assignment:Read page P411---P415Question 2, interactive marketing applications ,P423