Cours 7 - Pricing Strategy

8/11/2019 Cours 7 - Pricing Strategy

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Copyright 2003 Prentice-Hall, Inc.

Pricing Strategy

How to set prices?

When and how to initiate price changes?

How should a company react to competitorsprice changes?


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Economists approach to pricing: the

demand curve

Q2

Q1

P2

P1

Price

Quantity

Developed as anexplanation of marketbehaviour

Focuses on demandand supply


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16-3Copyright 2003 Prentice-Hall, Inc.

Inelastic and Elastic Demand

Price elasticity or sensitivity


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The three pricing methods: to be used

in combination

Cost

Competition Marketing

Pricing

methods


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Cost-oriented Pricing: full cost pricing

4,40Price (cost plusmark-up)

0,40Mark-up (10%)

4Full costs

2Fixed costs (200 K/100 K)

2Direct costs

Cost per unit

100,000Expected sales200,000Fixed costs

2Direct costs (per unit)

Year 1

6,60Price (cost plusmark-up)

0,60Mark-up (10%)

6Full costs

4Fixed costs (200 K/50 K)

2Direct costs

Cost per unit

50,000Expected sales

Year 2

Full costs indicate the minimum price necessary to make a profit


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Break-Even Chart for Determining Target-

Return Price and Break-Even Volume


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Cost-oriented Pricing: direct (marginal)

cost pricing

2,2Marginal Price

0,20Mark-up (10%)

2Marginal cost

100,000Expected sales

2Direct costs (per units)

Year 1Costs are taken into accountonly when they are directlyattributable to the productionof a particular product.

Fixed costs or overheads arenot included in the marginalcost.

Useful for services marketing seats in aircraft or rooms in hotels -that cannot be stored; if they are unused at any time the revenue islost.

Direct costs indicate the lowest price at which it is sensible to takebusiness if the alternative is to let machinery (seats or rooms) lie idle.


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Competitor-oriented Pricing:

going-rate pricing

In situations where there is no product differentiation,where costs are difficult to measure or competitive

response is uncertain.

The firm bases its price largely on competitors prices, itmight charge the same, more, or less than majorcompetitor(s).

Going-rate pricing is then setting price levels at the rategenerally applicable in the market, focusing oncompetitors offerings and prices rather than on company

costs. Marketers try to avoid going-rate pricing bycreating a differential advantage.


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Marketing-orientated pricing: a much

more customer-orientated view of pricing

Product line pricing

Price-qualityrelationships

Marketing strategy

Value to customerMarketing-oriented

pricing


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Three major considerations

in price setting

Costs set a floor to the price

Competitors prices and the price of substitutesprovide an orienting point

Customers assesment of unique productfeatures establishes the ceiling price


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Initiating price changes: when and how?

Strategic objectivesSelf-interest

Competitive situation

Past experience

Estimating competitor

reaction

Price fall

Staged price reductions

Fighter brands

Price bundling

Higher discounts

Price jump

Staged price increases

Escalator clauses

Price unbundling

Lower discounts

Tactics

Value less than price

Excess supply

Build objective

Price war unlikelyPre-empt competitive entry

Value greater than price

Rising costs

Excess demand

Harvest objective

Circumstances

CutsIncreases


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When and how to react to competitors

price changes?

Offset competitive threat

High customer loyalty

Margin improvement urgent

Gains to be made by being

customers friend

Tactics:

-quick response

-slow response

Rising costs

Excess demandPrice-insensitive customers

Price fall incompatible with brand

image

Harvest objective

Stable or falling costs

Excess supplyPrice-sensitive customers

Price rise incompatible with brand

image

Build objective

When to ignore

Falling costs

Excess supply

Price-sensitive customers

Price fall compatible with brandimage

Build or hold objective

Rising costs

Excess demand

Price-insensitive customers

Price rise compatible with brandimage

Harvest or hold objective

When to follow

CutsIncreases


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Setting price in line with

marketing strategy

Price should be set in line with other marketing decisionssuch as positioning, strategic objectives, promotion,distribution and product benefits.

Pricing new products Positioning strategy

Pricing Existing products Strategic objectives


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Adoption of innovations by segments:

calculators

S1 Engineer/scientists

S2 Commercial

S3 General public

S4 Schoolchildren

Time

Sales

The choice of targetmarket has a massive

impact on the price thatcan be charged


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Launch strategies

RapidSkimming

Nike

High SlowSkimming

Rolls-Royce

RapidPenetration

Easy Jet

Slow

Penetration own-label brands

Price

Low

Promotion

High Low

When is it sensible to use a high price (skimming) strategyand when should a low price (penetration) strategybe used?


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Characteristics of high price market

segments

1. Product provides high value

2. Customers have high ability to pay3. Customer and bill payer are different

4. Lack of competition

5. Excess demand6. High pressure to buy


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Conditions

for charging

low prices1. Only feasible alternative

2. Market presence or domination

3. Experience curve effect

4. Make money later

5. Make money elsewhere6. Barrier to entry

7. Predation


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Four strategic objectives are relevant to

pricing of existing products

Build objective:for price-sensitive markets, implies a

price lower than the competition; for price-insensitivemarkets, price will be dependent on the overallpositioning strategy;

Hold objective:maintain or match price relative to the

competition

Harvest objective:set premium prices

Repositioning objective: involve a price change Bruts repositioning involved new packaging and anincrease in price


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Pricing should be accurately keyed to

the value to the customer

The more value a product gives compared to that ofcompetition, the higher the price can be charged

How to estimate a products value to the customer?

1. The buy-response method

2. Trade-off (conjoint analysis) analysis

3. Economic value to the customer analysis


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The buy-response curve to set the

psychological price

20 21 22 23 24 25 26 27 28

Price

%o

fresponden

ts


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Pricing using EVC analysis

50 000

30 000

120 000100 000

20 000

80 000

EVC =

90 000

120 000

30 000

Life-cyclecost

Purchaseprice

Start-upcosts

Post-purchasecosts

200 000 200 000

40 000Added value

Referenceproduct

Newproduct X

Newproduct Y


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1.1. the lowest-priced product and pricethe lowest-priced product and price plays the role of traffic builderplays the role of traffic builder

1.1. the highest-priced product and pricethe highest-priced product and price

positioned as the premium itempositioned as the premium item

1.1. price differentials for all other products in the lineprice differentials for all other products in the line reflect differences in their perceived value ofreflect differences in their perceived value of

the products offeredthe products offered

Product-line pricing involves determining:

Product-Line Pricing

Documents

Cours 7 - Pricing Strategy