Pricing Strategies

5/19/2018 Pricing Strategies

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Pricing Considerations and StrategiesPricing Considerations and Strategies


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What is a Price?

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

BroadlyBroadly

, price is the sum of all the values that, price is the sum of all the values that

consumers exchange for the enefits of having orconsumers exchange for the enefits of having orusing theusing the product or service.product or service.

!ynamic Pricing!ynamic Pricing" charging" charging

different prices dependingdifferent prices dependingon individual customers andon individual customers and

situations.situations.


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#actors $ffecting Pricing

!ecisions


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%nternal #actors $ffecting Pricing

!ecisions

&ar'eting ()ectives"&ar'eting ()ectives" Company must decide on its strategy for theCompany must decide on its strategy for the

product.product. *eneral ()ectives"*eneral ()ectives"

Survival, current profit maximi+ation, mar'et shareSurvival, current profit maximi+ation, mar'et shareleadership, and product uality leadership.leadership, and product uality leadership.


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!ecisions

&ar'eting &ix Strategy"&ar'eting &ix Strategy" Price decisions must e coordinated with productPrice decisions must e coordinated with product

design, distriution, and promotion decisions todesign, distriution, and promotion decisions toform a consistent and effective mar'etingform a consistent and effective mar'eting

program.program.

-arget costing"-arget costing"

Pricing that starts with an ideal selling price, thenPricing that starts with an ideal selling price, thentargets costs that will ensure that the price is met.targets costs that will ensure that the price is met.


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!ecisions

Costs"Costs" #ixed Costs"#ixed Costs"

Costs that do not vary with production or sales level.Costs that do not vary with production or sales level. ariale Costs"ariale Costs"

Costs that vary directly with the level of production.Costs that vary directly with the level of production.


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!ecisions

(rgani+ational Considerations"(rgani+ational Considerations" &ust decide who within the organi+ation should&ust decide who within the organi+ation should

set prices.set prices. -his will vary depending on the si+e and type of-his will vary depending on the si+e and type of

company.company.


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/xternal #actors $ffecting Pricing

!ecisions

-he &ar'et and !emand"-he &ar'et and !emand" Costs set the lower limit of prices.Costs set the lower limit of prices.

-he mar'et and demand set the upper limit.-he mar'et and demand set the upper limit.


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Pricing in !ifferent -ypes of &ar'ets

Pure Competition:Many buyers and sellers

where each has little efecton the going market price

Monopolistic Competition:Many buyers and sellers

who trade over arange o prices

Pure Monopoly:Market consists o a

single seller

Oligopolistic Competition:ew sellers who are

sensitive to each other!spricing"marketing strategies


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&a)or Considerations in Setting Price


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Pricing $pproaches

Cost0Plus Pricing

$dding a standard mar'up to the cost of the$dding a standard mar'up to the cost of theproduct.product.

Popular ecause"Popular ecause" Sellers more certain aout cost than demandSellers more certain aout cost than demand

Simplifies pricingSimplifies pricing

When all sellers use, prices are similar andWhen all sellers use, prices are similar andcompetition is minimi+edcompetition is minimi+ed

Some feel it is more fair to oth uyers and sellersSome feel it is more fair to oth uyers and sellers


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Brea'0/ven Pricing


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alue0Based Pricing

1ses uyers2 perceptions of value, not1ses uyers2 perceptions of value, notthe seller2s cost, as the 'ey to pricing.the seller2s cost, as the 'ey to pricing.


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Competition0Based Pricing

*oing03ate Pricing"*oing03ate Pricing" #irm ases its price largely on competitors2 prices,#irm ases its price largely on competitors2 prices,

with less attention paid to its own costs or to demand.with less attention paid to its own costs or to demand.

Sealed0Bid Pricing"Sealed0Bid Pricing" #irm ases its price on how it thin's competitors will#irm ases its price on how it thin's competitors will

price rather than on its own costs or on demand.price rather than on its own costs or on demand.


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!ynamic Pricing Strategies

New product pricing strategiesNew product pricing strategies

Product mix pricing strategiesProduct mix pricing strategies

Price ad)ustment strategiesPrice ad)ustment strategies

Strategies for initiating and responding toStrategies for initiating and responding toprice changesprice changes


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New0Product Pricing Strategies

P3/&%1& S-3$-/*4

PREMIUM STRATEGY GOOD-VALUE

STRATEGY

OVERCHARGINGSTRATEGY

ECONOMY STRATEGY

#$%#&'

#$%#&'

(O)&'

(O)&'

QUALITY

PRICE


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&ar'et0S'imming&ar'et0S'imming

Set a high price for a newSet a high price for a new

product to 5s'im6product to 5s'im6

revenues layer y layerrevenues layer y layer

from the mar'et.from the mar'et.

Company ma'es fewer,Company ma'es fewer,ut more profitale sales.ut more profitale sales.

When to use"When to use"

Product2s uality and imageProduct2s uality and image

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

Costs of smaller volume cannotCosts of smaller volume cannot

e so high they cancel thee so high they cancel the

advantage of charging more.advantage of charging more.

Competitors should not e aleCompetitors should not e ale

to enter mar'et easily andto enter mar'et easily andundercut the high price.undercut the high price.


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&ar'et Penetration&ar'et Penetration

Set a low initial price inSet a low initial price in

order to 5penetrate6 theorder to 5penetrate6 themar'et uic'ly andmar'et uic'ly and

deeply.deeply.

Can attract a largeCan attract a largenumer of uyers uic'lynumer of uyers uic'ly

and win a large mar'etand win a large mar'et

share.share.

When to use"When to use"

&ar'et must e highly price&ar'et must e highly price

sensitive so a low pricesensitive so a low price

produces more mar'etproduces more mar'et

growth.growth.

Production and distriutionProduction and distriution

costs must fall as salescosts must fall as sales

volume increases.volume increases.

&ust 'eep out competition and&ust 'eep out competition andmaintain low price or effectsmaintain low price or effects

are only temporary.are only temporary.


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Product mix pricing strategies

Product 7ine Pricing

%nvolves setting price steps etween various%nvolves setting price steps etween variousproducts in a product line ased on"products in a product line ased on"

Cost differences etween productsCost differences etween products Customer evaluations of different featuresCustomer evaluations of different features

Competitors2 pricesCompetitors2 prices


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(ptional0 and Captive0Product Pricing

(ptional0Product(ptional0Product Pricing optional or accessory products sold withPricing optional or accessory products sold with

the main product 8e.g., ice ma'er with thethe main product 8e.g., ice ma'er with therefrigerator9.refrigerator9.

Captive0ProductCaptive0Product

Pricing products that must e used with the mainPricing products that must e used with the mainproduct 8e.g., replacement cartridges for *illetteproduct 8e.g., replacement cartridges for *illette

ra+ors, software with computer9.ra+ors, software with computer9.


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Product mix Pricing Strategies

By0Product Pricing"

Setting a price for y0products in order to ma'e

the main product2s price more competitive.

Product Bundle Pricing"Comining several products and offering the undle

at a reduced price 8e.g., computer with software and

%nternet access, hotel sell pac'ages including room,hotel sell pac'ages including room,

meals, entertainment, air0tic'ets etcmeals, entertainment, air0tic'ets etc ..9


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Price ad)ustment strategies!iscounts and $llowances

Cash

:uantity

#unctional

Seasonal

-rade0%n

Promotional

!iscounts $llowances


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$llowances

Promotional money paid y manufacturers toPromotional money paid y manufacturers toretailers in return for an agreement to featureretailers in return for an agreement to featurethe manufacturer2s products in some waythe manufacturer2s products in some way


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$llowances$llowances

-rade0in"-rade0in" Price reduction for turning in an oldPrice reduction for turning in an olditem when uying a new one.item when uying a new one.

Promotional"Promotional"

Price reductions to rewardPrice reductions to reward

dealers for participating in advertising ; salesdealers for participating in advertising ; salessupport programsupport program


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Segmented Pricing

Selling a product or service at two or more prices,Selling a product or service at two or more prices,where the difference in prices is not ased onwhere the difference in prices is not ased ondifferences in costs.differences in costs.

-ypes"-ypes". 7ocation pricing ex. theaters7ocation pricing ex. theaters

.. -ime pricing ex. hotels giving seasonal discount-ime pricing ex. hotels giving seasonal discount


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Psychological Pricing

Considers the psychologyConsiders the psychology

of prices and not simply theof prices and not simply the

economics.economics.

Consumers usuallyConsumers usuallyperceive higher0pricedperceive higher0priced

products as having higherproducts as having higher

uality.uality.

Consumers use priceConsumers use price lesslesswhen they can )udgewhen they can )udge

uality of a product.uality of a product.


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Promotional Pricing

*pecial+&vent Pricing

Cash 'ebates

(ow+$nterest inancing

(onger )arranties

ree Maintenance

,iscounts

(oss (eaders

-emporarily pricing products elow list price and sometimeseven elow cost to create uying excitement and urgency.

-pproaches:


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Promotional Pricing

Companies ofer promotional prices to create buying e.citement andurgency/


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%nitiating Price Changes

/xcess Capacity

#alling &ar'et

Share

!ominate &ar'et

-hrough 7ower

Costs

Cost %nflation

(verdemand"

Cannot Supply

$ll Customers2Needs

Price Cuts Price %ncreases


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$ssessing and 3esponding to

Competitor Price Changes


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Steps in Setting Price

. /stimate costs/stimate costs.. $naly+e competitor price mix$naly+e competitor price mix

@.@. Select pricing methodSelect pricing method

A.A. Select final priceSelect final price


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Step


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Step =" !etermining !emand

Price sensitivityPrice sensitivity

/stimate demand curves/stimate demand curves

Price elasticity of demandPrice elasticity of demand


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%nelastic and /lastic !emand


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Step >" /stimating Costs

-ypes of costs-ypes of costs

$ccumulated production$ccumulated production

$ctivity0ased cost accounting$ctivity0ased cost accounting

-arget costing-arget costing


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Cost Per 1nit at !ifferent 7evels of Production


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Cost -erms and Production

#ixed costs#ixed costs

ariale costsariale costs

-otal costs-otal costs

$verage cost$verage cost

Cost at different levels of productionCost at different levels of production


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Cost per 1nit as a #unction of

$ccumulated Production


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-arget Costing

&ar'et research estalishes a new product2s desired

functions and the price at which it will sell, given its

appeal and competitors2 prices. -his price lessdesired profit margin leaves the target cost the

mar'eter must achieve.


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Step " $naly+ing Competitor2s Costs

Competitors2 costsCompetitors2 prices

Possile price reactions


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-he -hree Cs &odel for Price0Setting


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Step @" Selecting a Pricing &ethod

&ar'up pricing&ar'up pricing

-arget0return pricing-arget0return pricing

Perceived0value pricingPerceived0value pricing

alue pricingalue pricing

*oing0rate pricing*oing0rate pricing

$uction0type pricing$uction0type pricing


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-arget03eturn Pricing


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Brea'0/ven Chart for !etermining -arget0

3eturn Price and Brea'0/ven olume


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Perceived0alue Pricing

Customer2s perceived0value Performance Warranty Customer support 3eputation


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$uction0-ype Pricing

/nglish

!utch

Sealed0Bid


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Step A" Selecting the #inal Price

%mpact of other mar'eting activities%mpact of other mar'eting activities

Company pricing policiesCompany pricing policies

*ain0and0ris' sharing pricing*ain0and0ris' sharing pricing

%mpact of price on other parties%mpact of price on other parties


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*eographical Pricing

Countertrade forms"Countertrade forms"

BarterBarter

Compensation dealCompensation deal

Buyac' arrangementBuyac' arrangement

(ffset(ffset


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Price !iscounts and $llowances

!iscount!iscount

:uantity discount:uantity discount

#unctional discount#unctional discountSeasonal discountSeasonal discount

$llowance$llowance


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Promotional Pricing -actics

7oss0leader pricing7oss0leader pricing

Special0event pricingSpecial0event pricing

Special customer pricingSpecial customer pricing

Cash reatesCash reates

7ow0interest financing7ow0interest financing

7onger payment terms7onger payment termsWarranties and service contractsWarranties and service contracts

Psychological discountingPsychological discounting


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!ifferentiated Pricing

Customer0segment pricingCustomer0segment pricing

Product0form pricingProduct0form pricing

%mage pricing%mage pricing

Channel pricingChannel pricing

7ocation pricing7ocation pricing

-ime pricing-ime pricing4ield pricing4ield pricing


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-raps in Price Cutting Strategies

7ow0uality trap7ow0uality trap

#ragile0mar'et0share trap#ragile0mar'et0share trap

Shallow0poc'ets trapShallow0poc'ets trap

Price0war trapPrice0war trap


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Should We 3aise Prices?


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&ethods for %ncreasing Prices

!elayed uotation pricing!elayed uotation pricing

/scalator clauses/scalator clauses

1nundling1nundling

3eduction of discounts3eduction of discounts


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Brand 7eader 3esponses to Competitive Price

Cuts

&aintain price&aintain price

&aintain price and add value&aintain price and add value

3educe price3educe price%ncrease price and improve uality%ncrease price and improve uality

7aunch a low0price fighter line7aunch a low0price fighter line

Documents

Pricing Strategies