Upload
rohitmishramba
View
225
Download
0
Embed Size (px)
Citation preview
8/8/2019 Session5 Pricing 091115003742 Phpapp02
1/27
Pricing:
Approaches andStrategies
Session 5Chapter 10 & 11
8/8/2019 Session5 Pricing 091115003742 Phpapp02
2/27
Objectives
o Understand the internal & external factors affecting afirms pricing decisions.
o Be able to contrast the three general approaches tosetting prices.
o Learn the major strategies for pricing imitative andnew products.
o Understand how companies find a set of prices thatmaximizes the profits from the total product mix.
o Learn how companies adjust their prices to take intoaccount different types of customers and situations.
o Know the key issues related to initiating and
responding to price changes.
8/8/2019 Session5 Pricing 091115003742 Phpapp02
3/27
Price
o The amount of money charged for a product, orthe sum of the values that consumers exchangefor the benefits of having/using the product orservice.
o Price and the Marketing Mix
Only element to produce revenues
Most flexible element
Can be changed quickly
o Price as a tool of Competition
o Common Pricing Mistakes
8/8/2019 Session5 Pricing 091115003742 Phpapp02
4/27
Factors to Consider in Setting Price
o Marketing objectives
o Marketing mix strategies
o Costs
o Organizationalconsiderations
o Market positioning influences
pricing strategy
o Other pricing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
o Not-for-profit objectives:
Partial or full cost recovery
Social pricing
Internal FactorsInternal Factors
8/8/2019 Session5 Pricing 091115003742 Phpapp02
5/27
o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Pricing must be carefully
coordinated with the othermarketing mix elements
o Target costing is often used to
support product positioning
strategies based on price
o Non-price positioning can also
be used
Internal FactorsInternal Factors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
6/27
o Marketing objectives
o Marketing mix strategies
o Costs
o Organizational
considerations
o Types of costs:
Variable Fixed
Total costs
o How costs vary at different
production levels will influenceprice setting
o Experience (learning) curve
effects on price
Internal FactorsInternal Factors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
7/27
Strategic Impact & Cost Analysis: Pareto Law EffecCitiBank NA Example
o 80% of Cost Structure on staff andeven Marketing Expenses iscaused by 20% of Accounts fortheir Low Deposits and highTransaction Volume.
o There are only few things that arereally important.
o If you successfully improve 20% ofthe most important problems, youwill gain the same effect as youwould by improving the rest 80%.
This represents a big advantagewith respect to cost versus effect.
80%20%
20%80% No. of Customers
80%
20%
No. of Services
Service Revenue
CustomerRevenue
Customer Accounts
for purification
ServiceR
ange
forRation
alization
Customer/ Service
for Elimination
20%
80%
Figure: Customer/Service Revenue Matrix
80%20%
20%80% No. of Customers
80%
20%
No. of Services
Service Revenue
CustomerRevenue
Customer Accounts
for purification
ServiceR
ange
forRation
alization
Customer/ Service
for Elimination
20%
80%
Figure: Customer/Service Revenue Matrix
For an Effective Cost-Structure:
o 20% of the Customers and 20% of the Services contribute 80% of Revenue.
o Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue.
o Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss.
8/8/2019 Session5 Pricing 091115003742 Phpapp02
8/27
o Marketing objectives
o Marketing mix strategies
o Costs
o Organizationalconsiderations
o Who sets the price?
In Small companies:
CEO or top management In Large companies:
Divisional or product line
managers
o Price negotiation is common
in industrial settings
o Some industries have pricing
departments
Internal FactorsInternal Factors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
9/27
o Nature of market and
demand
o Competitors costs,
prices, and offers
o Other environmental
elements
o Types ofmarkets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
o Consumer perceptions of
price and value
o Price-demand relationship
Demand curve
Price elasticity of demand
ExternalExternalFactorsFactors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
10/27
o Nature of market and
demand
o Competitors costs,
prices, and offerso Other environmental
elements
o Consider competitors costs,
prices, and possible reactions
when developing a pricing
strategy
o Pricing strategy influences the
nature of competition
Low-price low-margin strategies
inhibit competition
High-price high-marginstrategies attract competition
o Benchmarking costs against the
competition is recommended
ExternalExternalFactorsFactors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
11/27
o Nature of market and
demand
o Competitors costs,
prices, and offerso Other environmental
elements
o Economic conditions Affect production costs
Affect buyer perceptions ofprice and value
o Reseller reactions to pricesmust be considered
o Government may restrict orlimit pricing options
o Social considerations maybe taken into account
ExternalExternalFactorsFactors
Factors to Consider in Setting Price (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
12/27
1. Cost-Based Pricing: a) Cost-Plus Pricing Adding a standard markup to cost Ignores demand and competition
Popular pricing technique because: It simplifies the pricing process
Price competition may be minimized It is perceived as more fair to both buyers and sellers
Example
Variable costs: Tk. 20 Fixed costs: Tk. 500,000
Expected sales: 100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
Tk. 20+ Tk. 500,000/100,000= Tk. 25 per unit
Unit Cost/(1 Desired Return on Sales) = Markup Price
Tk. 25/(1 - .20) = Tk. 31.25
General Pricing Approaches
8/8/2019 Session5 Pricing 091115003742 Phpapp02
13/27
b) Break-Even Analysis & Target Profit Pricingo Break-even charts show total cost and total revenues at different
levels of unit volume.
o The intersection of the total revenue and total cost curves is the
break-even point.
o Companies wishing to make a profit must exceed the break-even unit
volume.
General Pricing Approaches (contd.)
Fi ed osts
Total osts
Reven es
ales Vol me in Tho sands of Units
Tho
sands
Taka
2 3 4
8
6
4
2
Break-evenpoint
Target Profit Tk. 200,000
Quantity To Be Sold ToMeet Target Profit
F
T
R
V m T U
T
T
2 3 4
8
6
4
2
Break-evenpoint
Target Profit Tk. 200,000
Quantity To Be Sold ToMeet Target Profit
8/8/2019 Session5 Pricing 091115003742 Phpapp02
14/27
2. alue-Based Pricingo Uses buyers perceptions
of value rather than sellerscosts to set price.
o Measuring perceived valuecan be difficult.
o Consumer attitudes towardprice and quality have
shifted during the lastdecade. Introduction of less
expensive versions ofestablished brands has
become common.
General Pricing Approaches (contd.)
o Business-to-businessfirms seek to retainpricing power Value-added strategies
can help
o Value pricing at the
retail level Everyday low pricing
(EDLP) vs. high-lowpricing
8/8/2019 Session5 Pricing 091115003742 Phpapp02
15/27
8/8/2019 Session5 Pricing 091115003742 Phpapp02
16/27
o Market-Skimming Pricing
Setting a high price for a new product to skim maximum revenueslayer by layer from segments willing to pay the high price.
o Market-Penetration Pricing
Setting a low price for a new product in order to attract a large
number of buyers and a large market share.
o Market Rate Pricing
Ceding the initiative to the key competitors to set the price.
Dangerous for leaving the strategic initiative to competitors
Potential threat of Sudden Price Shift by newer, or Changes indelivery system capability.
o Relationship Pricing
Different price for Different class of customers depending on
relationship and the potentiality of cross-selling or future business.
Other Pricing Approaches
8/8/2019 Session5 Pricing 091115003742 Phpapp02
17/27
o Product Line Pricing Setting price steps between
product line items.
Line of products rather single one
Price points
o Optional-Product Pricing Pricing optional or accessory
products sold with the mainproduct
o By-Product Pricing Pricing low-value by-products to
get rid of them
Product Mix Pricing Strategies
o Captive-Product Pricing Pricing products that must
be used with the mainproduct
High margins are often setfor supplies
Services: two-part pricingstrategy
Fixed fee plus a variableusage rate
o Product Bundle Pricing Pricing bundles of products
sold together
8/8/2019 Session5 Pricing 091115003742 Phpapp02
18/27
Price Adjustment Strategies
o Discount/allowance
o Segmented
o Psychological
o Promotional
o Types of discounts
Cash discount Quantity discount
Functional (trade) discount
Seasonal discount
o Allowances
Trade-in allowances
Promotional allowances
StrategiesStrategies
8/8/2019 Session5 Pricing 091115003742 Phpapp02
19/27
Price Adjustment Strategies (contd.)
o Discount/allowance
o Segmented
o Psychological
o Promotional
o Types of segmented pricingstrategies:
Customer-segment
Product-form pricing
Location pricing
Time pricing
oAlso called revenue or yield
managemento Certain conditions must
exist for segmented pricing tobe effective
StrategiesStrategies
8/8/2019 Session5 Pricing 091115003742 Phpapp02
20/27
Conditions Necessary for
Segmented Pricing Effectiveness
o Market is segmentable
o Lower priced segments
are not able to resell
o Competitors can not
undersell segmentscharging higher prices
o Pricing must be legal
o Costs of segmentationcan not exceed revenuesearned
o Segmented pricing must
reflect real differences incustomers perceivedvalue
8/8/2019 Session5 Pricing 091115003742 Phpapp02
21/27
o Discount/allowance
o Segmented
o Psychological
o Promotional
o The price is used to saysomething about the product.
Price-quality relationship Reference prices
Differences as small as fivecents can be important
Numeric digits may havesymbolic and visual qualitiesthat psychologically influencethe buyer
Odd
rounding
StrategiesStrategies
Price Adjustment Strategies (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
22/27
o Discount/allowance
o Segmented
o Psychological
o Promotional
o Temporarily pricing products belowthe list price or even below cost
o Loss leaders Special-event pricing
Cash rebates
Low-interest financing, longerwarranties, free maintenance
o Promotional pricing can haveadverse effects
StrategiesStrategies
Price Adjustment Strategies (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
23/27
Promotional Pricing Problems
o Easily copied bycompetitors
o Creates deal-proneconsumers
o May erode brands value
o Not a legitimate substitute
for effective strategic
planning
o Frequent use leads to
industry price wars which
benefit few firms
8/8/2019 Session5 Pricing 091115003742 Phpapp02
24/27
o Customer Discrimination
for students only
o Product-form
Discrim
ination Telecom products
o Place Discrimination
service at ATM versus at counters
o Time Discrimination
peak -hours/ off-peak-hours
Price Discrimination
8/8/2019 Session5 Pricing 091115003742 Phpapp02
25/27
o Initiating Price Cuts is Desirable When a Firm Has excess capacity
Faces falling market share due to price competition
Desires to be a market share leader
o Price Increases are Desirable
If a firm can increase profit, faces cost inflation, or faces
greater demand than can be supplied.
o Methods ofIncreasing Price
o Alternatives to Increasing Price
Reducing product size, using less expensive materials,
unbundling the product.
Price Changes
8/8/2019 Session5 Pricing 091115003742 Phpapp02
26/27
o Buyer reactions to price changes must be considered.
o Competitors are more likely to react to price changesunder certain conditions. Number of firms is small
Product is uniform Buyers are well informed
o Respond to Price Changes only if: Market share / profits will be negatively affected if nothing is
changed.
Effective action can be taken: Reducing price
Raising perceived quality
Improving quality and increasing price
Launching low-price fighting brand
Price Changes (contd.)
8/8/2019 Session5 Pricing 091115003742 Phpapp02
27/27
o Pricing within Channel Levels Price-fixing
Competitors can not work with each other to set prices
Predatory pricing
Firms may not sell below cost with the intention of punishing acompetitor or gaining higher long-run profits or running a competitorout of business.
o Pricing across Channel Levels
Price discrimination Retail price maintenance
Deceptive pricing Bogus reference / comparison pricing
Scanner fraud
Price confusion
Public Policy and Pricing