ZUST-Marketing-Lecture-7_Pricing strategy.ppt

8/14/2019 ZUST-Marketing-Lecture-7_Pricing strategy.ppt

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Pricing strategyModule 7



Learning objectives

Define the term ‘price’ Distinguish profit-oriented, sales-oriented and

status quo pricing objectives

Explain the influence of supply and demand onprices

Apply the concept of price elasticity and discuss

the impact of price changes on total revenue Explain three methods of pricing based on cost

and discuss the advantages and limitations of

each method.



Learning objectives

Briefly discuss some factors, other than costs,that influence pricing

Identify and explain the four steps in setting the

price for a product and apply the four-stepprocess to a real-word product or service

Use examples to differentiate price skimming,

penetration pricing and status quo pricing Identify and briefly discuss some of the legal and

ethical issues impacting on pricing.





Importance of price

Revenue

price x quantity sold Profit

revenue minus costs



Getting the price right is important

Getting it right can be difficult

Need to consider:

perceived value, costs, competitor’s prices reference prices, opportunity costs

Price is a cue to quality

People are becoming more price sensitive expect value for money



Role of pricing objectives

Objectives should be S.M.A.R.T.

specific

measurable

attainable

realistic

time-framed

Provide a benchmark for measuring

effectiveness of pricing strategies



Three categories of pricing

objectives

Profit-oriented objectives

Sales-oriented objectives Status quo objectives



Profit-oriented pricing objectives

Profit maximisation

Satisfactory profits Target return on investment



Profit maximisation objectives

Maximise the difference between total revenue

and total costs

So, why not set a very high price?

perceived value sets the ceiling

don’t want to attract new entrants

need to be competitive

avoid government intervention



Satisfactory profits

Acceptable level of profit

Matches risk level higher risk leads to higher profit margins



Return on investment objective

Return on total assets

ROI = net profit after tax/total assets Are we performing in line with industry ROI

average?



Sales oriented pricing objectives

Market share

Sales maximisation



Market share pricing objectives

Brand sales/total sales for product category

Penetration pricing may be used to gain large

market share

Large market share means higher production

volume which drives costs down

However, firms with a smaller market sharecan still be very profitable



Sales maximisation objectives

Maximise sales volume

Does not consider cost of sales or profit

may not be profitable if cost of sales is high

Short-term focus

temporary strategy to improve cash flow

clear excess stock

end of year sales



Status quo pricing objectives

Maintain existing price or match competitors

price

industry wisdom

follow the established price leader

Pricing stability

don’t rock the boat

avoid price wars

examples: airlines, pizza industry, video/DVD hire



Demand impacts on price

Demand is the quantity of goods that will be

sold at various prices for a specified period

Demand curve

exhibit 11.1, p.395

shows the relationship between price and quantity

demanded

usually inverse relationship

as price increases, quantity demanded decreases



Price elasticity of demand

How does quantity demanded respond to price

changes?

Price elasticity of demand

= % change in quantity demanded/% change in

price

i.e. if price increase of 2% creates a 10% fall in

demand then price elasticity of demand = -10/2 = -5



Elasticity of demand

Elastic demand

Inelastic demand



Impact on total revenue

Access to the Interactive elasticity diagram from module 7





What factors affect elasticity?

Availability of substitutes

Price relative to purchasing power

if very cheap, price rise won’t affect demand

Product durability

fix it rather than replace it if prices are high

Product’s other uses greater number of uses leads to greater elasticity of

demand



Costs impact on price

Costs set the floor for the price

Need to cover total costs

fixed costs plus variable costs

Fixed costs

do not vary with production volume

Variable costs vary proportionately with production volume



Mark-up pricing

Add a standard mark-up to the cost of the product

First, calculate unit cost unit cost = variable cost + fixed costs/unit sales

variable cost = $10

fixed cost = $300 000

expected unit sales = 50 000 units unit cost = $10 + 300 000/50 000 = $16

Second, calculate mark-up price

= unit cost / (1- desired return on sales) desired return = 20%

unit cost = $16 then, mark up price = $16 / (1-0.2) = $20

so, profit to manufacturer is $4 per unit



Profit maximisation pricing

Marginal revenue = marginal cost

Marginal revenue

the extra revenue associated with selling an extra

unit of output or the total change in total revenue

associated with one unit change in output

Marginal cost

change in total costs associated with a one unitchange in output



Break-even pricing

Break-even point

total revenue = total costs

Break-even volume

= fixed costs /(unit selling price - unit variable cost)

= 300,000/(20 - 10) = 30,000 units

Target profit pricing - add target return (i.e.

plus 20%)



Breakeven analysis

Dollar total revenue

1,200,000 target profit

10,00,000 total costs

800,000

600,000

400,000 fixed costs

200,000

10,000 20,000 30, 000 40,000 50,000

sales volume in units (quantity)

Break even point is 30,000 units



Other external factors that influence

price

Stage in product lifecycle

exhibit 11.5, p.402

Competitors’ prices

Distribution strategy pay extra for convenience

Promotion strategy price may be used as a promotional tool

price must cover the costs of promotion Demands of large customers

Relationship of price to quality



Steps in setting the price

1. Establish pricing goals

2. Estimate demand, costs and profits

3. Select pricing strategy to determine base price4. Determine pricing tactics to adjust base price



Pricing for new products

New products can be innovative or ‘imitative’

Innovative products lead to price skimming Imitative products lead to penetration pricing

Price reflects positioning

Price changes over product life cycle





Market penetration pricing

Suits standardised products

Low price

below the market

Large market share

High volume results in lower costs

production and distribution costs fall with volume

achieve even greater economies of scale Penetrate the market

Suits price sensitive market



Status quo pricing

Meeting the competition

at the market price

Safe strategy

May mean that costs are not covered by firms

with smaller production runs

May mean that profits are not captured byfirms with a differentiated offering



Pricing tactics

Used to adjust the base price

discounts and allowances

segmented pricing

psychological pricing

promotional pricing

value pricing

geographic pricing

international pricing



Discounts and allowances

Reduction to the list price for:

quantity discount - larger quantity purchased

cumulative and non-cumulative

cash discount - early payment functional discount - performing a function (ie

returns or delivery)

seasonal discount - purchasing out of season promotional allowance (trade allowance)

rebate (cash refund)



Value-based pricing

Price is based on consumers’ perceptions of value

what does the consumer consider to be value?

what value is placed on particular attributes/features?

what is the consumer prepared to pay? Sets the ceiling for the price

Non-price elements of the marketing mix are used to

create value

A more creative approach to pricing

can be very profitable



Geographical pricing

FOB origin pricing

buyer pays freight from the shipping point

Uniform delivered pricing

same freight charged to all locations

Zone pricing

freight cost varies across zones

Freight absorption pricing

seller pays freight



Documents

ZUST-Marketing-Lecture-7_Pricing strategy.ppt