Demographic Considerations

C H A P T E R E L E V E N

Chapter Eleven

Demographic Considerations

Psychological Considerations

Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy

Key Product Considerations

Competitive Considerations

Governmental Considerations

General Pricing Model

Pricing Strategy Improvement

The Authors

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11Pricing Strategy

MarketingManagement

J. Paul Peter

James H. Donnelly, Jr.

7th Edition

SECTION 1

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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From the Demand Perspective:Demographic Considerations

1. Number of potential buyers; their age, gender and education

2. Location of potential buyers

3. Position (type of buyer) of potential buyers

1. End user vs org buyer

4. Expected consumption of potential buyers

5. Economic strength of potential buyers

Chapter Eleven



Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






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1. Will potential buyers use price as an indicator of quality?

2. Will potential buyers be favorably attracted by odd pricing?

3. Woo (“Woo?” How about “Will”)potential buyers perceive price as too high relative to the service product gives?

4. Are potential buyers prestige oriented and willing to pay a premium to fill this need?

5. How much will potential buyers be willing to pay for the product?

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Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






The Authors

SECTION 1

Psychological Pricing

• Prestige pricing

• Odd-even pricing

• Bundle pricing (not really psych)

• Reference pricing– Ex. Walmart ads

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Price Elasticity Price elasticity is a measure of consumers’

price sensitivity

Even a crude estimate of price elasticity is useful input in pricing decisions

What will happen to my sales if I change my price?

What will happen if tuition is increased 10%?

e =Percent change in quantity demanded

Percent change in price

Chapter Eleven



Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






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From the Supply Perspective:The 4 Most Common Pricing Objectives

1. Pricing to achieve a target return on investment

2. Stabilization of price and margin

1. Price maintenance, DRTB pricing

3. Pricing to achieve a target market share

4. Pricing to meet or prevent competition

Chapter Eleven



Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

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2 Common Retail Strategies1. Everyday Low Pricing (EDLP)

Advantages

Reduces price wars

Reduces advertising

Improves customer service

Reduces stock-outs and improves inventory management

Increases overall profit margins

Sam’s Club pricing strategy

Chapter Eleven



Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






The Authors

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2 Common Retail Strategies2. High/Low Pricing

Advantages

Helps segment the market

Creates excitement

Moves merchandise

Emphasizes product quality and store service

Is easier to use

Chapter Eleven



Price Elasticity

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EDLP Advantages

High/Low Advantages

Pricing Strategy






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Pricing StrategyCost-based strategies

Markup pricing – percentage is added to the retailer’s invoice to determine final price

Cost-plus pricing – costs of producing a product plus desired profit are added to achieve price. non-routine job pricing akin to markup pricing

Rate-of-return or target pricing – price is determined by adding desired rate of return on investment to total costs

Chapter Eleven



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EDLP Advantages

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1. Perishability – must be priced to sell without costly delays; includes fruit to high fashion

1. Ex. Brazilian fruit markets

2. Distinctiveness – homogeneous goods have easy substitutes and make distinguishing between competitors difficult

3. Life Cycle –

• Skimming policy is when seller charges a high price on a new product.

• Penetration policy is when producer charges a low price for a new product.

Chapter Eleven



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Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






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1. Number of competitors

2. Size of competitors

3. Location of competitors

4. Conditions of entry into the industry

5. Degree of vertical integration of competitors

6. Number of products sold by competitors

7. Cost structure of competitors

8. Historical reaction of competitors to price changes

Chapter Eleven



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EDLP Advantages

High/Low Advantages

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Price fixing ruled illegal – sellers cannot make any agreements with competitors regarding final price

Deceptive pricing tactics outlawed – claiming high price then selling at lower price

Price discrimination eliminated– can’t charge different customers different prices without justification

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EDLP Advantages

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SET PRICING OBJECTIVES

EVALUATE PRODUCT-PRICE RELATIONSHIPS

ESTIMATE COSTS AND OTHER PRICE LIMITATIONS

ANALYZE PROFIT POTENTIAL

SET INITIAL PRICE STRUCTURE

CHANGE PRICE AS NEEDED

FIGURE 11-1

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1. Base pricing strategies on sound research in order to understand relevant price factors.

2. Continuously monitor pricing decisions because they often help define company image.

3. Remember that consumers have trouble recognizing subtle price differences.

4. Remember that consumers evaluate prices comparatively. They often use a sense of what they think the item should cost as a benchmark.

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EDLP Advantages

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5. Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits.

6. Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price.

7. Understand the importance of price information and its effects on differentiating products within a product line.

8. Recognize that price elasticity vary – it is easier to lose customers to price increases then gain them from price decreases.

Chapter Eleven



Price Elasticity

Pricing Objectives

EDLP Advantages

High/Low Advantages

Pricing Strategy






The Authors

SECTION 1

Business

Demographic Considerations