Week 8- 11.15.04Week 8- 11.15.04

Pricing Considerations and Pricing Considerations and StrategiesStrategies

Price ?

The amount of money charged for a product or service.

The sum of values consumers exchange for the benefits of the product or service.

Price in the mix, flexibility and problems.

Factors Affecting Pricing Decisions

Internal factorsInternal factorsMarketing objectivesMarketing-mix strategyCostsOrganizational considerations

Internal factorsInternal factorsMarketing objectivesMarketing-mix strategyCostsOrganizational considerations

External factorsExternal factorsNature of the market & demandCompetitionOther environmental factors (economy, resellers, government)

External factorsExternal factorsNature of the market & demandCompetitionOther environmental factors (economy, resellers, government)

Pricingdecisions

Pricingdecisions

The Experience Curve

$2

$4

$6

$8

$10

100 000 200 000 300 000 400 000Accumulated production

Cos

t per

uni

t

% change in Price

External Factors Affecting Pricing:Market and Demand

Sets the upper limit of price possibilities

Perceived value determined by perceived benefits (not a product only) versus perceived sacrifice

% change in quantity demand

=Elasticity

Demand Curves

PP’’22

PP’’11

QQ11QQ22

PP11

PP22

QQ’’11QQ’’22

Quantity demandedQuantity demandedper periodper period

A. Inelastic demandA. Inelastic demand

Quantity demandedQuantity demandedper periodper period

B. Elastic demandB. Elastic demand

Pri

ceP

rice

General Pricing Approaches

Low price

No possibleprofit atthis price

High price

No possibledemand atthis price

Competitors pricesOther internal andExternal factors

ConsumerPerceptionsOf value

Major considerations in setting price

Product Costs

Cost-Based Pricing

Add a standard markup to cost of the product.

Very popular because of certainty and fairness.

What about markups ?

Evolution to profit pricing: Break-even analysis.

Break-Even ChartD

olla

rs (

tho

usa

nd

s)D

olla

rs (

tho

usa

nd

s) 66

55

44

33

22

11

00

unit costunit cost

Fixed costFixed cost

Total revenueTotal revenue

10001000 20002000 30003000 40004000 50005000

Sales volume in units Sales volume in units

Total costTotal costB.E

Loss

Profit

Value-Based Pricing

Pricing developed early as part of overall marketing program

Target price based on perceived value of the extended product

Perceived value dictates design and cost

Value pricing strategies Value-added - business markets Everyday low pricing - consumer markets

Value versus cost based Pricing

Product CostCost PricePrice ValueValue CustomersCustomers

ProductProductCostCostPricePriceValueValueCustomersCustomers

Cost-based pricing

Value-based pricing

Competition-Based Pricing

Consumers use competitors’ price as reference for product’s value

Going Rate PricingFirm benchmarks on competitive pricePrice differences small and constantGoing price as indirect measure of

demandSealed-Bid PricingLowest price wins - the winner loses?

New Product Pricing Strategies:Market-Skimming Pricing

High price just worth-while to some segments fewer sales

Skim maximum revenue layer by layer more profit.

Conditions: Image and quality keyProduction economic

for segment sizeHigh barriers to entry

Low initial price - win many buyers and large market share quickly

Conditions:Market is price sensitiveScale economies existLow price an effective

market entry barrier

New Product Pricing Strategies:Market-Penetration Pricing

Product-Mix Pricing Strategies

Strategy Description

Product line pricingOptional-product pricing

Captive-product pricing

Product-bundle pricing

Setting price steps between product itemsPricing optional or accessory productssold with the main productPricing products that must be used withthe main product

Pricing bundles of products sold together

Price-Adjustment Strategies

Strategy Description

Discount and allowance pricing

Segmented pricing

Psychological pricing

Promotional pricing

Setting prices to reward customerresponses such as paying early or promoting the productAdjusting prices to allow for differencesin customers, products, or locations

Adjusting prices for psychological effect

Temporarily reducing prices to increaseshort-run sales

Price Changes:Reasons for Initiating Price Cuts

Excess capacityMarket share falling to competitionExploit competitive advantage in

costsAnticipate buyer and competitor

reactions

Price Changes:reasons for initiating price increases

Rising costs and falling profit margins

Demand exceeds ability to produce

What should a company do to justify ?Avoid negative reactionsCommunicate the reasons

Price Changes:Buyer Reactions

Price cut :May be perceived

as negative

Price increase :Hot product?Exceptional value?Greedy seller?

Price Changes:Competitor Reactions

Reaction likely when:Few competing firmsFew product differencesBuyers well informed

Reactions never certain: Each competitor may

react differently

Has competitorcut price?

Has competitorcut price?

Will lower pricenegatively affect our

market share & profits? ?

Will lower pricenegatively affect our

market share & profits? ?

Can/should effectiveaction be taken?

Can/should effectiveaction be taken?

Hold current price;continue to monitorcompetitor’s price

Hold current price;continue to monitorcompetitor’s price

Reduce priceReduce price

Raise perceivedquality

Raise perceivedquality

Improve quality& increase price

Improve quality& increase price

Launch low-price“fighting brand”

Launch low-price“fighting brand”Yes

No

No

No

Assessing & Responding to Competitor’s Price Changes

Yes

Yes