Post on 21-Dec-2015
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