Ch8 Pricing Strategy

8/12/2019 Ch8 Pricing Strategy

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Prof. DR: Thamer Al-Bakri

By Aasem alsayed soliman


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In this chapter

We will discuss: buyer and seller perspectives on pricingpricing objectives

the issue of price elasticity strategies for setting profitable andjustifiable prices.


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Introduction

Pricing decisions are important for several reasons:

1. Price is the only element of the marketing mix that leads torevenue and profit.

2. Price typically has a direct connection with customer demand

3. Pricing is the easiest element of the marketing program tochange.

4. Pricing is a major quality cue for customers.


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The Sellers Perspective on Pricing

Cost Demand

Customer value Competitors price

Four key issuesimportant in pricing

strategy


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The Buyers Perspective on Pricing From the buyers perspective, two key issues determin

pricing strategy for most firms:

(1) Perceived Value=

Customer Benefits

Customer Costs

(2) price sensitivity


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A Shift in the Balance of Power Buyers have increased power over sellers when:

1-there is a large number of sellers in the market

2-there are many substitutes for the product

3-the economy is weak and fewer customers will part with

their money

Sellers have increased power over buyers when:

1-certain products are in short supply or in high demand

2-during good economic times when customers will spend

more money


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The Relationship Between Price andRevenue

When setting prices, many firms hold fast to these two generalpricing myths:

Myth No. 1: When business is good, a price cut will capture

greater market share.

Myth No. 2: When business is bad, a price cut will stimulate sale

The relationship between price and revenue challenges theseassumptions and makes them a risky proposition for most firms.

Any price cut must be offset by an increase in sales volu

just to maintain the same level of revenue.


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Key Issues in Pricing Strategy1) pricing objectives

2) Supply and Demand

3) Firms Cost Structure

4) Competition and Industry Structure

5) Stage of the Product Life Cycle


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Key Issues in Pricing Strategy- PricingObjectives

COMMON PRICING OBJECTIVES

Profit-Oriented

Volume-Oriented MarketDemand MarketShare StatusQuo Prestige CompetMatch


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Key Issues in Pricing Strategy- Supply andDemand supply-side perspective: price goes up, demand goes down.

demand-side perspective : during periods of heavy customer demand,

prices tend to stay the same or even increase.

In some situations, customer expectations about price can be the driv

force in pricing strategy. allow marketers to set prices in accordance

with what the market will pay with little or no regard for their costs,

competition, or other factors that typically affect pricing strategy.


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Key Issues in Pricing Strategy- The Firms CoStructure The firms costs in producing and marketing a product are an

important factor in setting prices.

The most popular way to associate costs and prices is throughbreakeven pricing, where the firms fixed and variable costs areconsidered

Breakeven in Units= Total Fixed CostsUnit Price Unit Variable Costs


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Key Issues in Pricing Strategy- The Firms CoStructure -cont. cost-plus pricing: the firm sets prices based on average

unit costs and its planned markup percentage:

Selling Price= Average Unit Cost1 Markup Percent


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There are four basic competitive market structures:

1. Perfect Competition

2. Monopolistic Competition3. Oligopoly

4. Monopoly

Competition and Industry Structure


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Key Issues in Pricing Strategy- Stage of theProduct Life Cycle Introduction: Price skimming, price penetration

Growth

Maturity

Decline


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Pricing Service Products Services pricing becomes more important and more difficult when:

1. Service quality is hard to detect prior to purchase.

2. The costs associated with providing the service are difficult todetermine.

3. Customers are unfamiliar with the service process.

4. Brand names are not well established.

5. Customers can perform the service themselves.

6. The service has poorly defined units of consumption.

7. Advertising within a service category is limited.

8. The total price of the service experience is difficult to state

beforehand.


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Price Elasticity of Demand pricing has intricate connections to issues such as demand,

competition, and customer expectations.

All of these issues come together in the concept of prelasticity of demand.

Price elasticity is the most important overall consideration insetting effective prices.

Price elasticity: relative impact on the demand for a productgiven specific increases or decreases in the price charged forproduct.

Price Elasticity of Demand=Percentage Change in Quantity Demanded

Percentage Change in Price


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Unitary demandElastic demandInelastic demand

number that equals 1very close to 1number greater than 1number less than 1

the changes in price demand offset, so torevenue remains the

change in price will producea change in demand andtotal revenue

an increase or decrease inprice does not significantlyaffect the quantitydemanded

Price Elasticity of Demand- cont.


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Price Elasticity of Demand- cont.


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Pricing Strategies A firms base pricing strategy establishes the initial price and sets the

range of possible price movements throughout the products life cycle

The initial price is critical, not only for initial success, but also for

maintaining the potential for profit over the long term.

Base Pricing Strategies:1. Market Introduction Pricing

2. Prestige Pricing

3. Value-Based Pricing (EDLP)

4. Competitive Matching

5. Nonprice Strategies


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Pricing Strategies:Market Introduction Pricing The two most common introduction approaches:

price skimming: intentionally set a high price relative to thecompetition, thereby skimming the profits off the top of themarket.

Price skimming is designed to recover the high R&D and

marketing expenses associated with developing a newproduct.

penetration pricing: to maximize sales, gain widespread markeacceptance, and capture a large market share quickly by settingrelatively low initial price.


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Pricing Strategies:Prestige Pricing

Firms using prestige pricing set their prices at the top end of allcompeting products in a category.

This is done to promote an image of exclusivity andsuperior quality.

Prestige pricing is a viable approach in situations where it is harto objectively judge the true value of a product.

In these instances, a higher price may indicate a higher- quality product.


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Pricing Strategies:Value-Based Pricing (EDLP)

Firms that use a value-based pricing approach set reasonably low pricbut still offer high-quality products and adequate customer services.

Retailing has widely embraced this approach.

The goal of value-based pricing is to set a reasonable price for the levof quality offered.

Value-based pricing naturally draws customers because they haveconfidence in the value of the products they buy.

Customers also like the approach because it requires less effort to fingood prices on the products they want and need.


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Pricing Strategies:Competitive Matching

In many industries, particularly oligopolies, pricing strategyfocuses on matching competitors prices and price changes.

Twocompetitive factorslargely drivethis strategy:

1. Firms that offer commodity-type products (e.g., airlines, oil,steel) have a very difficult time finding any real or perceived

basis for product differentiation.2. Some industries are so highly competitive that competitive pr

matching becomes a means of survival. (e.g., automobileindustry )


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Pricing Strategies:Nonprice Strategies

building a marketing program around factors other than price isimportant strategic pricing decision.

Nonprice strategies are most effective when:

1. The product can be successfully differentiated.

2. Customers see the differentiating characteristics as beingimportant.

3. Competitors cannot emulate the differentiating characteristic

4. The market is generally not sensitive to price.


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Adjusting Prices in Consumer Markets

In addition to a base pricing strategy, firms also use othertechniques to adjust or fine-tune prices.

Four of the most common techniques:

1. promotional discounting.

2. reference pricing.

3. oddeven pricing.

4. price bundling.


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Adjusting Prices in Consumer Markets-promotional discounting

The hallmark of promotional discounting is a sale.

-All customers love a sale and that is precisely the maibenefit of promotional discounting.

Drawback: Customers become so accustomed to sales

and promotions that they will postpone purchases untiretailers discount prices.


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Adjusting Prices in Consumer Markets-Reference Pricing

Firms use reference pricing when they compare the actual sellinprice to an internal (expectation, recall from memory) orexternal (displayed in the environment) reference price.

A common use of reference pricing occurs when sale prices arecompared to regular prices. A $50 value for only $19.99 ,

Regularly $399, Now $349.


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Adjusting Prices in Consumer Markets-OddEven Pricing

A couple of factors drive the prevalence of odd prices over evenpricing:

1-Demand curves are not straight lines, the elasticity of a productsdemand will change significantly at various price points.

The move from $45.95 to $49.95 may result in verylittle drop in demand. When the price hits $50.00,

just 5 cents more, the drop in demand may be sizable.

2-Customers perceive that the seller did everything possible to getthe price as fine (and thus as low) as he or she possibly could.


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Adjusting Prices in Consumer Markets-PricBundling

This approach brings together two or more complementaryproducts for a single price.

Slow-moving items can be bundled with hot sellers to expand thscope of the product offering, build value, and manage inventor

Bundling is an attractive strategy in the banking, travel,insurance, communication, computer, and automobile marketsbecause these customers desire convenience and fewer hassles.


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Adjusting Prices in Business Markets

Here are a number of pricing techniques unique to businessmarkets, including these:

1. Trade Discounts

2. Discounts and Allowances

3. Geographic Pricing

4. Transfer Pricing

5. Barter and Countertrade


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Adjusting Prices in Business Markets- TradDiscounts

Manufacturers will reduce prices for certainintermediaries in the supply chain based on the functiothat the intermediary performs.


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Adjusting Prices in Business Markets-Discounts and Allowances

business buyers also receive other price breaks, includidiscounts for cash, quantity or bulk discounts, seasonadiscounts, or trade allowances for participation inadvertising or sales support programs.


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Adjusting Prices in Business Markets-Geographic Pricing

Selling firms often quote prices in terms of reductions increases based on transportation costs or the actualphysical distance between the seller and the buyer. Thmost common examples of geographic pricing areuniform delivered pricing (same price for all buyers

regardless of transportation expenses) and zone pricing(different prices based on transportation to predefinedgeographic zones).


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Adjusting Prices in Business Markets-Transfer Pricing

Transfer pricing occurs when one unit in an organizatiosells products to another unit.


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Adjusting Prices in Business Markets-Barteand Countertrade

Barter involves the direct exchange of goods or services betweetwo firms or nations.

Countertrade refers to agreements based on partial payments inboth cash and products, or to agreements between firms ornations to buy goods and services from each other.


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Fixed Versus Dynamic Pricing

Although relatively new to consumer markets, dynamic pricing has lonbeen a staple of business markets.

The Internet has played a large role in fostering the dynamic pricingapproach to buying everything, including airline tickets, hotel rooms,and cars.

Internet dynamic pricing approach is simple: Use an online auctionstrategy to bring buyers and sellers together in a competitive biddingprocess.

Auction strategies allow firms to lower marketing and transaction cosfind new buyers or markets, and reduce unwanted inventory.


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Fixed Versus Dynamic Pricing cont.

In a dynamic pricing situation, there are three pricinglevels that both the buyer and the seller mustunderstand and plan for:

1. Opening position

2. Aspiration price

3. The limit


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opening position: each side will put on the table as astarting point.

For example, in a deal for 500 cases of 20-pound papersalesperson might open with a price of $23.50 per caseThe buyer might counter with his or her opening positioof $17.50 per case.


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Aspiration price: the number that each side will use to distinguibetween a successful negotiation and an unsuccessful negotiatio

For the salesperson, this price might be $20.25 per case, wherefor the buyer it might be $20.00 per case.

If the two reach an agreement at a price higher than $20.25, th

salesperson will be happy. If they reach an agreement at a pricebelow $20.00, the buyer will be happy.


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the limit: the least favorable price either side will agree to durithe negotiation.

For example, the salespersons limit might be $18.50, whereas tbuyers limit might be $20.50.


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A deal for 500 cases of 20-pound paperexample

Pricing level Salesperson Buyer

Opening position $23.50 $17.50

Aspiration price $20.25If $20.00 happy

The limit $18.50 $20.50


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Q & A


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Thank You!

Ch8 Pricing Strategy

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