EFFECTIVE PRICING MANAGEMENT

Price – is the amount of money and services (or goods) the buyer exchanges for an assortment of products and services provided by the sellerSetting the right price for goods and services is one of the most fundamental of management disciplines.

WHY the right price?Pricing right is the fastest and most effective way for companies to grow profits.

Why is managing pricing so important?1. Profits are extremely sensitive to even minute changes in prices.2. Even if nothing changes internally, most companies whether selling to consumers or to

businesses, face unprecedented downward pressure on prices. If nothing is done, these external forces will depress prices and erode profits quickly.

Importance of Price DecisionsEnvironmental pressures affecting the management’s pricing decisions:

1. Faster technological progress2. Proliferation of new products3. Increased demand for services4. Increased global competition5. The changing legal environment6. Economic uncertainty

Industry Strategy Product/Market Strategy Transaction

Key issues:How will supply, demand, and cost dynamics affect overall industry price levels? How can appropriate price leadership and followership be established?What is the likelihood and effects of new competitors entering the market?

Key issues:Within each segment of your market, what price level provides your product with the optimal price/benefit position relative to competition?How easily can the firm deliver the level of benefits desired by customers at a cost below that of competitors?

Key issues:How do you decide the exact price to assign each customer transaction – what base price, discounts, allowances, adjustments, and other incentives?Day-to-day management of price changes: - timing - amount - direction - administration - communication

Profitability Objectives – allows assessment of results with performance Elements of Profitability

Price per unit of each product or service offering Costs: variable costs per unit and fixed cost per period

Volume produced and sold of each offering Monetary sales mix of the offerings sold Profit Maximization Low unit profit margins may maximize cumulative profits per period through high

inventory turn-over. Target Return on Investment ROI – ratio of profits to investments

Volume-Based Objectives – setting pricing objectives in terms of sales volume. A common goal is sales growth, in which

case the firm sets prices that will increase demand and therefore unit sales.Competitive Objectives

– firms base their marketing and pricing objectives on competitive strategies, most often when they seek price stability and engage in nonprice competition (Market situation in which competitors would not lower prices for fear of a price war. Instead they focus on extensive promotions to highlight the distinctive benefits or features of their products. Non price competition is an anomaly in a free market systems based on price-quantity relationship.)

Profitability objectives:It makes sense to use price to achieve profit objectives when:

1. The firm is the low-cost supplier in the market – that is, the firm has a competitive cost advantage.

2. The firm is the price leader – other sellers follow the firm’s pricing moves.3. There is an internal required rate of return for new product introductions.4. There is a short lead time for new products before competitors will likely enter the market

Volume objectives:It makes sense to use price to achieve volume-oriented objectives when:

1. It is known that the market is sensitive to relatively small price changes.2. The firm knows it is the low-cost supplier.3. Costs decline in a predictable way as cumulative volume increases.4. There is an identifiable growth market segment.5. There is a little differential perceived value in the offerings of firms in the market.6. There is a desire to limit competitive entry.

Competition objectives:It makes sense to pursue a competition-oriented objective when:

1. The firm is the low-cost supplier.2. There are no perceived value differences across sellers in the minds of buyers.3. Market share could be captured by using nonprice marketing efforts.