PricingPesewa

Presentat ions

Life Cycle StrategiesIntroduction

Maturity

Grow

th

Dec

line

Promotion

Place/DistributionPrice

Product

Price, the Lifecycle and Marketing Mix

Inelastic

SkimmingPremium

Elastic

Penetration

Competition lo

wer

Increasin

g to in

tense

competition

Promotion

Price

Product

Place

Pricing Best Practices• Develop pricing mentality

• Consistently deliver more value

• Price strategically, not opportunistically

• Know your competition

• Make pricing a process

Factors Affecting Pricing Decisions

External Factors• Nature of the market• Demand• Competitors’ costs,

prices, and offers• The economy• Reseller needs• Government actions• Social concerns

Internal Factors• Marketing objectives• Marketing mix strategy• Costs• Organizational

considerations• Target market• Positioning objectives

Pricing Products

• The meaning and use of price – Price—the amount of money a seller is willing to accept in exchange for a

product, at a given time, and under given circumstances. • Price functions as an allocator of goods and services among

those who are willing and able to buy them (customers). • Price also allocates financial resources among producers

according to how well the producers satisfy customers’ needs.

• Can firms control their prices? – Supply—the quantity of a product that producers are willing to sell at

each of various prices. – Demand—the quantity of a product that buyers are willing to purchase at

each of various prices.

60

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40

30

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10

0 5 10 15 20 25

Millions

D

0 5 10 15 20 25

Millions

0 5 10 15 20 25

Millions

Quantity Supplied Quantity Demanded QuantitySupplied/Demanded

DD S

E

SPrice

The upward slope means that producers will supply more

jeans at higher prices

The downward slope means that buyers will purchase more

jeans at lower prices

The point E indicates an equilibrium in quantity and price for sellers and buyers

Supply and Demand Curves

Pricing Products (cont’d)

• Can firms control their prices? (cont’d) – Differentiation—the process of developing and promoting differences

between one’s product and all similar products.

• Price and non-price competition – Price competition—an emphasis on setting a price equal to or lower than

competitors’ prices to gain sales or market share. – Non-price competition—competition based on factors other than price.

• Buyers’ perceptions of price – Buyers will accept different ranges of prices for different products.

Pricing Objectives

• Survival – Pricing the firm’s products (perhaps at a loss) in order to attract

customers to establish the firm in a market.

• Profit maximization – Pricing with the intent to reap profits as large

as possible from a market—usually an unattainable goal.

• Target return on investment (ROI)– Pricing that allows the firm to attain its profit

goal, which is a percentage of the investments the firm has made.

• Performing at par with competitors

Pricing Objectives (cont’d)•Market Share Goals

–Pricing that will create sales that are measured as a percentage of total industry sales.

• Status Quo Pricing

– Pricing the firm’s products so as to not disturb the stability

of prices in the industry.

Pricing Methods

• Cost-based pricing – Markup pricing—the amount a seller adds to the cost of a product to

determine its basic selling price. • Markup pricing can overprice or underprice a product for its

market, causing either lost sales or forgone profits. • Markup pricing separates pricing from other business functions

that impact on marketing decisions.

Product Cost Price Value Customers

Cost-based Pricing

• Breakeven analysis – Breakeven quantity—the number of units that must be sold for total

revenue (from all units sold) to equal the total cost (of all units). • Fixed costs—costs that are incurred no matter how many units are

sold or produced. • Variable costs—costs that vary with or depend on the number of

units produced.

Pricing Methods

Breakeven Analysis

$120,000

$80,000

$40,000

0 500 667

Quantity in units

1000

Breakevenquantity

Totalrevenue

Fixed costs

Variablecosts

Totalcost

Profit

Loss

Costs/Revenues

Breakeven analysis answers the question of what is the lowest level of production and sales at which a company can break even (incur no loss and not yet have made a profit) on a particular product.

Total fixed costsUnit selling price – Unit variable costs

Breakeven in units =

Pricing Methods (cont’d)

• Consumer-based pricing – Pricing of a product that is based on the level of customer demand for the

product and the value placed on a product by the consumer. Product prices are high when demand is high and low when demand is weak.

– Price differentiation—setting different prices in segmented markets based on segmental characteristics (e.g., time of purchase, type of customer, or distribution channel).

Customers Value Price Cost Product

Value-based Pricing

• Competition-based pricing – Product pricing that is based on meeting the challenge of

competitors’ prices in markets where products are quite similar or price is an important customer consideration (engaging in price war).

Pricing Methods (cont’d)

High Price

Low Price

Low EfficiencyHigh Cost

High EfficiencyLow Cost

Market shareDominance

CombativeStrength

CombativeWeakness

MarginErosion

Price skimming

Penetration

pricing

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•Negotiated pricing

Secondary-marketpricing

Periodicdiscounting

Randomdiscounting

Odd-number

pricing

Multiple-unit

pricing

Reference pricing

Bundle pricing

Everyday low

prices

Customary pricing

Captive pricing

Premium pricing

Price lining

Price leaders

Special-event

pricing

Comparisondiscounting

New-ProductPricing

DifferentialPricing

PsychologicalPricing

Product-LinePricing

PromotionalPricing

PRICING STRATEGIES

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Types of Pricing Strategies

Pricing Strategies

• New-product strategies – Price skimming—charging the highest-possible price for a product during

the introduction stage of its life cycle. Helps recover R&D costs quickly. May encourage competitors to enter market

– Penetration pricing—setting a low price for a new product to quickly build market share and discourage competitors. Used when setting the standard is important. Used when the product is easily copied. May discourage competitors to enter market.

Low High

Low

High

Economye.g. Tesco spaghetti

Penetratione.g. Telewest cable phones

Skimminge.g. New film or album

Premiume.g. BA first class

Price

Quality

Pricing Strategies (cont’d)

• Differential pricing – Negotiated pricing—bargaining to establish a final price. – Secondary-market pricing—setting one price for the primary target

market and a different price for another market. – Periodic discounting—temporary reduction of prices on a patterned

or systematic basis. – Random discounting—temporary reduction of prices on an

unsystematic basis.

Pricing Strategies (cont’d)

• Psychological pricing – Odd-number pricing—setting unit prices using odd numbers that are

slightly below whole dollar/pound/euro amounts. – Multiple-unit pricing—setting a single price for two or more units of a

product. – Reference pricing—pricing a product at a moderate level and positioning

it next to a more expensive model or brand. – Bundle pricing—packing two or more complementary products and

selling them for a single price. – Everyday low prices (EDLP or also known as economy pricing)—setting a

low price for products on a consistent basis. – Customary pricing—pricing on the basis of tradition.

Pricing Strategies (cont’d)

• Product-line pricing – Captive pricing—pricing the basic product in a product line low, but

pricing related items at a higher level. – Premium pricing—pricing the highest-quality or most versatile products

higher than other models in the product line. – Price lining—setting a limited number of prices for selected groups or

lines of merchandise. • e.g. MARS 32p, Four-pack 99p, Bite-size £1.29

• Promotional pricing – Price leaders—products priced below the usual markup, near cost, or

below cost. – Special-event pricing—advertised sales or price cutting linked to a holiday,

season, or event. – Comparison discounting—setting a price at a specific level and comparing

it with a higher price.

Pricing Business Products

• Geographic pricing – FOB (free-on-board) origin pricing—

the seller’s pricing is exclusive of delivery costs; the buyer pays the product delivery costs.

– FOB destination pricing—the seller includes transportation costs in the product pricing.

• Transfer pricing – A company’s strategy for the pricing

of internally transferred products between organizational units.

Pricing Business Products (cont’d)

• Discounting – Trade discounts—discounts given intermediaries or middlemen. – Quantity discounts—discounts for large volume purchases. – Cash discounts—discounts for prompt payment (e.g., “2/10, net 30”: a 2%

discount for paying the full bill within 10 days). – Seasonal discounts—price reductions for buyers who purchase out of

season. – Allowances—price reductions to achieve

certain goals (i.e., to increase sales and/or to switch customers away from competing products) through dealer incentives or customer trade-ins.

Has competitorcut price?

Will lower pricenegatively affect our

market share & profits?

Can/should effectiveaction be taken?

Hold current price;continue to monitorcompetitor’s price

Reduce price

Raise perceivedquality

Launch low-price“fighting brand”

Yes

No

No

No

Yes

Yes

Responding to Competitor’s Price Changes

Public Policy Issues in Pricing

• Between manufacturers– Price-fixing– Predatory pricing

• Between manufacturers and retailers– Retail price maintenance– Discriminatory pricing

• Between retailers and consumers– Deceptive pricing

• Between manufacturers and consumers– Deceptive pricing

Ten ways to ‘increase’ prices without increasing price

• Revise the discount structure• Change the minimum order size• Charge for delivery and special services• Invoice for repairs on serviced equipment• Charge for engineering, installation• Charge for overtime on rushed orders• Collect interest on overdue accounts• Produce less of the lower margin models in the line• Write penalty clauses into contracts• Change the physical characteristics of the product