Pricing Considerations and Strategies 7. 7-2 Professor Takada ROAD MAP: Previewing the Concepts...
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Transcript of Pricing Considerations and Strategies 7. 7-2 Professor Takada ROAD MAP: Previewing the Concepts...
Pricing Considerations and Pricing Considerations and StrategiesStrategies
7
Professor TakadaProfessor Takada 7-2
ROAD MAP: Previewing the Concepts
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-3
Synonyms for Price
• RentRent
• TuitionTuition
• FeeFee
• FareFare
• RateRate
• TollToll
• PremiumPremium
• Honorarium Honorarium
• Special assessmentSpecial assessment
• BribeBribe
• DuesDues
• SalarySalary
• CommissionCommission
• WageWage
• Tax Tax
Professor TakadaProfessor Takada 7-4
Possible Consumer Reference Prices
• ““Fair price”Fair price”
• Typical priceTypical price
• Last price paidLast price paid
• Upper-bound priceUpper-bound price
• Lower-bound priceLower-bound price
• Competitor pricesCompetitor prices
• Expected future Expected future priceprice
• Usual discounted Usual discounted priceprice
Professor TakadaProfessor Takada 7-5
What is a Price?
• NarrowlyNarrowly, price is the amount of money , price is the amount of money charged for a product or service.charged for a product or service.
• BroadlyBroadly, price is the sum of all the , price is the sum of all the values that consumers exchange for values that consumers exchange for the benefits of having or using the the benefits of having or using the product or service.product or service.
• Dynamic PricingDynamic Pricing: charging different : charging different prices depending on individual prices depending on individual customers and situations.customers and situations.
Professor TakadaProfessor Takada 7-6
The Internet and Pricing Effects
Buyers can: -Get instant price comparisons from vendors: PriceScan.com -Name their price and have it met: Priceline.com
Sellers can: -Monitor customer behavior and tailor offers to individuals. -Giver certain customers access to special prices: CDNOW
Both buyers and sellers can: -Negotiate prices in online auctions and exchanges: eBay
Kotler and Keller (2006)
Professor TakadaProfessor Takada 7-7
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-8
Factors Affecting Pricing Decisions
Professor TakadaProfessor Takada 7-9
Internal Factors Affecting Pricing Decisions
• Marketing Objectives:Marketing Objectives:– Company must decide on its Company must decide on its
strategy for the product.strategy for the product.– General Objectives:General Objectives:
• Survival, current profit Survival, current profit maximization, market share maximization, market share leadership, and product quality leadership, and product quality leadership.leadership.
• Marketing Mix Strategy:Marketing Mix Strategy:– Price decisions must be Price decisions must be
coordinated with product design, coordinated with product design, distribution, and promotion distribution, and promotion decisions to form a consistent and decisions to form a consistent and effective marketing program.effective marketing program.
– Target costing:Target costing:• Pricing that starts with an ideal Pricing that starts with an ideal
selling price, then targets costs that selling price, then targets costs that will ensure that the price is met.will ensure that the price is met.
• Costs:Costs:– Fixed Costs:Fixed Costs:
• Costs that do not vary with Costs that do not vary with production or sales level.production or sales level.
– Variable Costs:Variable Costs:• Costs that vary directly with Costs that vary directly with
the level of productionthe level of production..
• Organizational Considerations:Organizational Considerations:– Must decide who within the Must decide who within the
organization should set prices.organization should set prices.– This will vary depending on the This will vary depending on the
size and type of company.size and type of company.
Professor TakadaProfessor Takada 7-10
Product Quality Leadership
Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match.
Professor TakadaProfessor Takada 7-11
External Factors Affecting Pricing DecisionsMarket and Demand
Pricing in Different Types of Markets
Pure Competition:
Many buyers and sellerswhere each has little effecton the going market price
Monopolistic Competition:
Many buyers and sellerswho trade over a
range of prices
Pure Monopoly:
Market consists of a single seller
Oligopolistic Competition:
Few sellers who aresensitive to each other’s
pricing/marketing strategies
Professor TakadaProfessor Takada 7-12
Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
Professor TakadaProfessor Takada 7-13
Demand Curve
Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices.
Upward Sloping Demand Curve
Price Elasticity of Demand
Elastic demandInelastic demand
Professor TakadaProfessor Takada 7-14
Inelastic and Elastic Demand
Professor TakadaProfessor Takada 7-15
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-16
Major Considerations in Setting Price
Cost-based pricing Cost-plus pricing Break-even pricing (Target profit pricing)
Value-based pricingCompetition-based pricing
Professor TakadaProfessor Takada 7-17
Cost-Plus Pricing
• Adding a standard markup to the Adding a standard markup to the cost of the product.cost of the product.
• Popular because:Popular because:– Sellers more certain about cost than Sellers more certain about cost than
demanddemand– Simplifies pricingSimplifies pricing– When all sellers use, prices are similar When all sellers use, prices are similar
and competition is minimizedand competition is minimized– Some feel it is more fair to both buyers Some feel it is more fair to both buyers
and sellersand sellers
Professor TakadaProfessor Takada 7-18
Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated
ProductionActivity-Based
Cost Accounting
Professor TakadaProfessor Takada 7-19
Cost Terms and Production• Fixed costsFixed costs
• Variable costsVariable costs
• Total costsTotal costs
• Average costAverage cost
• Cost at different Cost at different levels of productionlevels of production
Professor TakadaProfessor Takada 7-20
Cost per Unit as a Function of Accumulated Production
Professor TakadaProfessor Takada 7-21
Target Profit Pricing (Break-Even Analysis)
At break even: Total revenue=Total cost Total revenue = Price ($15)*Quantity sold Total cost = Fixed cost + Variable cost ($5 per unit)* units sold
What is the sales volume to break even?If price is raised to $20, how does this change affect the above analysis?If the company decides to increase advertising by $1million, how does this affect the break even point?
Professor TakadaProfessor Takada 7-22
Value-Based Pricing
Uses buyers’ perceptions of value, not Uses buyers’ perceptions of value, not the seller’s cost, as the key to the seller’s cost, as the key to pricing.pricing.– Wal-Mart, EDLPWal-Mart, EDLP
• What does value mean?What does value mean?– Does “value” mean the same thing as Does “value” mean the same thing as
“low price”?“low price”?– How do these concepts differ?How do these concepts differ?
Professor TakadaProfessor Takada 7-23
Competition-Based Pricing
• Going-Rate Pricing:Going-Rate Pricing:– Firm bases its price largely on Firm bases its price largely on
competitors’ prices, with less attention competitors’ prices, with less attention paid to its own costs or to demand.paid to its own costs or to demand.
• Sealed-Bid Pricing:Sealed-Bid Pricing:– Firm bases its price on how it thinks Firm bases its price on how it thinks
competitors will price rather than on its competitors will price rather than on its own costs or on demand.own costs or on demand.
Professor TakadaProfessor Takada 7-24
Price Tiers in the Ice Cream Market
Professor TakadaProfessor Takada 7-25
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-26
New-Product Pricing Strategies
Market-SkimmingMarket-Skimming
Set a high price for a new Set a high price for a new product to “skim” revenues product to “skim” revenues layer by layer from the market.layer by layer from the market.
Company makes fewer, but Company makes fewer, but more profitable sales.more profitable sales.
• When to use:When to use:– Product’s quality and image must Product’s quality and image must
support its higher price.support its higher price.– Costs of smaller volume cannot be Costs of smaller volume cannot be
so high they cancel the advantage so high they cancel the advantage of charging more.of charging more.
– Competitors should not be able to Competitors should not be able to enter market easily and undercut enter market easily and undercut the high price.the high price.
Market PenetrationMarket Penetration
Set a low initial price in order to Set a low initial price in order to “penetrate” the market quickly and “penetrate” the market quickly and deeply.deeply.
Can attract a large number of buyers Can attract a large number of buyers quickly and win a large market share.quickly and win a large market share.
• When to use:When to use:– Market must be highly price sensitive so Market must be highly price sensitive so
a low price produces more market a low price produces more market growth.growth.
– Production and distribution costs must Production and distribution costs must fall as sales volume increases.fall as sales volume increases.
– Must keep out competition and maintain Must keep out competition and maintain low price or effects are only temporary.low price or effects are only temporary.
Which strategy is employed by Sony, Dell, Wal-Mart, and Apple iPod?Why?
Professor TakadaProfessor Takada 7-27
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-28
Product Mix Pricing Strategies
• Product line pricingProduct line pricing
• Optional-product pricingOptional-product pricing
• Captive-product pricingCaptive-product pricing
• By-product pricingBy-product pricing
• Product bundle pricingProduct bundle pricing
Professor TakadaProfessor Takada 7-29
Product Line Pricing• Involves setting price steps between various Involves setting price steps between various
products in a product line based on:products in a product line based on:– Cost differences between productsCost differences between products– Customer evaluations of different features Customer evaluations of different features – Competitors’ pricesCompetitors’ prices
Optional- and Captive-Product Pricing• Optional-ProductOptional-Product
– Pricing optional or accessory products sold with the main Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).product (e.g., ice maker with the refrigerator).
• Captive-ProductCaptive-Product– Pricing products that must be used with the main product Pricing products that must be used with the main product
(e.g., replacement cartridges for Gillette razors).(e.g., replacement cartridges for Gillette razors).
Product Mix Pricing Strategies
Professor TakadaProfessor Takada 7-30
Product Mix Pricing Strategies
By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive (e.g., sawdust andZoo Doo)
Product Bundle Pricing:Combining several products and offering the bundleat a reduced price (e.g., computer with software and Internet access).
Professor TakadaProfessor Takada 7-31
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-32
Price-Adjustment Strategies
• Discounts and allowancesDiscounts and allowances
• Segmented pricingSegmented pricing
• Psychological pricingPsychological pricing
• Promotional pricingPromotional pricing
• Geographical pricingGeographical pricing
• International pricingInternational pricing
Professor TakadaProfessor Takada 7-33
Discounts and Allowances
Cash
Quantity
Functional
Seasonal
Trade-In
Promotional
Discounts Allowances
Professor TakadaProfessor Takada 7-34
Segmented Pricing
• Selling a product or service at two Selling a product or service at two or more prices, where the or more prices, where the difference in prices is not based on difference in prices is not based on differences in costs.differences in costs.
• Types:Types:1.1. Customer-segmentCustomer-segment
2.2. Product-formProduct-form
3.3. Location pricingLocation pricing
4.4. Time pricingTime pricing
Professor TakadaProfessor Takada 7-35
Psychological Pricing
• Considers the psychology Considers the psychology of prices and not simply of prices and not simply the economics.the economics.
• Consumers usually Consumers usually perceive higher-priced perceive higher-priced products as having higher products as having higher quality.quality.
• Consumers use price Consumers use price lessless when they can judge when they can judge quality of a product.quality of a product.
Professor TakadaProfessor Takada 7-36
Promotional Pricing
Special-Event PricingSpecial-Event Pricing
Cash RebatesCash Rebates
Low-Interest FinancingLow-Interest Financing
Longer WarrantiesLonger Warranties
Free MaintenanceFree Maintenance
DiscountsDiscounts
Loss LeadersLoss Leaders
Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.
Approaches:
Professor TakadaProfessor Takada 7-37
Geographical Pricing
• FOB-origin pricingFOB-origin pricing
• Uniform-delivered Uniform-delivered pricingpricing
• Zone pricingZone pricing
• Basing-point pricingBasing-point pricing
• Freight-absorption Freight-absorption pricingpricing
Professor TakadaProfessor Takada 7-38
International Pricing
• Price depends on Price depends on many factors, many factors, including:including:– Economic conditionsEconomic conditions– Competitive Competitive
situationssituations– Laws and regulationsLaws and regulations– Development of the Development of the
wholesaling and wholesaling and retailing systemretailing system
– CostsCosts
Professor TakadaProfessor Takada 7-39
ROAD MAP
• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.
Professor TakadaProfessor Takada 7-40
Initiating Price Changes
Excess Capacity
Falling MarketShare
Dominate MarketThrough Lower
Costs
Cost Inflation
Overdemand:Cannot SupplyAll Customers’
Needs
Price Cuts Price Increases
Professor TakadaProfessor Takada 7-41
•Choose a partner and consider the Choose a partner and consider the following.following.– What would you think if Mercedes What would you think if Mercedes
suddenly lowered its prices on its cars?suddenly lowered its prices on its cars?– What would you think if Mercedes What would you think if Mercedes
suddenly raised its prices on its cars?suddenly raised its prices on its cars?– Why?Why?
Interactive Student Assignment
Professor TakadaProfessor Takada 7-42
Assessing and Responding to Competitor Price Changes
Professor TakadaProfessor Takada 7-43
Price-Reaction Program for Meeting Competitor’s Price Cut
Professor TakadaProfessor Takada 7-44
Public Policy and Pricing
Professor TakadaProfessor Takada 7-45
Rest Stop: Reviewing the Concepts
1.1. Identify and define the external and internal Identify and define the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.
2.2. Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.
3.3. Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.
4.4. Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.
5.5. Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.
6.6. Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.