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8/11/2019 session5-pricing-091115003742-phpapp02 (1)

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Pricing:

Approaches andStrategies

Session 5Chapter 10 & 11


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Objectiveso Understand the internal & external factors affecting a

firms pricing decisions.

o Be able to contrast the three general approaches tosetting prices.

o Learn the major strategies for pricing imitative andnew products.

o Understand how companies find a set of prices thatmaximizes the profits from the total product mix.

o Learn how companies adjust their prices to take intoaccount different types of customers and situations.

o Know the key issues related to initiating and

responding to price changes.


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Price

o The amount of money charged for a product, orthe sum of the values that consumers exchangefor the benefits of having/using the product orservice.

o Price and the Marketing Mix

Only element to produce revenues

Most flexible element

Can be changed quickly

o Price as a tool of Competition

o Common Pricing Mistakes


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Factors to Consider in Setting Price

o Marketing objectives

o Marketing mix strategies

o Costs

o Organizationalconsiderations

o Market positioning influences

pricing strategy

o Other pricing objectives: Survival

Current profit maximization

Market share leadership

Product quality leadership

o Not-for-profit objectives:

Partial or full cost recovery

Social pricing

Internal Facto

rs


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o Costs


o Pricing must be carefully

coordinated with the other

marketing mix elements

o Target costing is often used to

support product positioning

strategies based on price

o Non-price positioning can also

be used

Internal Facto

rs

Factors to Consider in Setting Price (contd.)


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o Costs


o Types of costs:

Variable Fixed

Total costs

o How costs vary at different

production levels will influence

price setting

o Experience (learning) curve

effects on price

Internal

Factors



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Strategic Impact & Cost Analysis: Pareto Law EffecCitiBank NA Example

o 80% of Cost Structure on staff andeven Marketing Expenses iscaused by 20% of Accounts fortheir Low Deposits and highTransaction Volume.

o There are only few things that arereally important.

o If you successfully improve 20% ofthe most important problems, youwill gain the same effect as youwould by improving the rest 80%.

This represents a big advantagewith respect to cost versus effect.

80%20%

20%80% No. of Customers

80%

20%

No. of Services

Service Revenue

CustomerRevenue

Customer Accounts

for purification

Service

Range

forRationalization

Customer/ Service

for Elimination

20%

80%

Figure: Customer/Service Revenue Matrix

80%20%

20%80% No. of Customers

80%

20%

No. of Services

Service Revenue

CustomerRevenue

Customer Accounts

for purification

Service

Range

forRationalization

Customer/ Service

for Elimination

20%

80%

Figure: Customer/Service Revenue Matrix

For an Effective Cost-Structure:

o 20% of the Customers and 20% of the Services contribute 80% of Revenue.

o Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue.

o Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss.


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o Costs


o Who sets the price?

In Small companies:

CEO or top management In Large companies:

Divisional or product line

managers

o Price negotiation is common

in industrial settings

o Some industries have pricing

departments

Internal Factors



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o Nature of market and

demand

o Competitors costs,

prices, and offers

o Other environmental

elements

o Types of markets

Pure competition

Monopolistic competition Oligopolistic competition

Pure monopoly

o Consumer perceptions of

price and value

o Price-demand relationship

Demand curve

Price elasticity of demand

ExternalFactors



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demand


prices, and offerso Other environmental

elements

o Consider competitors costs,

prices, and possible reactions

when developing a pricing

strategy

o Pricing strategy influences the

nature of competition

Low-price low-margin strategies

inhibit competition

High-price high-marginstrategies attract competition

o Benchmarking costs against the

competition is recommended

ExternalFactors



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demand


prices, and offerso Other environmental

elements

o Economic conditions Affect production costs

Affect buyer perceptions ofprice and value

o Reseller reactions to pricesmust be considered

o Government may restrict orlimit pricing options

o Social considerations maybe taken into account

ExternalFactors



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1. Cost-Based Pricing: a) Cost-Plus Pric ing Adding a standard markup to cost Ignores demand and competition

Popular pricing technique because: It simplifies the pricing process

Price competition may be minimized It is perceived as more fair to both buyers and sellers

Example

Variable costs: Tk. 20 Fixed costs: Tk. 500,000

Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost

Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit

Unit Cost/(1Desired Return on Sales) = Markup PriceTk. 25 / (1 - .20) = Tk. 31.25

General Pricing Approaches


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b) Break-Even Analysis & Target Profit Pricing

o Break-even charts show total cost and total revenues at different

levels of unit volume.

o The intersection of the total revenue and total cost curves is the

break-even point.

o Companies wishing to make a profit must exceed the break-even unitvolume.

General Pricing Approaches (contd.)

Fixed Costs

Total Costs

Revenues

Sales Volume in Thousands of Units

Thousands

Taka

0 10 20 30 40

1000

800

600

400

200

Break-even

po in t

Target Pro fit Tk . 200,000

Quanti ty To Be Sold ToMeet Target Pro fit

Fixed Costs

Total Costs

Revenues

Sales Volume in Thousands of Units

Thousands

Taka

0 10 20 30 40

1000

800

600

400

200

Break-even

point

Target Pro fit Tk . 200,000

Quanti ty To Be Sold ToMeet Target Pro fit


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2. Value-Based Pricingo Uses buyers perceptions

of value rather than sellerscosts to set price.

o Measuring perceived valuecan be difficult.

o Consumer attitudes towardprice and quality have

shifted during the lastdecade. Introduction of less

expensive versions ofestablished brands has

become common.


o Business-to-businessfirms seek to retain

pricing power Value-added strategies

can help

o Value pricing at the

retail level Everyday low pricing

(EDLP) vs. high-lowpricing


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3. Competition-Based Pricing

Also called going-rate pricing

May price at the same level, above, or below the

competition

Bidding for jobs is another variation of competition-

based pricing

Sealed bid pricing



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o Market-Skimming Pricing

Setting a high price for a new product to skim maximum revenueslayer by layer from segments willing to pay the high price.

o Market-Penetration Pricing

Setting a low price for a new product in order to attract a large

number of buyers and a large market share.

o Market Rate Pricing Ceding the initiative to the key competitors to set the price.

Dangerous for leaving the strategic initiative to competitors

Potential threat of Sudden Price Shift by newer, or Changes indelivery system capability.

o Relationship Pricing

Different price for Different class of customers depending on

relationship and the potentiality of cross-selling or future business.

Other Pricing Approaches


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o Product Line Pricing Setting price steps betweenproduct line items.

Line of products rather single one

Price points

o Optional-Product Pricing Pricing optional or accessory

products sold with the mainproduct

o By-Product Pricing Pricing low-value by-products to

get rid of them

Product Mix Pricing Strategies

o Captive-Product Pricing Pricing products that must

be used with the mainproduct

High margins are often set

for supplies

Services: two-part pricingstrategy

Fixed fee plus a variableusage rate

o Product Bundle Pricing Pricing bundles of products

sold together


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Price Adjustment Strategies

o Discount / allowance

o Segmented

o Psychological

o Promotional

o Types of discounts

Cash discount Quantity discount

Functional (trade) discount

Seasonal discount

o Allowances

Trade-in allowances

Promotional allowances

Strategies


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Price Adjustment Strategies (contd.)


o Segmented

o Psychological

o Promotional

o Types of segmented pricingstrategies:

Customer-segment

Product-form pricing

Location pricing

Time pricing

oAlso called revenue or yieldmanagement

o Certain conditionsmustexistfor segmented pricing tobe effective

Strategies


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Conditions Necessary for

Segmented Pricing Effectiveness

o Market is segmentable

o Lower priced segmentsare not able to resell

o Competitors can not

undersell segmentscharging higher prices

o Pricing must be legal

o Costs of segmentationcan not exceed revenuesearned

o Segmented pricing must

reflect real differences incustomers perceivedvalue


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o Segmented

o Psychological

o Promotional

o The price is used to saysomething about the product.

Price-quality relationship

Reference prices

Differences as small as fivecents can be important

Numeric digits may have

symbolic and visual qualitiesthat psychologically influencethe buyer

Odd

rounding

Strategies



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o Segmented

o Psychological

o Promotional

o Temporarily pricing products belowthe list price or even below cost

o Loss leaders Special-event pricing

Cash rebates

Low-interest financing, longerwarranties, free maintenance

o Promotional pricing can haveadverse effects

Strategies



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Promotional Pricing Problems

o Easily copied bycompetitors

o Creates deal-proneconsumers

o May erode brands value

o Not a legitimate substitute

for effective strategic

planning

o Frequent use leads to

industry price wars which

benefit few firms


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o Customer Discrimination for students only

o Product-form Discrimination

Telecom products

o Place Discrimination

service at ATM versus at counters

o Time Discrimination

peak -hours/ off-peak-hours

Price Discrimination


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o Initiating Price Cuts is Desirable When a Firm

Has excess capacity

Faces falling market share due to price competition

Desires to be a market share leader

o Price Increases are Desirable

If a firm can increase profit, faces cost inflation, or faces

greater demand than can be supplied.

o Methods of Increasing Price

o Alternatives to Increasing Price

Reducing product size, using less expensive materials,

unbundling the product.

Price Changes


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o Buyer reactions to price changes must be considered.o Competitors are more likely to react to price changes

under certain conditions. Number of firms is small

Product is uniform Buyers are well informed

o Respond to Price Changes only if: Market share / profits will be negatively affected if nothing is

changed. Effective action can be taken:

Reducing price

Raising perceived quality

Improving quality and increasing price

Launching low-price fighting brand

Price Changes (contd.)


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o Pricing with inChannel Levels Price-fixing

Competitors can not work with each other to set prices

Predatory pricing Firms may not sell below cost with the intention of punishing a

competitor or gaining higher long-run profits or running a competitorout of business.

o Pricing acrossChannel Levels

Price discrimination Retail price maintenance

Deceptive pricing Bogus reference / comparison pricing

Scanner fraud

Price confusion

Public Policy and Pricing

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