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Pricing Products:Pricing Products:
Pricing Considerations &Pricing Considerations &
StrategiesStrategies
Prof. Rushen Chahal
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Factors to Consider When
Setting Prices
Internal Factors
PricingDecisions
External Factors
Price is the Amount of Money Charged for a Product orService.
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Internal Factors Affecting
Pricing Decisions
MarketingObjectives
Marketing-MixStrategy
Costs
OrganizationalConsiderations
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Marketing Objectives that Affect
Pricing Decisions
Marketing
Objectives
Marketing
Objectives
Survival
Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.
Survival
Low Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.
Current Profit MaximizationChoose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.
Current Profit MaximizationChoose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover HigherPerformance Quality and R & D.
Product Quality Leadership
High Prices to Cover HigherPerformance Quality and R & D.
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Marketing Mix Variables that AffectPricing DecisionsMarketing Mix Variables that AffectPricing Decisions
Marketing-MixStrategy
Product Design
Distribution
Promotion
Non-PriceFactors
Companies Will Consider Price Along With All the OtherMarketing-Mix Elements When Developing the MarketingProgram. Price Must be Coordinated With:
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Types of Cost Factors that
Affect Pricing Decisions
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Fixed Costs(Overhead)
Costs that dontvary with sales orproduction levels.
Executive SalariesRent
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External Factors Affecting PricingDecisionsExternal Factors Affecting PricingDecisions
Market andDemand
Competitors Costs,Prices, and Offers
Other External FactorsEconomic Conditions
Reseller NeedsGovernment Actions
Social Concerns
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Market and Demand Factors that
Affect Pricing Decisions
Pure CompetitionPure CompetitionMany Buyers and Sellers WhoHave Little Effect on the Price.
Monopolistic CompetitionMonopolistic CompetitionMany Buyers and Sellers WhoTrade Over a Range of Prices.
Oligopolistic CompetitionFew Sellers Who Are Sensitive to EachOthers Pricing/ Marketing Strategies
Pure MonopolySingle Seller
Pricing in Different Types of Markets
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Price Elasticity of Demand
Price
Quantity Demanded per Period
A. Inelastic Demand -Demand Hardly Changes With
a Small Change in Price.P2
P1
Q1Q2
Pr
ice
Quantity Demanded per Period
P2
P1
Q1Q2
B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.
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Major Considerations inSetting PricesMajor Considerations inSetting Prices
NoPossibleProfit at
This Price
ProductCosts
ConsumerPerceptions
of Value
NoPossible
Demand atThis Price
Competitors Price andOther External &Internal Factors
FactoryExistingProducts
Sellingand
Promoting
ProfitsthroughVolume
HighPrice
LowPrice
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MinimizesPrice
Competition
What is Cost-Plus Pricing and Why
is it Popular?
Perceived
Fairness toBoth Buyersand Sellers
Sellers Are MoreCertain AboutCosts Than
Demand
Adding a Standard Markup to the Cost of the Product.
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Breakeven Analysis or
Target Profit Pricing
2
4
6
8
10
12
200 400 600 800 1,000
Total Revenue
Total Cost
Fixed Cost
Target Profit
($2 million)
Sales Volume in Units (thousands)
Co
stin
Dollars(m
illions)
Tries to Determine the Price at Which a Firm WillBreak Even or Make a Target Profit
0
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Cost-Based Vs. Value-Based Pricing
Product
Cost
Price
Value
Customers
Customer
Value
Price
Cost
Product
Cost-Based Pricing Value-Based Pricing
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Competition-Based Pricing
Setting Prices
Sealed-BidCompany Sets Prices Based onWhat They Think Competitors
Will Charge.
Going-RateCompany Sets Prices Based on What
Competitors Are Charging.
??
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New-Product Pricing StrategiesPrice - Quality Strategies
Premium
Strategy
OverchargingStrategy
Good-Value
Strategy
EconomyStrategy
PricePrice
Higher Lower
Higher
Lower
Quality
Quality
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Setting Initial Product Prices
Market SkimmingMarket Skimming Market PenetrationMarket Penetration
>Setting a High Pricefor a New Productto Skim MaximumRevenues from theTarget Market.
>Results in Fewer,
More ProfitableSales.
> Intels $1,000 Chip
> Setting a Low Price
for a New Product inOrder to Attract aLarge Number ofBuyers.
>Results in a Larger
Market Share.
>Wal-mart
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Product Line PricingProduct Line PricingSetting Price Steps
Between Product Line Itemsi.e. Lawnmowers at $299 & $399
OptionalOptional--Product PricingProduct PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options such as a CD player
CaptiveCaptive--Product PricingProduct PricingPricing Products That Must BeUsed Along With The Main Product
i.e. Razor Blades, Film, Software
ByBy--Product PricingProduct PricingPricing Low-Value By-Products To
Get Rid ofThemi.e. From Chemicals, Lumber Mills, Zoos
ProductProduct--Bundle PricingBundle PricingBundles Of Products Sold
Together at a Reduced Pricei.e. Season Tickets, Computer Makers
Product Mix Pricing Strategies
ProductMixPricing
Strategies
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Price-Adjustment Strategies
Price Adjustment Strategies
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
Segmented
Adjusting Prices to Allowfor Differences in Customers,
Products, and Locations.
Cash Discount
Quantity Discount
Functional Discount
Seasonal Discount
Customer
Product-Form
Location
Time
Trade-In Allowance Promotional Allowance
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Price-Adjustment Strategies
Adjusting Prices forPsychological Effect.
Price Used as a QualityIndicator.
Reference Prices i.e.Clothing.
Temporarily Reducing Pricesto Increase Short-Run Sales.
i.e. Loss Leaders, forSpecial-Events, Cash Rebates
Psychological Pricing
Promotional Pricing
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Price-Adjustment StrategiesPrice-Adjustment Strategies
Adjusting Prices to Accountfor the Geographical Locationof Customers.
i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, etc.
Adjusting Prices forInternational Markets.
Price Depends on Costs,Consumers, EconomicConditions & Other Factors.
Geographical Pricing
International Pricing
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Initiating and Responding to
Price Changes
InitiatingPrice
Increases
CompetitorReactions
toPrice Changes
InitiatingPrice Cuts
Buyer Reactionsto
PriceChanges
PriceChanges
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Assessing & Responding toCompetitor Price ChangesAssessing & Responding toCompetitor Price Changes
Hold Current Price;Continue to MonitorCompetitors Price.
Reduce Price
Raise PerceivedQuality
Improve Quality& Increase Price
Launch Low-PriceFighting Brand
Has Competitor CutPrice?
Will Lower PriceNegatively Affect Our
Market Share & Profits?
Can/ Should EffectiveAction be Taken?
Yes
No
No
No
Yes
Yes
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Public Policy and PricingPublic Policy and Pricing
DeceptivePricing
PriceFixing
PriceDiscrimination
Public Policy on Pricing Centers on Three PotentiallyDamaging Pricing Practices.
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