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Pricing strategy and management


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Pricing strategy and management

Pricing strategy and management

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  • 1. Chapter 8 Pricing Strategy and Management
  • 2. Conceptual Orientation to Pricing
    • Demand factors (Value to buyers)
    • (price ceiling)
    • Competitive factors
    • Final pricing Initial
    • discretion pricing
    • Corporate objectives discretion
    • and regulatory
    • constraints
    • Direct variable costs
    • (price floor)
  • 3. Price as an Indicator of Value
    • for a given price, value decreases as perceived benefits decrease and vice versa
    • price also affects consumer perceptions of prestige; as price increases, demand may also increase
    Value = Perceived benefits Price
  • 4. Price Elasticity of Demand
    • if the % change in quantity demanded is greater than the % change in price, demand is said to be elastic – E is greater than 1.
    • if the % change in quantity demanded is less than the % change in price, demand is said to be inelastic – E is less than 1.
    E = Percentage change in quantity demanded Percentage change in price where E is the coefficient of elasticity
  • 5. Factors that Influence Price Elasticity of Demand
    • the more substitutes a product or service has, the greater its price elasticity
    • the more uses a product or service has, the greater its price elasticity
    • the higher the ratio of the price of the product or service to the income of the buyer, the greater the price elasticity
  • 6. Product-Line Pricing
    • Product-Line Pricing involves determining:
      • the lowest-priced product and price
      • the highest-priced product and price, and
      • price differentials for all other products in the line
  • 7. Pricing Strategies
    • full-cost price strategies – consider both variable and fixed costs
    • variable-cost price strategies – consider only variable costs, not total costs
  • 8. Full-Cost Pricing
    • markup pricing : fixed amount added to the total cost of the product
    • break-even pricing : per-unit fixed costs + per-unit variable costs
    • rate-of-return pricing : set to obtain a desired ROI
  • 9. Variable-Cost Pricing
    • Variable-cost pricing is demand-oriented pricing .
    • Two purposes:
      • stimulate demand
      • shift demand
    Assumption is that variable-cost pricing will stimulate demand and increase revenues.
  • 10. New-Offering Pricing Strategies
    • skimming pricing strategy
    • penetration pricing strategy
    • intermediate pricing strategy
  • 11. Use Skimming Pricing Strategy when:
    • demand likely to be price inelastic
    • different price-market segments, appealing to buyers with a higher acceptable price
    • offering is unique enough to be protected from competition
    • production or marketing costs are unknown
    • capacity constraint exists
    • organization wants to generate funds quickly
    • realistic perceived value of the product exists
  • 12. Use Penetration Pricing Strategy when:
    • demand likely to be price elastic
    • offering is not unique enough to be protected from competition
    • competitors expected to enter market quickly
    • no distinct price-market segments
    • possibility of cost savings with large volume of sales
    • organization’s major objective is to obtain a large market share
  • 13. Intermediate Pricing Strategy
    • falls between skimming and penetration
    • most prevalent in practice
    • more likely to be used in majority of pricing decisions
  • 14. Pricing and Competitive Interaction
    • the action and reaction of rival companies in setting and changing prices for their offerings
    • managers should focus more on long-term – “look forward and reason backwards”
    • Competitors’ goals and objectives ?
    • Assumptions competitor made about itself ?
    • Strengths and weaknesses of competitor ?
  • 15. Industry Characteristics and Risk of Price Wars Characteristics High Risk Low Risk Product/Service Type undifferentiated differentiated Market Growth Rate stable/decreasing increasing Price Visibility to Competitors high low Consumer Price Sensitivity high low Overall Industry Cost Trend declining stable Industry Capacity Utilization low high Number of Competitors many few