Pricing strategies1

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  • Q: When you set the price for your products or service, what factors influenced you? Pricing decisions are influenced by various factors:  Cost of the product  Economic conditions  Competition  Customer needs and characteristics (age, taste, geography)  Company objectives NEXT SLIDE
  • This chapter, the second of four on the marketing function, gives you a close look at two elements of the marketing mix: product and price. The exploration of price starts with a rundown of the major types of products, the life cycle that most products progress through from introduction to the point at which they’re removed from the market, and the process companies use to create new products. Following that, you’ll learn about the techniques used to identify products: branding, packaging, and labeling. The final product discussion involves the decisions companies make when managing multiple families of products. The chapter wraps up with a look at pricing strategies.
  • Most manufacturers design a product, then try to figure out how to make it for a price. But recent thinking holds that cost should be the last item analyzed in the pricing formula, not the first. Companies that use priced-based pricing can maximize their profit by first establishing an optimal price for a product or service. The product's price is based on an analysis of a product's competitive advantages, the users' perception of the item, and the market being targeted. Once the desired price has been established, the firm focuses its energies on keeping costs at a level that will allow a healthy profit. Optimal pricing uses computer software to generate the ideal price for every item, at each individual store, at any given time. Research shows that many retailers routinely underprice or overprice the merchandise of their shelves. They generally set a price by marking up from cost, or by benchmarking against the competition’s prices, or simply by hunch. A product's price seldom remains constant and will vary depending on the product's stage in its life cycle. During the introductory phase, for example, the objective might be to recover product development costs as quickly as possible. To achieve this goal, the manufacturer might charge a high initial price — a practice known as skimming — and then drop the price later, when the product is no longer a novelty and competition heats up. Rather than setting a high initial price to skim off a small but profitable market segment, a company might try to build sales volume by charging a low initial price, a practice known as penetration pricing. This approach has the added advantage of discouraging competition, because the low price (which competitors would be pressured to match) limits the profit potential for everyone.
  • Once a company has set a products’ price, it may choose to adjust that price from time to time to account for changing market situations or changing customer preferences. Three common price adjustment strategies are price discounts, bundling, and dynamic pricing. When you use discount pricing, you offer various types of temporary price reductions, depending on the type of customer being targeted and the type of item being offered. Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can promote sales of products consumers might not otherwise buy — especially when the combined price is low enough to entice them to purchase the bundle. Dynamic pricing is the opposite of fixed pricing. Using Internet technology, companies continually reprice their products and services to meet supply and demand. Dynamic pricing not only enables companies to move slow selling merchandise instantly but also allows companies to experiment with different pricing levels. Because price changes are immediately posted to electronic catalogs or websites, customers always have the most current price information.

Transcript

  • 1. Pricing Strategies and Tactics Khaja Hammad uddin
  • 2. Fatores na fixação de Preço
  • 3. Market Structure
    • Perfect Competition
    • Monopolistic Competition
    • Oligopoly
    • Monopoly
    More Competitive Less Competitive
  • 4. Perfect Competition
    • Many buyers and sellers
    • Buyers and sellers are price takers
    • Product is homogeneous
    • Perfect mobility of resources
    • Economic agents have perfect knowledge
    • Example: Stock Market
  • 5. Monopoly
    • Single seller and many buyers
    • No close substitutes for product
    • Significant barriers to resource mobility
      • Control of an essential input
      • Patents or copyrights
      • Economies of scale: Natural monopoly
      • Government franchise: Post office
  • 6. Oligopoly
    • Few sellers and many buyers
    • Product may be homogeneous or differentiated
    • Barriers to resource mobility
    • Example: Automobile manufacturers
  • 7. Monopolistic Competition
    • Many sellers and buyers
    • Differentiated product
    • Perfect mobility of resources
    • Example: Fast-food outlets
  • 8. Market Structure ,Pricing decisions
    • Market structure and pricing decisions are closely related.
    • The degree to which the firm gets to choose price is determined in large part by market structure
    • There are two extreme cases: perfect competition and monopoly
  • 9. Perfect Competition
    • Conditions necessary:
      • Large numbers of buyers and sellers
      • Homogeneous product
      • Free entry and exit
      • Perfect information
  • 10. Perfect Competition
    • Demand curve for any given firm is horizontal. Price is set by market at P e
    • Firm can sell as much or as little as desired at market price, but nothing if they raise P.
  • 11. Monopoly
    • Conditions necessary
      • Single seller of product
      • No close substitutes
      • Significant barriers to entry
    • There are few examples of perfect competition and pure monopoly.
  • 12. Pricing in Perfect Competition
    • Do not choose price.
    • Choose output quantity.
    • What will be our profit (loss) from our output decision?
      • Should we produce now? (SR)
      • Should we stay in the industry? (LR)
  • 13. Costs at different levels of production Cost per unit at different levels of production
  • 14. Pricing in a Monopoly
    • Profit maximization will be achieved by setting price so that MC=MR.
    • It is not reached by setting price as “high as possible.”
    • Like any firm, the monopolist is constrained by their demand curve.
    • One cannot choose both P and Q.
  • 15. Price Discrimination
    • Selling the same good to different people at different prices
    • Conditions necessary:
      • Identifiable customer groups with differing price elasticities
      • Maintain separation of groups--prevent resale.
  • 16. Types of Price Discrimination
    • First degree
      • Identify and charge each customer what they are willing to pay
      • Limit: D = MR, no consumer surplus .
    • Second degree
      • Quantity discounts. Volume purchases are given lower prices. Need to measure goods and services bought by consumers.
  • 17. Types of Price Discrimination
    • Third degree
      • Segment markets in some way. Charge all in the segment the same prices.
      • Treat each segment as a separate market– then do MR=MC in each
  • 18. Oligopoly Strategies
    • Common theme - Rivalrous behavior
    • Pricing - limit pricing - set prices low as signal to possible entrants or other competitors your willingness and ability to defend your market share.
      • Must have credibility.
      • Trading SR profit for more profits later
  • 19. Oligopoly Strategies
    • Use the legal / regulatory systems
      • File patent application
      • File regulatory challenge
  • 20. Oligopoly Strategies
    • Capacity and production
      • Announce capacity expansion
      • Revise/modify products - more difficult to copy
    • Advertising
      • Raise cost of entry for others
  • 21. Oligopoly and Monopolistic Competition
    • Most industries are one or the other
      • Oligopoly : many heavy manufacturing
        • Autos, steel, chemicals, pharmaceuticals
      • Monopolistic Competition
        • Service companies, retail stores, large corporations (McDonald’s, Wendy’s)
  • 22. Pricing Strategies
    • Profit maximizing rule:
        • Set production at level where MR = MC
    • Non - Maximizing pricing rules
        • there are a variety of these
  • 23. Pricing Strategy
    • How does a company decide what price to charge for its products and services?
    • What is “the price” anyway? doesn’t price vary across situations and over time?
    • Some firms have to decide what to charge different customers and in different situations
    • They must decide whether discounts are to be offered, to whom, when, and for what reason
  • 24. Why is Pricing Important?
    • In a company with average economics*,
    • 1% increase in volume = 3.3% increase in profit
    • 1% increase in price = 11.1% increase in profit
    • Improvements in price typically have 3-4 times the effect on profit as proportionate increases in volume.
    *Based on average of 2,463 companies
  • 25. Price vs. Nonprice Competition
    • In price competition , a seller regularly offers products priced as low as possible and accompanied by a minimum of services
    • In non price competition , a seller has stable prices and stresses other aspects of marketing
    • With value pricing , firms strive for more benefits at lower costs to consumer
    • With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm
  • 26. Nonprice Competition
    • Some firms feel price is the main competitive tool, that customers always want low prices
    • Other firms are looking for ways to add value , thereby being able to avoid low prices
    • Sometimes prices have to be changed in response to competitive actions
    • Many firms would prefer to engage in non price competition by building brand equity and relationships with customers
  • 27. Steps for Determining Prices
    • Establish Pricing Objectives
      • Increase sales volume?
      • Prestigious image?
      • Increase market share?
  • 28. Steps for Determining Prices
    • Study Costs
      • Can you make a profit?
      • Can you reduce costs without affecting quality or image?
  • 29. Steps for Determining Prices
    • Estimate Demand
      • What do customers expect to pay?
      • Prices usually are directly related to demand.
  • 30. Steps for Determining Prices
    • Decide on a Pricing Strategy
      • Price higher than the competition because your product is superior
      • Price lower, then raise it once your product is accepted
  • 31. Steps for Determining Prices
    • Set Price
      • Monitor and evaluate its effectiveness as conditions in the market change
  • 32. Product and Pricing Strategies
  • 33. Other Pricing Strategies Price-Based Optimization Skimming Penetration
  • 34. Price Adjustment Strategies Discount Pricing Bundling Dynamic Pricing
  • 35. Pricing Strategies
  • 36. Penetration Pricing
  • 37. Penetration Pricing
    • Price set to ‘penetrate the market’
    • ‘ Low’ price to secure high volumes
    • Typical in mass market products – chocolate bars, food stuffs, household goods, etc.
    • Suitable for products with long anticipated life cycles
    • May be useful if launching into a new market
  • 38. Market Skimming
  • 39. Market Skimming
    • High price, Low volumes
    • Skim the profit from the market
    • Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)
    • Examples include: Playstation, jewellery, digital technology, new DVDs, etc.
  • 40. Value Pricing
  • 41. Value Pricing
    • Price set in accordance with customer perceptions about the value of the product / service
    • Examples include status products/exclusive products
    Companies may be able to set prices according to perceived value. Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery
  • 42. Loss Leader
  • 43. Loss Leader
    • Goods/services deliberately sold below cost to encourage sales elsewhere
    • Purchases of other items more than covers ‘loss’ on item sold
    • e.g. ‘Free’ mobile phone when u fill petrol of Rs 500 at Reliance petrol pump.
  • 44. Psychological Pricing
  • 45. Psychological Pricing
    • Used to play on consumer perceptions
    • Classic example - $9.99 instead of $10.00!
    • Odd-even: $5.95, $.79, $699 OR $12, $50
    • Multiple Unit-3 for !1.00 better than $.34 each
  • 46. Psychological Pricing
    • Odd-Even Pricing
      • Odd numbers convey a bargain image -- $.79, $9.99, $699
      • Even numbers convey a quality image -- $10, $50, $100
  • 47. Psychological Pricing
    • Prestige Pricing – sets a higher than average price to suggest status
  • 48. Psychological Pricing
    • Multiple-Unit Pricing – 3 for $.99
    • Suggests a bargain and helps increase sales volume.
    • Better than selling the same items at $.33 each.
  • 49. Psychological Pricing
    • Everyday Low Prices (EDLP) – set on a consistent basis
  • 50. Going Rate (Price Leadership)
  • 51. Going Rate (Price Leadership)
    • In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
    • May follow pricing leads of rivals especially where those rivals have a clear dominance of market share
    • Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
  • 52. Tender Pricing
  • 53. Tender Pricing
    • Many contracts awarded on a tender basis
    • Firm (or firms) submit their price for carrying out the work
    • Purchaser then chooses which represents best value
    • Most government contracts
    A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!
  • 54. Price Discrimination
  • 55. Price Discrimination
    • Charging a different price for the same good/service in different markets
    • Requires different price elasticity of demand in each market
    • Air/rail
      • First class
      • Business class
      • Economy class
    Prices for rail travel differ for the same journey at different times of the day
  • 56. Discounts and Allowances
    • Cash Discounts – offered to buyers to encourage them to pay their bills quickly.
      • 2/10, net 30
    • Quantity Discounts – offered for placing large orders
    • Trade Discounts – the way manufacturers quote prices to wholesalers and retailers.
  • 57. Promotional Pricing -- Used with sales promotion
    • Loss Leader Pricing – offering very popular items for sale at below-cost prices
    • Special-Event
      • Back-to-school specials
      • Dollar days
      • Anniversary sales
    • Rebates and Coupons
  • 58. Discounts and Allowances
    • Seasonal Discount – offered outside the customary buying season
  • 59. Discounts and Allowances
    • Allowances – go directly to the buyer. Customers are offered a price reduction if they sell back an old model of the product they are purchasing
  • 60. Destroyer Pricing/Predatory Pricing
  • 61. Destroyer/Predatory Pricing
    • Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants
    • Anti-competitive and illegal if it can be proved
    • Typical of oligopoly with collusion
    Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market
  • 62. Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
  • 63. Absorption/Full Cost Pricing
  • 64. Absorption/Full Cost Pricing
    • Full Cost Pricing – attempting to set price to cover both fixed and variable costs
    • Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
  • 65. Marginal Cost Pricing
  • 66. Marginal Cost Pricing
    • Marginal cost – the cost of producing ONE extra or ONE fewer item of production
    • MC pricing – allows flexibility
    • Particularly relevant in transport where fixed costs may be relatively high
    • Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied, a good deal to attract customers and fill the aircraft.
    • Get one extra student and get fees discount.
  • 67. Target Pricing
  • 68. Target Pricing
    • Setting price to ‘target’ a specified profit level
    • Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
    • Mark-up = Profit/Cost x 100
    • This strategy is used by many clothes retailers where they can add upto 60% mark-up on the basic cost of the clothes. So even with a 50% sales offer they still make a profit!