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Kotler Chapter 14 Developing Pricing Strategies and Programs
 

Kotler Chapter 14 Developing Pricing Strategies and Programs

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  • Fixed Cost or overhead cost are costs that do not vary with production level or sales revenue.Variable cost vary directly with level of production.
  • Total cost consist of the sum of the fixed and variable costs for any given level of production.
  • It refers to the gain a company experiences in producing a product over a period of time. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result is that average cost falls with accumulated production experience. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Average cost is the cost per unit at a level of production given total costhttp://design-marketing-dictionary.blogspot.com/2009/09/accumulated-production.html
  • Also used for season items, specialty items, slower-moving items, items with high storage and handling cost, demand-inelastic (drugs)
  • The firm determines the price that would yield its target rate of return on investment (ROI).Example 15 % to 20% ROI-does not consider other scenarios- if item will not sell at 50,000-manufacturers should consider different prices and their impact on sales volume-Find ways to decrease fixed costs and variable costs to lower break even volume
  • There is always a segment of buyers who care only about the priceDeliver more value than the competitor and demonstrate this to prospective buyers

Kotler Chapter 14 Developing Pricing Strategies and Programs Kotler Chapter 14 Developing Pricing Strategies and Programs Presentation Transcript

  • DEVELOPING PRICINGSTRATEGIES ANDPROGRAMS MARKMA Rhea G. Jardin May 11, 2012 www.donnasia.blogspot.com
  • Outline1. 6 Steps in Setting the Price2. 4 Price-adaptation Strategies www.donnasia.blogspot.com
  • What is Price?Price is :- the one element of the marketing mix that produces revenue- the amount paid for some goods or services www.donnasia.blogspot.com
  • Concept 1: 6 Steps in Setting the Price Selecting the Determining Estimatingpricing objective demand costs Price objective Demand CostsSelecting the Selecting Analyze competitors’ pricing method costs, prices, and offers final price Final Pricing price method Competitors www.donnasia.blogspot.com
  • Concept 1: 1. Selecting the pricing objective Selecting the pricing objective Price objectiveSurvival (B/E) Maximize profit Maximize market share Product leadership Maximize market skimming www.donnasia.blogspot.com
  • Concept 1: 2. Determining Demand Selecting the Determiningpricing objective demand Price objective Demand Surveys Demand elasticity Statistical analysis Price experiments www.donnasia.blogspot.com
  • Concept 1: 3. Estimating costs Selecting the Determining Estimatingpricing objective demand costs Price objective Demand Costs Learning curve Fixed and Variable Cost per unit of production www.donnasia.blogspot.com
  • Concept 1: 4. Analyze competitors’ costs, prices and offers Selecting the Determining Estimatingpricing objective demand costs Price objective Demand Costs Analyze competitors’ costs, prices, and offers Competitors Evaluate the competitors’ price and product value www.donnasia.blogspot.com
  • Concept 1: 5. Selecting price method Selecting the Determining Estimatingpricing objective demand costs Price objective Demand Costs Selecting Analyze competitors’ pricing method costs, prices, and offers Pricing method Competitors Price Perceived markup value Value pricing Target Going-rate ROI pricing Auction- Break- type pricing even point www.donnasia.blogspot.com
  • Concept 1: 6. Selecting final price Selecting the Determining Estimating pricing objective demand costs Price objective Demand Costs Selecting the Selecting Analyze competitors’ costs, pricing method prices, and offers final price Final Pricing price method Competitors Gain & risk sharing High advertising Pricing policiesPrice fixing www.donnasia.blogspot.com
  • Concept 1: Selecting the 6 Steps in Setting the Price Determining Estimating pricing objective demand costs Price objective Demand Costs Surveys Learning Demand curveSurvival (B/E) Maximize profit elasticity Fixed and Variable Maximize market share Cost per Statistical unit of analysis Price Product experiments production leadership Maximize market skimming Selecting the Selecting Analyze competitors’ costs, pricing method prices, and offers final price Final Pricing price method Competitors Price Perceived markup value Evaluate the Gain & risk competitors’ sharing Value High pricing price and advertising product value Target Going-rate ROI pricing Pricing policies Auction- Break- Price fixing type pricing even point www.donnasia.blogspot.com
  • Concept 2:4 Price-adaptation strategies 1. Geographical pricing 2. Price discounts and allowances 3. Promotional pricing 4. Differentiated pricing www.donnasia.blogspot.com
  • Concept 2: 1. Geographical pricing Barter Compensation deal Direct exchange of goods Payment in products and cashBuyback arrangement Offset Payment in form of products manufactured by the supplied Receives payment in cash but agrees to equipment and cash spend some of the money in the products of that country www.donnasia.blogspot.com
  • Concept 2: 2. Price discounts and allowances Cash discount Quantity discount Discounts given to cash, Discounts given to those early or prompt payments who buy large volumes Seasonal discount Discounts given to products or services that are out of seasonTrade discount Allowances Discounts given by Discounts given to gainmanufacturers to resellers reseller participation in special programs www.donnasia.blogspot.com
  • Concept 2: 3. Promotional pricingSpecial-event pricing Longer payment terms Low-interest financing Cash rebates Warranties and service contracts www.donnasia.blogspot.com
  • Concept 2: 4. Differentiated pricingPrice discrimination - selling a product at two or more pricesCustomer-segment pricing - different customer groups pay different prices for the same product or serviceProduct-form pricing - different versions of the product are priced differently, but not proportionately to their costsImage pricing - the same product are priced at two different levels based on image differences www.donnasia.blogspot.com
  • Concept 2: 4. Differentiated pricingChannel pricing - a product is priced depending on where it was purchase (fine restaurant, fast-food chain, or vending machine)Location pricing - same product is priced differently at different locations even though the cost is the sameTime pricing - prices are varied by season, day, or hour (weekend vs weekdays, “early bird” customers) www.donnasia.blogspot.com
  • DEVELOPING PRICINGSTRATEGIES ANDPROGRAMS MARKMA Rhea G. Jardin May 11, 2012 www.donnasia.blogspot.com
  • DEVELOPING PRICING STRATEGIES AND PROGRAMS Shelle Caiga MBA Standard May 11, 2012 www.donnasia.blogspot.com
  • Outline: Developing Pricing Strategies and ProgramsI. Consumer Psychology and PricingII. Steps in Setting PriceIII. Learning what Price Adaptation is all about.IV. Promotional Pricing TacticsV. Differentiated PricingVI. Increasing PricesVII. Brand Leader Responses To Competitive Price Cuts www.donnasia.blogspot.com
  • How do consumers process & evaluate prices? process prices evaluate www.donnasia.blogspot.com
  • CONSUMER PSYCHOLOGY and PRICING REFERENCE PRICES PRICE-QUALITY INFERENCES PRICE ENDINGS PRICE CUES www.donnasia.blogspot.com
  • Definition of Terms:CONSUMER PSYCHOLOGY: providesopportunities to examine issues such as what factors are mostimportant… when people decide to purchase a particular item how customers determine the value of a service and whether or not television & magazine advertisements can convince a reluctant consumer to try a new product for the 1st time.PRICING: is the process of determining what a company will receive in exchange for its products www.donnasia.blogspot.com
  • REFERENCE PRICES… is a strategy in which a product is sold at a price justbelow its main competing brand. is one component of psychological pricing – sellersconsider the psychology of prices & not simply theeconomics. are prices that buyers carry in their minds and refer towhen looking at a given product. www.donnasia.blogspot.com
  • PRICE CUESWhen to use… Customers purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores www.donnasia.blogspot.com
  • How should a company set prices for products or services?STEPS: 1) Select the PRICE OBJECTIVE 2) Determine DEMAND 3) Estimate COSTS 4) Analyze competitor PRICE MIX 5) Select PRICING METHOD 6) Select FINAL PRICE www.donnasia.blogspot.com
  • I. SELECT THE PRICE OBJECTIVE  Survival  Maximum current profit  Maximum market share  Maximum market skimming  Product – quality leadership www.donnasia.blogspot.com
  • II. DETERMINE DEMAND Price sensitivity Estimating demand curves Price elasticity of demand www.donnasia.blogspot.com
  • III. ESTIMATE COSTS  Types of Costs  Accumulated Production  Activity – based Cost Accounting  Target Costing www.donnasia.blogspot.com
  • IV. ANALYZE COMPETITOR PRICE MIX Identify nearest pricecompetitors Take competitor’s features andprices into account Make decision to chargemore, the same or less thancompetitors Monitor competitors’ reaction toyour pricing strategy www.donnasia.blogspot.com
  • V. SELECT PRICING METHOD  Mark up Pricing  Target-return pricing  Perceived-value pricing  Value pricing  Going-rate pricing  Auction-type pricing www.donnasia.blogspot.com
  • VI. SELECT THE FINAL PRICE Impact of other marketingactivities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties www.donnasia.blogspot.com
  • PRICE-ADAPTATION STRATEGIES GEOGRAPHICAL PRICING DISCOUNTS / ALLOWANCES PROMOTIONAL PRICING DIFFERENTIATED PRICING www.donnasia.blogspot.com
  • PRICE-ADAPTATION STRATEGIES COUNTERTRADE Barter Compensation deal Buyback arrangement Offset www.donnasia.blogspot.com
  • PRICE-ADAPTATION STRATEGIES DISCOUNTS / ALLOWANCES Cash Discount  Seasonal Discount Quantity Discount  Allowance Functional Discount www.donnasia.blogspot.com
  • PROMOTIONAL PRICING TACTICS Loss-leader pricing  Longer payment terms Special-event pricing  Warranties & service contracts Low-interest financing  Cash Rebates  Psychological discounting www.donnasia.blogspot.com
  • DIFFERENTIATED PRICING & PRICE DISCRIMINATION Customer-segment pricing  Channel pricing Product-form pricing  Location pricing Image pricing  Time pricing  Yield pricing www.donnasia.blogspot.com
  • INCREASING PRICES Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts www.donnasia.blogspot.com
  • BRAND LEADER RESPONSES TO COMPETITIVE PRICE CUTS Maintain price Maintain price & add value Reduce price Increase price & improve qualityLaunch a low-price fighter line www.donnasia.blogspot.com
  • DEVELOPING PRICING STRATEGIES AND PROGRAMS Shelle Caiga MBA Standard May 11, 2012 www.donnasia.blogspot.com
  • Chapter 14Developing PricingStrategies and Programs Donna Sia May 11, 2012 www.donnasia.blogspot.com
  • OUTLINE:When setting effective pricing policy a company 1. Follows six pricing procedures 2. Selects a pricing structure that reflects various situations 3. Chooses what price adaptation strategy to use 4. Examine the effect of price changes 5. Responds to competitors price challenge www.donnasia.blogspot.com
  • Price is the only element inthe marketing mix thatproduces revenue;the others produce cost. www.donnasia.blogspot.com
  • Consumers use common pricereferences. Fair price Typical PriceLower-bound Last Price Paid www.donnasia.blogspot.com
  • They may also refer to:Competitor’s Price Usual Discounted Price Expected Future Price www.donnasia.blogspot.com
  • Companies follow 6 steps when setting prices.1 Select the price objective 2 Determine demand 3 Estimate costs 4 Analyze competitor price mix 5 Select pricing method 6 Select final price www.donnasia.blogspot.com
  • In selecting price objectives, companies must look at Maximum Maximum Survival current profit market shareMaximum market skimming Product-quality leadership www.donnasia.blogspot.com
  • Demand can be determined by examining: Price Estimating Price ElasticitySensitivity Demand of Demand Curves www.donnasia.blogspot.com
  • Changes in price affect consumer demand:Source: Marketing Management, Kotler and Keller, 13th ed. www.donnasia.blogspot.com
  • Customers are likely to be less sensitive to price changes when:product is more distinctive less aware of substitutes expenditure is a cannot easily compare the smaller part of quality of substitutes buyer’s total income www.donnasia.blogspot.com
  • Customers are likely to be less sensitive to price changes when:small compared to the total cost Part of the cost is paidof the end product by another party used with previously purchased assets www.donnasia.blogspot.com
  • Customers are likely to be less sensitive to price changes when:assumed to have high quality cannot store the productand prestige www.donnasia.blogspot.com
  • Costs can either be fixed or variable processFixed Cost Variable Cost output www.donnasia.blogspot.com
  • The sum of variable and fixedcost for any given level ofproduction is the total cost www.donnasia.blogspot.com
  • As production accumulates average cost decreasesSource: Marketing Management, Kotler and Keller, 13th ed. www.donnasia.blogspot.com
  • To arrive at target cost, firstdetermine target given product’s appealprice and desired and competitor’s pricefunction Then: Target Selling Price = $ 9.90 Less Profit Margin = $ 3.40 Target Cost = $ P 6.50 www.donnasia.blogspot.com
  • Different pricing methods canbe used in varying situations Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing www.donnasia.blogspot.com
  • Markup Pricing is just adding a standard mark-up to the product’s cost.Variable cost per unit $10.00Fixed Cost $ 300,000.00Expected Unit Sales 50,000 unitsUnit cost= variable cost + fixed cost unit sales = $10.00+ $ 300,000.00 50,000 = $16.00Desired Mark Up= 20%Selling Price= Unit Cost = $16.00 = $20 (1- desired return) (1-0.20) www.donnasia.blogspot.com
  • Target-return pricing is used by companies who need to make a fair return on investmentDesired ROI = 20% or € 200,000Target-return on price= unit cost + desired return x investment capital unit sales= $16.00 + 0.20 x $1,000,000.00 = $20.00 50,000 www.donnasia.blogspot.com
  • Break-even analysis is used to determine target return price and break-even volumeSource: Marketing Management, Kotler and Keller, 13th ed. www.donnasia.blogspot.com
  • Perceived Value Pricing$ 90,000 tractor’s price = competitor’s price$ 7,000 superior durability$ 6,000 superior reliability$ 5,000 superior service$ 2,000 longer warranty$ 110,000 superior value- 10,000 discount$ 100,000 final price www.donnasia.blogspot.com
  • The internet and Auction type pricing: English auctions Dutch auctions Sealed-bid auctionsSource: Marketing Management, Kotler and Keller, 13th ed. www.donnasia.blogspot.com
  • Price Adaptation StrategyGeographical Pricing www.donnasia.blogspot.com
  • Discounts and AllowancesPrompt payment discount Seasonal Discount Volume discount www.donnasia.blogspot.com
  • Promotional Pricing Special-event pricingLoss-leader Pricing Low-interest financing www.donnasia.blogspot.com
  • Profits Before and After a Price IncreaseSource: Marketing Management, Kotler and Keller, 13th ed. www.donnasia.blogspot.com
  • Respond to Low-Cost rival by:1. Maintaining price2. Maintaining price and adding value3. Reducing price4. Increasing price and improving quality5. Launching a low-price fighter line www.donnasia.blogspot.com
  • In summary:Price is the only element in the marketing Competitor’s can also offermix that produces revenue attractive prices Survival and ProfitPrice objectives Maximize market share Products Cost (Variable/Fixed) Deliver value to customers consumer psychology Sensitivity to price Durability, reliability, excellent service changes www.donnasia.blogspot.com
  • Chapter 14Developing PricingStrategies and Programs Donna Sia May 11, 2012 www.donnasia.blogspot.com