Developing pricing strategies

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pricing involves the customer demand schedule, the cost function, and competitors’ prices. The question is how should a company integrate cost-, demand-, and competition-based pricing considerations? In setting a price the firm, for example Kodak, will have to consider the following cost-, demand-, and competition-based pricing decisions:

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  • Chapter 19 Pricing Concepts Notes: Price is typically money exchanged for a good or service; however, it may also be time lost while waiting to acquire the good or service. Consumers are interested in obtaining a “reasonable price,” which means a perceived reasonable value at the time of the transaction. The price paid is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction they actually receive. Price can relate to anything with perceived value, not just money. When goods or services are exchanged, the trade is called barter .
  • Chapter 19 Pricing Concepts Notes: Price means one thing to the consumer and another to the seller. To the consumer, the price is the cost of something; to the seller, price is the source of profits. Marketing mangers find the task of setting prices a challenge.
  • Chapter 19 Pricing Concepts Notes: Prices are the key to revenues, which are the key to profits for an organization. Revenue is what pays for every activity of the company. What’s left over is profit. The price is set to earn a profit for the company. Managers strive to charge a price that will earn a fair profit. The price must not be too high or too low, and must equal a perceived value to consumers. Lost sales mean lost revenue; on the other hand, if a price is too low, the company loses revenue. Additionally, setting prices too low may not attract as many buyers as managers might think.
  • Price is the only one of the 4 P’s that produces revenue, all over elements produce costs. Price is also the easiest element of the marketing mix to adjust, and communicates the intended value of the offering.
  • Holistic marketers take into account the company, their customers, the competition, and the marketing environment in determine prices. Pricing decisions must be consistent with the firm’s marketing strategy and its target market and brand positioning's. Pricing takes many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price people pay for some good or service. Price also has many components. Prices can be altered through rebates and incentives, and payment can be made with more than cash, such as through the use of frequent flyer miles.
  • Chapter 19 Pricing Concepts Notes: Although profit maximization aims at setting prices for a large total revenue, it does not always signify unreasonably high prices. Both price and profits depend on the competitive environment and the product’s perceived value. Remember, too, that a firm cannot charge a price higher than the product’s perceived value. Satisfactory profits represent a reasonable level of profits that is consistent with the level of risk an organization faces.
  • Chapter 19 Pricing Concepts Notes: The most common profit objective is a target ROI, or the return on total assets. It represents a firm’s effectiveness in generating profits with the available assets. The higher the firm’s ROI, the better off the firm is. ROI puts a firm’s profits into perspective by showing profits relative to investment. ROI needs to be evaluated in terms of the competitive environment, risks in the industry, and economic conditions. In general, firms seek ROIs in the 10 to 30 percent range, depending on the industry. For example GE seeks a 25 percent ROI, while grocery chains obtain a return under 5 percent.
  • Instant price comparisons: mySimon.com. PriceSCAN.com, Intelligent shopping agents (“bots”). Name your own price: Priceline.com. Free products: Open Source, the free software movement.
  • Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.
  • Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be— not on the marketer’s stated price. Reference prices : consumers compare an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.” Price-quality inferences: consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. Price endings: Many sellers believe prices should end in an odd number. Customers see an item priced at $299 as being in the $200 rather than the $300 range; they tend to process prices “left-to-right” rather than by rounding. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain. Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory.
  • “ A Black T-Shirt” example illustrates the large part consumer psychology plays in determining three different prices for essentially the same item.
  • A firm must consider many factors in setting its pricing policy.31 The chart above summarizes the six steps in the process.
  • Survival is a short-run objective for firms to deal with overcapacity, intense competition, or changing consumer wants. Maximize current profits emphasis current performance . But firms may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price. Maximum market share utilizes a market-penetration pricing strategy, in which a higher sales volume will lead to lower unit costs and higher long-run profit. Maximum market skimming utilizes a market-skimming pricing strategy, in which prices start high and slowly drip over time. This strategy can be fatal if competitors price low. A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach. Other objectives: Nonprofit and public organizations may have other pricing objectives.
  • The demand curve sums the reactions of many individuals with different price sensitivities. Customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. Firms estimate demand curves using: surveys, price experiments, and statistical analysis. Marketers need to know how responsive, or elastic, demand is to a change in price. Research findings show that (1) The average price elasticity across all products, markets, and time periods studied was –2.62. (2) Price elasticity magnitudes were higher for durable goods than for other goods, and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages. (3) Inflation led to substantially higher price elasticities, especially in the short run. (4) Promotional price elasticities were higher than actual price elasticities in the short run (although the reverse was true in the long run). (5) Price elasticities were higher at the individual item or SKU level than at the overall brand level.
  • The normally inverse relationship between price and demand is captured in a demand curve shown above: The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward.
  • Chapter 19 Pricing Concepts
  • Chapter 19 Pricing Concepts Notes: The concepts of supply and demand are combined to see how competitive market prices are determined.
  • Demand sets the price ceiling while costs set the floor. Costs include production, distribution, and selling expenses, plus a fair return (profit) to cover effort and risk. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.
  • Fixed costs , also known as overhead , are costs that do not vary with production level or sales revenue. Variable costs vary directly with the level of production. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals total costs divided by production.
  • To price intelligently, management needs to know how its costs vary with different levels of production. Figure 14.2 provides an example of choosing optimal size for a production plant at TI.
  • Experience curve or learning curve refers to the decline in the average cost with accumulated production experience.
  • Costs can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve.
  • Figure 14.3 shows that average cost falls with accumulated production experience.
  • Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices, and possible price reactions into account. If the firm’s offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor’s price. If the competitor’s offer contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor.
  • Prices fall between the price floor (costs) and price ceiling (customer demand based on their assessment of unique features). The price of competitive offerings and substitute goods serve as an orientation point.
  • Standard markup is the most basic method used to calculate price, used by construction companies, lawyers, and accountants. This method does not take into account current demand, perceived value, or competition.
  • In target-return pricing, the firm determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on investment, often use this method.
  • Break-Even Chart for Determining Target- Return Price and Break-Even Volume.
  • Customer’s perceived value is determined by the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem. Companies must deliver the value promised by their value proposition, and the customer must perceive this value. Firms use the other marketing program elements, such as advertising, sales force, and the Internet, to communicate and enhance perceived value in buyers’ minds.
  • Value pricing is not just setting lower prices; it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality. As shown in the graph, the company reduces costs from C1 to C2, while maintaining the same level of quality. Prices are reduced giving buyers greater value. EDLP – Retailers that maintains an everyday low price policy charges a constant price with little or no price promotions and special sales. Consistent prices eliminates week-to-week price uncertainty. Retailers adopt an EDLP is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices. High-low pricing is where the retailer charges higher prices on an everyday basis but runs frequent promotions with prices temporarily lower than the EDLP level.
  • Going-rate pricing is popular for commodities such as steel, paper, and fertilizer as all firms normally charge the same price. Small firms follow the leader, changing prices when the market leader prices change.
  • Auction-type pricing is growing more popular in the electronic marketplaces. English auctions (ascending bids) have one seller and many buyers. E.g., eBay, Amazon.com. Dutch auctions (descending bids) feature one seller and many buyers (an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts) , or one buyer and many sellers (the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. E.g., FreeMarkets.com. Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. government often uses this method to procure supplies.
  • Figure 14.4 summarizes the three major considerations in price setting. Companies select a pricing method that includes one or more of these three considerations.
  • In selecting the final price, firms must consider factors including impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.
  • Companies rarely realize the same profit from each unit of a product that it sells due to variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. Several price-adaptation strategies company usually use are: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing.
  • Companies increase prices to raise profits, to reduce rising cost due to cost inflation, or when facing overdemand. Companies must carefully manage customer perceptions when raising prices. Companies cut prices to utilize excess plant capacity, to dominate the market through lower costs, or to deal with declining market share or economic recession. Companies must anticipate competitor price changes and prepare contingent responses. The firm facing a competitor’s price change must try to understand the competitor’s intent and the likely duration of the change. Strategy often depends on whether a firm is producing homogeneous or nonhomogeneous products. A market leader attacked by lower-priced competitors can seek to better differentiate itself, introduce its own low-cost competitor, or transform itself more completely.
  • Developing pricing strategies

    1. 1. Emran MalikEmran Malik 1
    2. 2. PricePrice What Is Price? 2 Price is that which is given up in an exchange to acquire a good or service.
    3. 3. The Importance of Price 3 Price allocates resources in a free-market economy Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the consumer... Price is the cost of something To the seller... Price is revenue To the seller... Price is revenue
    4. 4. The Importance of Price to Marketing Managers 4
    5. 5. 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 5
    6. 6. The Meaning of Price • we generally think of price in monetary terms • may be more useful to think of what it costs us to acquire something of value • the costs may be monetary or non- monetary • we need to think in terms of time and effort, as well as the monetary costs • the consumer often vows never to go back because “it’s not worth the _______” 6
    7. 7. The Customer Wants Value • price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more • the customer considers what he or she gets for the price paid; the seller must offer value • price of a product or service communicates a message to the consumer about quality • what causes them to conclude that they “paid too much” or “got a great deal”? 7
    8. 8. The Consumer’s View of Price • some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal • many are interested in other elements of the purchase, including brand, quality, etc. • there is a tendency to link quality with price • consumers are often prepared to pay more if they expect to get added value • adding value doesn’t mean dropping price 8
    9. 9. Marketing Mix PromotionPlace Revenue Producer Cost Cost Cost
    10. 10. Pricing Bargainin g $31. 50 $33. 50
    11. 11. Profit Maximization 11 Profit Maximization Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs.
    12. 12. Return on Investment 12 Return on Investment Return on Investment ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets.
    13. 13. Changing Price Environment Instant Price Comparisons I’ll pay $235.00 Name Your Own Price Get Products Free Buyers
    14. 14. $29.9 9 $19.9 9 $24.9 9 Changing Price Environment Sellers Monitor Customers Selective Pricing Negotiate Prices
    15. 15. How Companies Price Pricing Department Small Business Owner Product-line Managers (w/guidance)
    16. 16. Consumer Psychology and Pricing Reference Prices Price-Quality Inferences Price Endings $1.99
    17. 17. A Black T-Shirt Armani - $275 Gap - $14.90 H&M - $7.90
    18. 18. Price High Medium Low High Low ProductQuality Med Premium Value Premium Value Medium Value Economy Overcharging Rip-Off False Economy Price - Quality StrategiesPrice - Quality Strategies
    19. 19. Select Final Price Setting the Price 1 Price Method Competitor Analysis 2 3 4 5 6 Estimate Costs Determine Demand Pricing Objective
    20. 20. Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Variable Costs Costs that do vary directly with the level of production. Raw materials
    21. 21. Selecting the Pricing Objective Survival Maximum Current Profit Maximum Market Share Maximum Market Skimming Product-Quality Leadership Other Objectives
    22. 22. Demand and SupplyDemand and Supply DemandDemand The quantity of a product that will be sold in the market at various prices for a specified period. The quantity of a product that will be sold in the market at various prices for a specified period. SupplySupply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
    23. 23. Determining Demand Price sensitivity Estimating demand curves Price Elasticity of Demand
    24. 24. Inelastic and Elastic Demand
    25. 25. Elasticity of DemandElasticity of Demand ElasticElastic DemandDemand ElasticElastic DemandDemand  Consumers buy more or less of a product when the price changes InelasticInelastic DemandDemand InelasticInelastic DemandDemand  An increase or decrease in price will not significantly affect demand UnitaryUnitary ElasticityElasticity UnitaryUnitary ElasticityElasticity  An increase in sales exactly offsets a decrease in prices, and revenue is unchanged
    26. 26. Elasticity of Demand Elasticity (E) = Percentage change in quantity demanded of good A Percentage change in price of good A If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary.
    27. 27. Factors that Affect ElasticityFactors that Affect Elasticity FactorsFactors That AffectThat Affect ElasticityElasticity ofof DemandDemand FactorsFactors That AffectThat Affect ElasticityElasticity ofof DemandDemand Availability of SubstitutesAvailability of Substitutes Price relative to Purchasing Power Price relative to Purchasing Power Product DurabilityProduct Durability Product’s Other UsesProduct’s Other Uses
    28. 28. How Demand and Supply Establish Price 28 Price Equilibrium Price Equilibrium The price at which demand and supply are equal. The price at which demand and supply are equal. Elasticity of Demand Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. Consumers’ responsiveness or sensitivity to changes in price.
    29. 29. Equilibrium PriceEquilibrium Price Quantity demanded S S Price .50 1.00 1.50 2.00 2.50 0 20 40 60 80 100 120 D D SurplusSurplus ShortageShortage PricePrice EquilibriumEquilibrium
    30. 30. Estimating Costs Demand Price Ceiling Costs Profit Price Price Floor
    31. 31. Estimating Costs Fixed Costs (overhead) Variable Costs Total Costs Types of costs
    32. 32. Figure 14.2 Costs at Varying Levels of Production
    33. 33. Estimating Costs Accumulated Production Experience Curve (Learning Curve)
    34. 34. Estimating Costs Target Costing Market research Design engineers
    35. 35. Figure 14.3 The Experience Curve
    36. 36. Analyzing Competitors’ Offers “A” “B” Worth to Customer Costs Reaction Price
    37. 37. Selecting a Pricing Method Pricing Methods • Markup • Target-return • Perceived-Value • Value • Going-rate • Auction-type
    38. 38. Markup Pricing Variable cost per toaster $10 Fixed costs $300,000 Expected unit sales 50,000
    39. 39. Target-Return Pricing
    40. 40. Factors to Consider When Setting Prices break-even= fixed cost volume (price-variable cost) 10-20 Break-Even Analysis and Target Profit Pricing
    41. 41. Target-Return Pricing
    42. 42. Perceived-Value Pricing Customer’s perceived-value • Performance $$$ • Warranty $ • Customer support $ • Reputation $$
    43. 43. Value Pricing P 1 P 2 C 1 C 2 Level of Qualit y THOUSANDS OF LOW PRICES EVERY DAY throughout the store EDLP High Low Pricing
    44. 44. Going-Rate Pricing Follow the Leader Commodities
    45. 45. Auction Pricing English auction (ascending bids) Dutch auction (descending bids) Sealed-bid auction
    46. 46. Definitions • Market-Skimming Pricing – Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.
    47. 47. Definitions • Market-Penetration Pricing Setting a low priceSetting a low price for a new productfor a new product in order to attractin order to attract a large number ofa large number of buyers and a largebuyers and a large market share.market share.
    48. 48. • Product Line Pricing –Setting price steps between product line items. • Price points Product Mix Pricing Strategies
    49. 49. 12- 49 • Optional-Product Pricing – Pricing optional or accessory products sold with the main product – Supplemental software, digital cameras, and printers sold with a new PC are examples Product Mix Pricing Strategies
    50. 50. • Captive-Product Pricing – Pricing products that must be used with the main product • High margins are often set for supplies – Services: two-part pricing strategy • Fixed fee plus a variable usage rate Product Mix Pricing Strategies
    51. 51. • By-Product Pricing – Pricing of low-value by-products to get rid of them Product Mix Pricing Strategies
    52. 52. • Product Bundle Pricing – Pricing bundles of products sold together – Common in fast food industry Product Mix Pricing Strategies
    53. 53. Three Cs Model for Price Setting Ceiling price Customers’ assessment of unique product features Orienting point Competitors’ prices and prices of substitutes Costs Floor Price High Price (No possible demand at this price) Low Price (No possible profit at this price)
    54. 54. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Survival • Maximize current profits • Maximize market share – Penetration strategy • Market skimming – Skimming strategy • Product quality leaders • Partial cost recovery
    55. 55. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Understand factors that affect price sensitivity • Estimate demand curves • Understand price elasticity of demand – Elasticity – Inelasticty
    56. 56. Marketing Strategies • Product is more distinctive • Buyers are less aware of substitutes • Buyers cannot easily compare quality of substitutes • The expenditure is a lower part of buyer’s total income • The expenditure is small compared to the total cost • Part of the cost is borne by another party • The product is used with assets previously bought • The product is assumed to have more quality, prestige, or exclusiveness • Buyers cannot store the product Conditions Under Which Consumers are Less Price Sensitive:
    57. 57. Marketing Strategies • There are few or no substitutes • Buyers do not readily notice the higher price • Buyers are slow to change their buying habits and search for lower prices • Buyers think higher prices are justified Conditions Under Which Demand is Less Elastic:
    58. 58. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Types of costs and levels of production must be considered • Accumulated production leads to cost reduction via the experience curve • Differentiated marketing offers create different cost levels
    59. 59. Setting the Price • Key Pricing Terms: – Fixed costs: do not vary directly with changes in level of production – Variable costs: vary with production – Total costs: sum of fixed and variable costs a given level of production – Average cost: cost per unit at a given level of production
    60. 60. Selecting the Final Price Brand Qualit y Impact on others Pricing Policies Gain-and-risk-sharing
    61. 61. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Firms must analyze the competition with respect to: – Costs – Prices – Possible price reactions • Pricing decisions are also influenced by quality of offering relative to competition
    62. 62. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Price-setting begins with the three “C’s” • Select method: – Markup pricing – Target-return pricing – Perceived-value pricing – Value pricing – Going-rate pricing – Auction-type pricing – Group pricing
    63. 63. Setting the Price Pricing Procedure • Select pricing objective • Determine demand • Estimate costs • Analyze competition • Select pricing method • Select final price • Requires consideration of additional factors: – Psychological pricing – Gain-and-risk-sharing pricing – Influence of other marketing mix variables – Company pricing policies – Impact of price on other parties
    64. 64. Adapting the Price Geographic Pricing Price Discounts and Allowances Promotional Pricing Differentiated Pricing
    65. 65. Adapting the Price • Geographical Pricing – Barter – Compensation deal – Buyback arrangement – Offset
    66. 66. – Has excess capacity – Faces falling market share due to price competition – Desires to be a market share leader Price Changes Initiating Price Cuts is DesirableInitiating Price Cuts is Desirable When a Firm:When a Firm:
    67. 67. 12- 67 • Price Increases are Desirable: – If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied. Price Changes
    68. 68. Adapting the Price • Cash discounts • Quantity discounts • Trade-in allowances • Functional discounts • Seasonal discounts • Promotion allowances Price Discounts and Allowances:
    69. 69. Adapting the Price • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting Promotional Pricing Tactics:
    70. 70. Adapting the Price • Customer segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing Discriminatory Pricing Tactics:
    71. 71. Adapting the Price • Price discrimination works when: – Market segments show different intensities of demand – Consumers in lower-price segments can not resell to higher-price segments – Competitors can not undersell the firm in higher- price segments – Cost of segmenting and policing the market does not exceed extra revenue
    72. 72. Adapting the Price • Product-line pricing • Optional-feature pricing • Captive-product pricing • Two-part pricing • By-product pricing • Product-bundle pricing Product-Mix Pricing Tactics:
    73. 73. Dealing with Price Changes Competitor Moves Raising Prices Cutting Prices
    74. 74. • Methods of Increasing Price – Eliminating discounts – Adding higher-priced units to the product line • Alternatives to Increasing Price – Reducing product size – Using less expensive materials – Unbundling the product Price Changes
    75. 75. • Buyer reactions to price changes must be considered. Price Changes
    76. 76. • Competitors are more likely to react to price changes under certain conditions. –Number of firms is small –Product is uniform –Buyers are well informed Price Changes
    77. 77. • 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
    78. 78. Initiating and Responding to Price Changes • Strategic Options Include: – Maintain price and perceived quality; selectively prune customers – Raise price and perceived quality – Partially cut price and raise quality – Fully cut price, maintain perceived quality – Maintain price, reduce perceived quality – Introduce an economy model
    79. 79. Initiating and Responding to Price Changes Key Considerations • Initiating price cuts • Initiating price increases • Reactions to price changes • Responding to competitor’s price changes • Circumstances leading to price cuts: – Excess plant capacity – Declining market share – Attempt to dominate the market via lower costs • Price cutting traps: – Price/quality perceptions – Low prices don’t create market loyalty – Competition may match or beat price cuts
    80. 80. Initiating and Responding to Price Changes Key Considerations • Initiating price cuts • Initiating price increases • Reactions to price changes • Responding to competitor’s price changes • Circumstances leading to price increases: – Cost inflation – Overdemand • Methods of dealing with overdemand: – Delayed quotation pricing – Escalator clauses – Unbundling – Reduction of discounts
    81. 81. Initiating and Responding to Price Changes Key Considerations • Initiating price cuts • Initiating price increases • Reactions to price changes • Responding to competitor’s price changes • Firms must monitor both customer and competitor reactions • Competitor reactions are common when: – Few firms offer the product – The product is homogeneous – Buyers are highly informed
    82. 82. Initiating and Responding to Price Changes Key Considerations • Initiating price cuts • Initiating price increases • Reactions to price changes • Responding to competitor’s price changes • The degree of product homogeneity affects how firms respond to price cuts initiated by the competition • Market leaders can respond to aggressive price cutting by smaller competitors in several ways
    83. 83. Initiating and Responding to Price Changes • Maintain price and profit margin • Maintain price, add value • Increase price, improve quality • Launch a low-price fighter line Market Leader Responses to Competitor Initiated Price Cuts:  Reduce price

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