Pricing

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Pricing

  1. 1. Pricing Strategy <ul><li>… critical marketing mix variable </li></ul><ul><ul><li>actually produces revenue </li></ul></ul><ul><ul><li>shortest term marketing mix variable </li></ul></ul><ul><ul><li>relates directly to microeconomics </li></ul></ul><ul><ul><ul><li>supply versus demand analysis </li></ul></ul></ul><ul><ul><ul><li>breakeven analysis </li></ul></ul></ul><ul><ul><ul><li>price elasticity </li></ul></ul></ul>
  2. 2. Pricing Strategy <ul><li>How to improve profit performance? </li></ul>Increase price Cut Variable Cost rev var. cost fixed cost $ Q $ Q
  3. 3. Pricing Strategy <ul><ul><ul><ul><ul><li>… profit performance. </li></ul></ul></ul></ul></ul>Cut Fixed Cost Increase Volume $ Q $ Q
  4. 4. Pricing Strategy <ul><li>Supply versus Demand </li></ul>D S P Q D Q inelastic Q elastic D
  5. 5. Pricing Strategy <ul><li>Shift in Supply Curve </li></ul><ul><ul><li>change in cost </li></ul></ul><ul><ul><li>change in expectations of cost </li></ul></ul><ul><ul><li>change in price of other goods sold </li></ul></ul>
  6. 6. Price Strategy <ul><li>Shift in Demand Curve </li></ul><ul><ul><li>change in income </li></ul></ul><ul><ul><li>change in price of related goods </li></ul></ul><ul><ul><li>change in price expectations </li></ul></ul><ul><ul><li>change in taste </li></ul></ul><ul><li>Increase in demand versus increase in quantity demanded </li></ul>
  7. 7. Pricing Strategy <ul><li>Set Pricing Objective </li></ul><ul><li>Estimate Demand </li></ul><ul><li>Estimate Costs </li></ul><ul><li>Analyze Competitors’ Prices </li></ul><ul><li>Select Pricing Policy/Method </li></ul><ul><li>Set Final Price </li></ul>
  8. 8. Pricing Strategy <ul><li>Pricing Objectives </li></ul><ul><ul><li>survival </li></ul></ul><ul><ul><ul><li>cover fixed cost and some variable cost </li></ul></ul></ul><ul><ul><ul><li>very short-run….(avoid extinction) </li></ul></ul></ul><ul><ul><li>profit maximization </li></ul></ul><ul><ul><ul><li>requires accurate knowledge of demand, cost functions </li></ul></ul></ul>
  9. 9. Pricing Strategy <ul><li>Pricing Objectives (cont.) </li></ul><ul><ul><li>revenue maximization </li></ul></ul><ul><ul><ul><li>costs hard to determine </li></ul></ul></ul><ul><ul><ul><li>assume increase in revenue leads to decrease in unit costs (…old BCG model) </li></ul></ul></ul><ul><ul><ul><ul><li>… both production and distribution costs fall </li></ul></ul></ul></ul><ul><ul><ul><li>works if market is price sensitive </li></ul></ul></ul><ul><ul><ul><li>low price may discourage competition </li></ul></ul></ul><ul><ul><ul><li> … market penetration strategy </li></ul></ul></ul>
  10. 10. Pricing Strategy <ul><li>Pricing Objectives (cont.) </li></ul><ul><ul><li>market skimming </li></ul></ul><ul><ul><ul><li>highest price that market will bear </li></ul></ul></ul><ul><ul><ul><li>benefits are barely worthwhile for some customers to buy </li></ul></ul></ul><ul><ul><ul><li>… then work down the demand curve </li></ul></ul></ul><ul><ul><ul><li>works if no cost benefit of increasing volume </li></ul></ul></ul><ul><ul><ul><li>image is important </li></ul></ul></ul><ul><ul><ul><li>may or may not discourage competition </li></ul></ul></ul>
  11. 11. Pricing Strategy <ul><li>Estimate Demand (…curve) </li></ul><ul><ul><li>unique value </li></ul></ul><ul><ul><li>awareness of substitutes </li></ul></ul><ul><ul><li>difficult to compare alternatives </li></ul></ul><ul><ul><li>price relative to income </li></ul></ul><ul><ul><li>inventory effect </li></ul></ul><ul><ul><ul><li>Can customer hold inventory? </li></ul></ul></ul>
  12. 12. Pricing Strategy <ul><li>Estimate Costs (supply curve) </li></ul><ul><ul><li>cost structure at different levels of production </li></ul></ul><ul><ul><ul><li>… old long run average cost curves </li></ul></ul></ul><ul><ul><li>experience curves from BCG model </li></ul></ul><ul><ul><ul><li>… profit is a function of market share. </li></ul></ul></ul><ul><ul><li>penetration versus skimming </li></ul></ul><ul><ul><ul><li>… How is supply curve affected? </li></ul></ul></ul>
  13. 13. Pricing Strategy <ul><li>Analyze Competitors’ Prices </li></ul><ul><ul><li>What is the structure of the market? </li></ul></ul><ul><ul><ul><li>oligopoly versus pure competition </li></ul></ul></ul><ul><li>Select Pricing Policy/Method </li></ul><ul><ul><li>single or multiple prices </li></ul></ul><ul><ul><li>administered pricing </li></ul></ul><ul><ul><ul><li>ceiling and floor prices versus the level of competition </li></ul></ul></ul>
  14. 14. Pricing Strategy <ul><li>Cost Based Pricing </li></ul><ul><ul><li>cost plus, markup pricing </li></ul></ul><ul><ul><ul><li>easy, costs known, minimizes price competition </li></ul></ul></ul><ul><ul><ul><li>ignores demand elasticity, not profit maximizing </li></ul></ul></ul><ul><ul><li>target return of investment </li></ul></ul><ul><ul><ul><li>use breakeven analysis to find a price to yield a target ROI </li></ul></ul></ul><ul><ul><ul><li>… use sales volume to derive price…? </li></ul></ul></ul>
  15. 15. Pricing Strategy <ul><li>Demand Based Pricing </li></ul><ul><ul><li>perceived value </li></ul></ul><ul><ul><ul><li>requires detailed knowledge of buyer behavior and demand elasticity </li></ul></ul></ul><ul><ul><ul><li>only true profit maximizing strategy </li></ul></ul></ul><ul><ul><ul><li>ignores costs and competitors </li></ul></ul></ul>
  16. 16. Pricing Strategy <ul><li>Demand Based Pricing (cont.) </li></ul><ul><ul><li>demand differential </li></ul></ul><ul><ul><li>price discrimination </li></ul></ul><ul><ul><li>yield maximization pricing </li></ul></ul><ul><ul><ul><li>sell at multiple prices to multiple segments </li></ul></ul></ul><ul><ul><ul><li>not based on marginal costs of dealing with each </li></ul></ul></ul><ul><ul><ul><li>daily, weekly, or seasonal pricing </li></ul></ul></ul><ul><ul><ul><li>geographic, physical, or electronic barriers </li></ul></ul></ul>
  17. 17. Pricing Strategy <ul><li>Competition Based Pricing </li></ul><ul><ul><li>going rate pricing </li></ul></ul><ul><ul><ul><li>used when costs difficult to measure </li></ul></ul></ul><ul><ul><ul><li>competitors lack differential advantage </li></ul></ul></ul><ul><ul><li>sealed bid </li></ul></ul><ul><ul><ul><li>forces competitors to lowest price </li></ul></ul></ul>
  18. 18. Pricing Strategies <ul><li>Select Final Price </li></ul><ul><ul><li>psychological pricing, prestige pricing </li></ul></ul><ul><ul><ul><li>know demand elasticity </li></ul></ul></ul><ul><ul><ul><li>start high, work toward costs </li></ul></ul></ul><ul><ul><li>discounts </li></ul></ul><ul><ul><ul><li>cash, trade, quantity, or seasonal </li></ul></ul></ul><ul><ul><li>promotional pricing </li></ul></ul><ul><ul><ul><li>loss leaders </li></ul></ul></ul>
  19. 19. Pricing Strategy <ul><li>Select Final Price (cont.) </li></ul><ul><ul><li>price lining </li></ul></ul><ul><ul><li>odd pricing </li></ul></ul><ul><ul><ul><li>perception </li></ul></ul></ul>
  20. 20. Pricing Strategy <ul><li>Price cuts </li></ul><ul><ul><li>excess capacity leads to margin squeezes (aka price wars) </li></ul></ul><ul><ul><li>build market share not brand loyalty </li></ul></ul><ul><ul><li>low cost producer will always win </li></ul></ul>
  21. 21. Pricing Strategy <ul><li>Price Increases </li></ul><ul><ul><ul><ul><ul><li>Before After </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Price 10.00 10.10 +1% </li></ul></ul></ul><ul><ul><ul><li>Quantity x 100 x 100 </li></ul></ul></ul><ul><ul><ul><li>Revenue 1,000 1,010 </li></ul></ul></ul><ul><ul><ul><li>Total Cost 970 970 </li></ul></ul></ul><ul><ul><ul><li>Profit 30 40 +33% </li></ul></ul></ul>
  22. 22. Pricing Strategy <ul><li>Intense pressure to “inflate” prices </li></ul><ul><ul><li>reduce discounts </li></ul></ul><ul><ul><li>decrease amount of product </li></ul></ul><ul><ul><li>substitute cheaper materials </li></ul></ul><ul><ul><li>reduce product features </li></ul></ul>

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