MARKETING Pricing Strategies

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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
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  • FOCUS: pricing strategies SHOW TITLE ONLY! ELICIT the appropriate PRICING STRATEGIES at each stage of the Product Life Cycle! Ask Ss for an example of one of their products or services. Q: At what stage is it? How are you pricing it? (How much does it cost?) Have you changed the price? Are you planning to change the price? When and why? Q: As a produce r, what pricing strategy would you use when you introduce a product ? high volume/low price or high price/lower volume  must recover R&D investment; penetration or skimming Q: What would you do regarding the price as the product enters the growth and maturity stage ? Lower price  Competitive pricing Q: At what stages do you think it is really important to promote the product to ensure its survival? ( introduction & maturity )  Please remember this for your own product. During which of the 6 weeks would that be? (Weeks 4,5,6) Q: What would you do in terms of amount of promotion to introduce a product? Special sales promotions; displays; flyers to raise awareness Emphasize uniqueness of product! Q: What would you do in the maturity stage – increase or decrease advertising? Advertising = heaviest; highest cost outlay for the product
  • Let’s look at how we can figure out the proper price for our products. We’ve already discussed the first triangle— Meeting Business Objectives—by maximizing profits or increasing market share . In order to determine the right price for the products/services you are selling, there are 3 tools or strategies you can use : Cost-based pricing Supply and Demand Pricing Breakeven Pricing Let’s start with Economic Pricing—by Supply and Demand.
  • Q: How many memory sticks/flash drives are you willing to buy at $200? (20) At $300? (15) The D curve indicates the QD by customers at a particular price level. The D curve slopes downward, from left to right  as the P goes down, the Q D goes up. Q: As a producer, how many flash drives are you willing to produce at $200? At $300? (25) The Supply curve indicates the Q that producers are willing to produce and offer to customers at a given price level. Producers are willing to produce more (QS) if they can get a higher P. When QD = QS, we have an equilibrium price and a sale can be made. Both parts of the exchange are satisfied with the price.
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  • In general, for EXISTING PRODUCTS/SERVICES (mature) producers have 3 options for pricing : below, above, or at market prices as established by S + D forces. 1. Pricing below market prices  price wars EX: airlines , store brand vs. manufacturer’s brand Extreme example: DUMPING = illegal (U.S. has been accused of dumping tomatoes in foreign countries to get rid of oversupply) 2. Pricing above prevailing market prices for similar products EX: Sony  higher price = higher quality? 3. Pricing at or near market prices, especially for products with elastic D  customers switch brands easily (food items; toothbrushes)
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  • Q for producer : If we set the P for bottle openers at $ 3, how many bottle openers do we have to produce to break even, i.e. cover our fixed costs (FC) ? If we produce one more item , we go beyond covering our costs and will make a profit  hence the name for the denominator – Contribution Margin (= contributing to our profit) .
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  • POINT OUT that Markup can be calculated as a % of the sales price and as a % of product cost: % MARK-UP CALCULATION Dollar Markup / Selling Price = % Markup over the Selling Price (or Markup in relation to the selling price) Dollar Markup / Cost = % Markup of the product cost (or Markup in relation to product cost) Let’s look at an example! ( NEXT SLIDE !)
  • Q: How much is gas today? Compare that to the average in 2005 and 2004!!! Q: How do gas stations arrive at the price they charge customers for gasoline? What are the different components? (Let’s start at the bottom.) Crude oil (per barrel) – 53% of the retail price Federal & State taxes – 19% of the retail price Refining – another 19% of the retail price Distribution & Marketing – 9% of the retail price So we have 4 steps in between—before the gas goes into the customer’s car.  We call those steps in the distribution process INTERMEDIARIES . Where does the money go? To the intermediary – Why? Needs to cover his/her costs and make a profit. Q: Which of the 3 kinks of pricing strategies is being used here ? (mark-up, but also market-based to assess the bottom component, crude oil).
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  • $250 Q: What pricing strategy would you suggest for this product?
  • Look at the Pricing Strategies Matrix  Show the quadrants. Premium and Economy are added to indicate quality. With your neighbors, come up with the appropriate pricing strategy for each of these situations. Be prepared to explain your choice: Wal-Mart launches a new range of own-label soups.  ECONOMY > PENETRATION Cunard launches two new cruise ships.  SKIMMING or PREMIUM A cable TV provider moves into a new area and needs to achieve a market share.  PENETRATION Holiday Inns try to fill hotels during winter weekends.  PENETRATION Burger King introduces a new range of value meals.  PENETRATION Nokia launches a new videophone.  SKIMMING
  • Producers and retailers resort to particular tactics when they set prices for goods/services. These include: 1. Price Lining - Setting a limited number of prices for certain categories of products EX: sweaters, pant selection at Filene’s 2. Psychological Pricing - Pricing to take advantage of the fact that consumers do not always respond rationally to stated prices EX: $19.99 3. Discounting - Price reductions offered as an incentive to purchase 4. High tech Pricing : giving it away! Free Web tools—messaging programs, voiceboards, free downloads of applications, free electronic greetings REASON? Get customer to come back to visit the site; get the other products;
  • MARKETING Pricing Strategies

    1. 1. MARKETING Pricing Strategies
    2. 2. Overview <ul><li>Definition of price </li></ul><ul><li>Factors that influence the pricing decision </li></ul><ul><li>Pricing objectives </li></ul><ul><li>Pricing strategies over the product life cycle </li></ul><ul><li>Three major pricing strategies and their advantages and disadvantages </li></ul><ul><li>Exercises applying different pricing strategies </li></ul><ul><li>Pricing tactics </li></ul>
    3. 3. Price -- Definition <ul><li>the amount of money charged for a product or service </li></ul><ul><li>the sum of all the values that consumers exchange for the benefits of having or using the product or service </li></ul><ul><li>Examples of “price?” </li></ul><ul><ul><li>Tuition, rent, fare, retainer, toll, salary, dues </li></ul></ul>
    4. 4. Factors in Setting Price
    5. 5. Pricing Objectives
    6. 6. Marketing Strategy Over the Product Life Cycle INTRODUCTION GROWTH MATURITY DECLINE Marketing strategy Market development Increase market Defend market Maintain efficiency in emphasis share share exploiting product Pricing High price, unique Lower price Price at or below Set price to remain strategy product / cover over time competition profitable or reduce production costs to liquidate Promotion Mount sales Appeal to Emphasize Reinforce loyal Strategy promotion for mass market brand differences, customers; reduce product awareness benefits & loyalty promotion costs Place strategy Distribute through Build intensive Enlarge Be selective in selective outlets network of distribution distribution, trim outlets network unprofitable outlets
    7. 7. Determining Prices Meet Business Objectives Profit-Maximization Market Share <ul><li>Other Pricing Objectives </li></ul><ul><li>Loss Containment </li></ul><ul><li>Survival </li></ul><ul><li>Customer Benefit </li></ul><ul><li>Social & Ethical Considerations </li></ul>Price-Setting Tools Cost-Oriented - Variable/Fixed Economic Supply/Demand Break-even Analysis
    8. 8. Equilibrium Price: Supply = Demand Number of flash drives/memory sticks demanded Price per flash drive/memory stick
    9. 9. Elasticity of Demand measure of the sensitivity of demand to changes in prices not price sensitive - no real change in demand price sensitive - changes in demand Inelastic Demand Q 2 Q 1 Quantity P 1 P 2 Electricity Price Elastic Demand Q 2 Quantity P 1 P 2 Recreational Vehicles Q 1 Price
    10. 10. Market-based Pricing <ul><li>Pricing Existing Products/Services - 3 options </li></ul><ul><ul><li>Pricing below market prices  price wars </li></ul></ul><ul><ul><ul><li>EX: airlines, store brand vs. manufacturer’s brand </li></ul></ul></ul><ul><ul><ul><li>Dumping </li></ul></ul></ul><ul><ul><li>Pricing above prevailing market prices for similar products </li></ul></ul><ul><ul><ul><li>EX: Sony  higher price = higher quality? </li></ul></ul></ul><ul><ul><li>Pricing at or near market prices </li></ul></ul>
    11. 11. Breakeven Analysis
    12. 12. Breakeven Point Formula <ul><li>Breakeven Quantity = </li></ul><ul><li>Fixed Costs </li></ul><ul><li>Price/unit –Variable cost/unit </li></ul>(Contribution Margin)
    13. 13. Cost-based Pricing <ul><li>Estimating the per-unit cost of production </li></ul><ul><ul><li>Capital (K): land, building, equipment = fixed cost (FC) </li></ul></ul><ul><ul><li>Labor (L): workers’ wages = variable cost (VC) </li></ul></ul><ul><ul><ul><li>EX: $0.50 + $0.50 = $1.00 ( production cost ) </li></ul></ul></ul><ul><li>Adding a mark-up </li></ul><ul><ul><li>Desired profit per item : $0.50 </li></ul></ul><ul><li>Sales price = cost of production + mark-up </li></ul><ul><ul><li>$1.00 + $0.50 = $1.50 </li></ul></ul><ul><ul><li>50% markup </li></ul></ul>
    14. 14. Mark-up Calculation
    15. 15. How costs affect gasoline prices
    16. 16. Price Strategies for New Products <ul><li>Penetration </li></ul><ul><ul><li>Low price  establish product in the market </li></ul></ul><ul><ul><li>Elastic demand; Predatory pricing </li></ul></ul><ul><li>Skimming </li></ul><ul><ul><li>High price ; unique product; appeal to early adopters; Prestige pricing </li></ul></ul><ul><ul><li>Recovering high R&D costs </li></ul></ul><ul><li>Combination </li></ul><ul><ul><li>Move inventory; stimulate D; extend product life </li></ul></ul>PRICE PRICE PRICE Skimming > Penetration Penetration Price Strategy Skimming Price Strategy
    17. 17. Pricing of iPhones
    18. 18. Exercise Select the appropriate pricing strategy. Explain your choice. <ul><li>Wal-Mart launches a new range of own-label soups. </li></ul><ul><li>Cunard launches two new cruise ships. </li></ul><ul><li>A cable TV provider moves into a new area and needs to achieve a market share. </li></ul><ul><li>Holiday Inns try to fill hotels during winter weekends. </li></ul><ul><li>Burger King introduces a new range of value meals. </li></ul><ul><li>Nokia launches a new videophone. </li></ul>
    19. 19. Pricing Tactics <ul><li>Price Lining </li></ul><ul><ul><li>Setting a limited number of prices for certain categories of products </li></ul></ul><ul><li>Psychological Pricing </li></ul><ul><ul><li>Pricing to take advantage of the fact that consumers do not always respond rationally to stated prices </li></ul></ul><ul><li>Discounting </li></ul><ul><ul><li>Price reductions offered as an incentive </li></ul></ul><ul><ul><ul><li>to purchase </li></ul></ul></ul><ul><li>High tech Pricing : giving it away! </li></ul>

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