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- 1. C H A P T E R E L E V E N Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors menu 1 1 Pricing Strategy Marketing Management J. Paul Peter James H. Donnelly, Jr . 7 th Edition SECTION 1 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
- 2. menu 1 From the Demand Perspective: Demographic Considerations <ul><li>Number of potential buyers; their age, gender and education </li></ul><ul><li>Location of potential buyers </li></ul><ul><li>Position (type of buyer) of potential buyers </li></ul><ul><ul><li>End user vs org buyer </li></ul></ul><ul><li>Expected consumption of potential buyers </li></ul><ul><li>Economic strength of potential buyers </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors 1 SECTION 1
- 3. menu 1 1 Psychological Considerations <ul><li>Will potential buyers use price as an indicator of quality? </li></ul><ul><li>Will potential buyers be favorably attracted by odd pricing? </li></ul><ul><li>Woo (“Woo?” How about “Will”) potential buyers perceive price as too high relative to the service product gives? </li></ul><ul><li>Are potential buyers prestige oriented and willing to pay a premium to fill this need? </li></ul><ul><li>How much will potential buyers be willing to pay for the product? </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 4. Psychological Pricing <ul><li>Prestige pricing </li></ul><ul><li>Odd-even pricing </li></ul><ul><li>Bundle pricing (not really psych) </li></ul><ul><li>Reference pricing </li></ul><ul><ul><li>Ex. Walmart ads </li></ul></ul>
- 5. menu 1 1 Price Elasticity Price elasticity is a measure of consumers’ price sensitivity Even a crude estimate of price elasticity is useful input in pricing decisions What will happen to my sales if I change my price? What will happen if tuition is increased 10%? e = Percent change in quantity demanded Percent change in price Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 6. menu 1 1 From the Supply Perspective: The 4 Most Common Pricing Objectives <ul><li>Pricing to achieve a target return on investment </li></ul><ul><li>Stabilization of price and margin </li></ul><ul><ul><li>Price maintenance, DRTB pricing </li></ul></ul><ul><li>Pricing to achieve a target market share </li></ul><ul><li>Pricing to meet or prevent competition </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 7. menu 1 1 2 Common Retail Strategies 1. Everyday Low Pricing (EDLP) <ul><li>Advantages </li></ul><ul><li>Reduces price wars </li></ul><ul><li>Reduces advertising </li></ul><ul><li>Improves customer service </li></ul><ul><li>Reduces stock-outs and improves inventory management </li></ul><ul><li>Increases overall profit margins </li></ul><ul><li>Sam’s Club pricing strategy </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 8. menu 1 1 2 Common Retail Strategies 2. High/Low Pricing <ul><li>Advantages </li></ul><ul><li>Helps segment the market </li></ul><ul><li>Creates excitement </li></ul><ul><li>Moves merchandise </li></ul><ul><li>Emphasizes product quality and store service </li></ul><ul><li>Is easier to use </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 9. menu 1 1 Pricing Strategy Cost-based strategies <ul><li>Markup pricing – percentage is added to the retailer’s invoice to determine final price </li></ul><ul><li>Cost-plus pricing – costs of producing a product plus desired profit are added to achieve price. non-routine job pricing akin to markup pricing </li></ul><ul><li>Rate-of-return or target pricing – price is determined by adding desired rate of return on investment to total costs </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 10. menu 1 1 Key Product Considerations <ul><li>Perishability – must be priced to sell without costly delays; includes fruit to high fashion </li></ul><ul><ul><li>Ex. Brazilian fruit markets </li></ul></ul><ul><li>Distinctiveness – homogeneous goods have easy substitutes and make distinguishing between competitors difficult </li></ul><ul><li>Life Cycle – </li></ul><ul><ul><li>Skimming policy is when seller charges a high price on a new product. </li></ul></ul><ul><ul><li>Penetration policy is when producer charges a low price for a new product. </li></ul></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 11. menu 1 1 Competitive Considerations <ul><li>Number of competitors </li></ul><ul><li>Size of competitors </li></ul><ul><li>Location of competitors </li></ul><ul><li>Conditions of entry into the industry </li></ul><ul><li>Degree of vertical integration of competitors </li></ul><ul><li>Number of products sold by competitors </li></ul><ul><li>Cost structure of competitors </li></ul><ul><li>Historical reaction of competitors to price changes </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 12. menu 1 1 Governmental Considerations Price fixing ruled illegal – sellers cannot make any agreements with competitors regarding final price Deceptive pricing tactics outlawed – claiming high price then selling at lower price Price discrimination eliminated– can’t charge different customers different prices without justification Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 13. menu 1 1 General Pricing Model SET PRICING OBJECTIVES EVALUATE PRODUCT-PRICE RELATIONSHIPS ESTIMATE COSTS AND OTHER PRICE LIMITATIONS ANALYZE PROFIT POTENTIAL SET INITIAL PRICE STRUCTURE CHANGE PRICE AS NEEDED FIGURE 11-1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 14. menu 1 1 Pricing Strategy Improvement <ul><li>Base pricing strategies on sound research in order to understand relevant price factors. </li></ul><ul><li>Continuously monitor pricing decisions because they often help define company image. </li></ul><ul><li>Remember that consumers have trouble recognizing subtle price differences. </li></ul><ul><li>Remember that consumers evaluate prices comparatively. They often use a sense of what they think the item should cost as a benchmark. </li></ul>Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1
- 15. menu 1 1 Pricing Strategy Improvement 5. Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits. 6. Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price. 7. Understand the importance of price information and its effects on differentiating products within a product line. 8. Recognize that price elasticity vary – it is easier to lose customers to price increases then gain them from price decreases. Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors SECTION 1

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