Pricing strategy and management

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Pricing strategy and management

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Pricing strategy and management

  1. 1. Chapter 8 Pricing Strategy and Management
  2. 2. Conceptual Orientation to Pricing <ul><li>Demand factors (Value to buyers) </li></ul><ul><li> (price ceiling) </li></ul><ul><li>Competitive factors </li></ul><ul><li>Final pricing Initial </li></ul><ul><li>discretion pricing </li></ul><ul><li>Corporate objectives discretion </li></ul><ul><li>and regulatory </li></ul><ul><li>constraints </li></ul><ul><li>Direct variable costs </li></ul><ul><li> (price floor) </li></ul>
  3. 3. Price as an Indicator of Value <ul><li>for a given price, value decreases as perceived benefits decrease and vice versa </li></ul><ul><li>price also affects consumer perceptions of prestige; as price increases, demand may also increase </li></ul>Value = Perceived benefits Price
  4. 4. Price Elasticity of Demand <ul><li>if the % change in quantity demanded is greater than the % change in price, demand is said to be elastic – E is greater than 1. </li></ul><ul><li>if the % change in quantity demanded is less than the % change in price, demand is said to be inelastic – E is less than 1. </li></ul>E = Percentage change in quantity demanded Percentage change in price where E is the coefficient of elasticity
  5. 5. Factors that Influence Price Elasticity of Demand <ul><li>the more substitutes a product or service has, the greater its price elasticity </li></ul><ul><li>the more uses a product or service has, the greater its price elasticity </li></ul><ul><li>the higher the ratio of the price of the product or service to the income of the buyer, the greater the price elasticity </li></ul>
  6. 6. Product-Line Pricing <ul><li>Product-Line Pricing involves determining: </li></ul><ul><ul><li>the lowest-priced product and price </li></ul></ul><ul><ul><li>the highest-priced product and price, and </li></ul></ul><ul><ul><li>price differentials for all other products in the line </li></ul></ul>
  7. 7. Pricing Strategies <ul><li>full-cost price strategies – consider both variable and fixed costs </li></ul><ul><li>variable-cost price strategies – consider only variable costs, not total costs </li></ul>
  8. 8. Full-Cost Pricing <ul><li>markup pricing : fixed amount added to the total cost of the product </li></ul><ul><li>break-even pricing : per-unit fixed costs + per-unit variable costs </li></ul><ul><li>rate-of-return pricing : set to obtain a desired ROI </li></ul>
  9. 9. Variable-Cost Pricing <ul><li>Variable-cost pricing is demand-oriented pricing . </li></ul><ul><li>Two purposes: </li></ul><ul><ul><li>stimulate demand </li></ul></ul><ul><ul><li>shift demand </li></ul></ul>Assumption is that variable-cost pricing will stimulate demand and increase revenues.
  10. 10. New-Offering Pricing Strategies <ul><li>skimming pricing strategy </li></ul><ul><li>penetration pricing strategy </li></ul><ul><li>intermediate pricing strategy </li></ul>
  11. 11. Use Skimming Pricing Strategy when: <ul><li>demand likely to be price inelastic </li></ul><ul><li>different price-market segments, appealing to buyers with a higher acceptable price </li></ul><ul><li>offering is unique enough to be protected from competition </li></ul><ul><li>production or marketing costs are unknown </li></ul><ul><li>capacity constraint exists </li></ul><ul><li>organization wants to generate funds quickly </li></ul><ul><li>realistic perceived value of the product exists </li></ul>
  12. 12. Use Penetration Pricing Strategy when: <ul><li>demand likely to be price elastic </li></ul><ul><li>offering is not unique enough to be protected from competition </li></ul><ul><li>competitors expected to enter market quickly </li></ul><ul><li>no distinct price-market segments </li></ul><ul><li>possibility of cost savings with large volume of sales </li></ul><ul><li>organization’s major objective is to obtain a large market share </li></ul>
  13. 13. Intermediate Pricing Strategy <ul><li>falls between skimming and penetration </li></ul><ul><li>most prevalent in practice </li></ul><ul><li>more likely to be used in majority of pricing decisions </li></ul>
  14. 14. Pricing and Competitive Interaction <ul><li>the action and reaction of rival companies in setting and changing prices for their offerings </li></ul><ul><li>managers should focus more on long-term – “look forward and reason backwards” </li></ul><ul><li>Competitors’ goals and objectives ? </li></ul><ul><li>Assumptions competitor made about itself ? </li></ul><ul><li>Strengths and weaknesses of competitor ? </li></ul>
  15. 15. Industry Characteristics and Risk of Price Wars Characteristics High Risk Low Risk Product/Service Type undifferentiated differentiated Market Growth Rate stable/decreasing increasing Price Visibility to Competitors high low Consumer Price Sensitivity high low Overall Industry Cost Trend declining stable Industry Capacity Utilization low high Number of Competitors many few

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