Pricing Strategies

1. MMAARRKKEETTIINNGG
PPrriicciinngg SSttrraatteeggiieess
Prof. Bauer-Ramazani

2. OOvveerrvviieeww
 Definition of price
 Prices in BU113 companies
 Factors that influence the pricing decision
 Pricing objectives
 Three major pricing strategies and their
advantages and disadvantages
 Pricing strategies over the product life cycle
 Pricing tactics

3. Price -- Definition
• the amount of money charged for a product or
service
• the sum of all the values that consumers
exchange for the benefits of having or using
the product or service
• Examples of “price?”
– Tuition, rent, fare, retainer, toll, salary/wage, dues

4. PPrriicceess ---- BBUU111133 CCoommppaanniieess
• What objectives did the managers have in
mind when they set their prices?

5. FFaaccttoorrss iinn SSeettttiinngg PPrriiccee

6. PPrriicciinngg OObbjjeeccttiivveess
Volume
Sales Maximization
Market Share
Profit-Maximization
Meet
Business
Objectives
Profitability
Target Return Goals
Other Pricing Objectives
 Status Quo
 Image
 Social & Ethical Considerations

7. PPrriiccee SSttrraatteeggiieess ffoorr NNeeww PPrroodduuccttss
PRICE PRICE PRICE
Penetration Pricing
Skimming Pricing
Skimming  Penetration
Low price  establish
product in the market
High price/Prestige
pricing
 appeal to early
adopters; recover high
R&D costs
Lower price over time
 Move inventory, stimulate
D, extend product life

8. 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
strategy product / cover over time competition remain profitable
production costs or
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
reduce to
Low price/gain liquidate
market share

9. DDeetteerrmmiinniinngg PPrriicceess
Break-even Analysis
Price-
Setting
Tools
Cost-Oriented -
Variable/Fixed
Economic—Supply/Demand

10. EEllaassttiicciittyy ooff DDeemmaanndd
measure of the sensitivity of demand to changes in prices
Inelastic Demand
Electricity
Q2 Q1 Quantity
Price
PP22
PP11
Elastic Demand
Fast food
Q1
QQ22 Quantity
Price
PP22
PP11
not price sensitive - no real change in demand price sensitive - changes in demand

11. MMaarrkkeett--bbaasseedd PPrriicciinngg
Pricing Existing Products/Services - 3 options
 Pricing below market prices  price wars
 EX: airlines, store brand vs. manufacturer’s brand
 Dumping
 Pricing above prevailing market prices for
similar products
 EX: Sony  higher price = higher quality?
 Pricing at or near market prices

12. PPrriicciinngg TTaaccttiiccss
Price Lining
• Price points: Setting a limited number of prices for
certain categories of products
Psychological Pricing
• Odd-even
Discounting
• Quantity discounts
• Cash discounts (2/10 net 30)
 Web programs: free!

13. ba Cost-basseedd PPrriicciinngg ((CCoosstt--PPlluuss))
1. Cover ccoossttss
 Material
 Labor
 Capital resources
 Marketing
22.. MMaarrkk--uupp
variable costs
fixed costs
 Targeted return for shareholders
 CCoossttss + mmaarrkk--uupp == SSaalleess pprriiccee
$$11..0000 ++ $$00..5500 == $$11..5500 ((5500%% mmaarrkkuupp))

14. Mark-uupp CCaallccuullaattiioonn –– EExxeerrcciissee
1. Price per product
2. Less the cost per product (what you paid
the supplier, e.g. total cost paid / # of items
purchased)
% MARK - UP = Dollar Mark - Up
Sales Price

15. BBrreeaakkeevveenn AAnnaallyyssiiss
TC = TR

16. P Breakeven Pooiinntt FFoorrmmuullaa
BREAKEVEN QUANTITY = Fixed Costs
Price/unit – Variable cost/unit
(Contribution Margin)

17. Review
• 5 Factors that influence prices
• Pricing objectives
• Pricing strategies at different stages of the
Product Life Cycle (advantages/disadvantages)
• Methods of Determining Prices
– Elasticity of demand
– Mark-up
– Breakeven Analysis