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Pricing Considerations and Strategies

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  1. 1. Pricing Considerations and Strategies
  2. 2. What is a Price? <ul><li>Narrowly , price is the amount of money charged for a product or service. </li></ul><ul><li>Broadly , price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. </li></ul><ul><li>Dynamic Pricing : charging different prices depending on individual customers and situations. </li></ul>
  3. 3. What is Price? <ul><li>Rent </li></ul><ul><li>Fee </li></ul><ul><li>Rate </li></ul><ul><li>Commission </li></ul><ul><li>Assessment </li></ul><ul><li>Tuition </li></ul><ul><li>Fare </li></ul><ul><li>Toll </li></ul><ul><li>Premium </li></ul><ul><li>Retainer </li></ul>Price Has Many Names <ul><li>Bribe </li></ul><ul><li>Salary </li></ul><ul><li>Wage </li></ul><ul><li>Interest </li></ul><ul><li>Tax </li></ul>
  4. 4. Dynamic Pricing The Internet is ushering in a new era of fluid pricing. is an independent site that provides product comparisons and guides, and searches all merchant sites for the best prices.
  5. 5. <ul><li>Dynamic Pricing on the Web allows SELLERS to: </li></ul><ul><ul><li>Charge lower prices, reap higher margins. </li></ul></ul><ul><ul><li>Monitor customer behavior and tailor offers. </li></ul></ul><ul><ul><li>Change prices on the fly to adjust for changes in demand or costs. </li></ul></ul><ul><ul><li>Negotiate prices in online auctions and exchanges. </li></ul></ul>
  6. 6. <ul><li>Dynamic Pricing on the Web allows BUYERS to: </li></ul><ul><ul><li>Get instant price comparisons from thousands of vendors. </li></ul></ul><ul><ul><li>Find and negotiate lower prices. </li></ul></ul><ul><ul><li>Negotiate prices in online auctions and exchanges. </li></ul></ul>
  7. 7. Three Approaches to Setting Prices Figure 9.1
  8. 8. Factors Affecting Pricing Decisions Figure 9.2
  9. 9. Internal Factors Affecting Pricing Decisions <ul><li>Marketing Objectives : </li></ul><ul><ul><li>Company must decide on its strategy for the product. </li></ul></ul><ul><ul><li>General Objectives: </li></ul></ul><ul><ul><ul><li>Survival, current profit maximization, market share leadership, and product quality leadership. </li></ul></ul></ul>
  10. 10. Product Quality Leadership Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match.
  11. 11. Internal Factors Affecting Pricing Decisions <ul><li>Marketing Mix Strategy : </li></ul><ul><ul><li>Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. </li></ul></ul><ul><ul><li>Target costing: </li></ul></ul><ul><ul><ul><li>Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. </li></ul></ul></ul>
  12. 12. Internal Factors Affecting Pricing Decisions <ul><li>Costs : </li></ul><ul><ul><li>Fixed Costs : </li></ul></ul><ul><ul><ul><li>Costs that do not vary with production or sales level. </li></ul></ul></ul><ul><ul><li>Variable Costs : </li></ul></ul><ul><ul><ul><li>Costs that vary directly with the level of production. </li></ul></ul></ul>
  13. 13. Internal Factors Affecting Pricing Decisions <ul><li>Organizational Considerations : </li></ul><ul><ul><li>Must decide who within the organization should set prices. </li></ul></ul><ul><ul><li>This will vary depending on the size and type of company. </li></ul></ul>
  14. 14. External Factors Affecting Pricing Decisions <ul><li>The Market and Demand : </li></ul><ul><ul><li>Costs set the lower limit of prices. </li></ul></ul><ul><ul><li>The market and demand set the upper limit. </li></ul></ul>
  15. 15. Pricing in Different Types of Markets Pure Competition: Many buyers and sellers where each has little effect on the going market price Monopolistic Competition: Many buyers and sellers who trade over a range of prices Pure Monopoly: Market consists of a single seller Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies
  16. 16. Demand Curve A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged . Figure 9.3
  17. 17. Upward Sloping Demand Curve Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices.
  18. 18. <ul><li>Competition : </li></ul>External Factors Affecting Pricing Decisions <ul><li>Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy </li></ul><ul><li>Pricing strategy influences the nature of competition </li></ul><ul><ul><li>-Low-price low-margin strategies inhibit competition </li></ul></ul><ul><ul><li>-High-price high-margin strategies attract competition </li></ul></ul><ul><li>Benchmarking costs against the competition is recommended </li></ul>
  19. 19. External Factors Affecting Pricing Decisions Other External Factors <ul><li>Economic conditions </li></ul><ul><ul><ul><ul><li>-Affect production costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>-Affect buyer perceptions of price and value </li></ul></ul></ul></ul><ul><li>Reseller reactions to prices must be considered </li></ul><ul><li>Government may restrict or limit pricing options </li></ul><ul><li>Social considerations may be taken into account </li></ul>
  20. 20. Major Considerations in Setting Price Figure 9.5
  21. 21. Cost-Plus Pricing <ul><li>Adding a standard markup to the cost of the product. </li></ul><ul><li>Popular because: </li></ul><ul><ul><li>Sellers more certain about cost than demand </li></ul></ul><ul><ul><li>Simplifies pricing </li></ul></ul><ul><ul><li>When all sellers use, prices are similar and competition is minimized </li></ul></ul><ul><ul><li>Some feel it is more fair to both buyers and sellers </li></ul></ul>
  22. 22. Break-Even Chart for Determining Target Price Figure 9.6
  23. 23. Value-Based Pricing <ul><li>Uses buyers’ perceptions of value , not the seller’s cost, as the key to pricing. </li></ul><ul><li>Measuring perceived value can be difficult. </li></ul><ul><li>Consumer attitudes toward price and quality have shifted during the last decade. </li></ul><ul><ul><li>Introduction of less expensive versions of established brands has become common </li></ul></ul>
  24. 24. Value pricing at the retail level Everyday low pricing (EDLP) Wal-Mart practices “everyday low prices” in order to build store traffic and increase sales volume
  25. 25. Cost-Based versus Value-Based Pricing Figure 9.7
  26. 26. Perceived Value A less expensive piano might play well, but would it take you places your have never been before?
  27. 27. Competition-Based Pricing <ul><li>Going-Rate Pricing : </li></ul><ul><ul><li>Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. </li></ul></ul><ul><li>Sealed-Bid Pricing : </li></ul><ul><ul><li>Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand. </li></ul></ul>
  28. 28. New-Product Pricing Strategies <ul><li>Market-Skimming </li></ul><ul><li>Set a high price for a new product to “skim” revenues layer by layer from the market. </li></ul><ul><li>Company makes fewer, but more profitable sales. </li></ul><ul><li>When to use : </li></ul><ul><ul><li>Product’s quality and image must support its higher price. </li></ul></ul><ul><ul><li>Costs of smaller volume cannot be so high they cancel the advantage of charging more. </li></ul></ul><ul><ul><li>Competitors should not be able to enter market easily and undercut the high price. </li></ul></ul>
  29. 29. New-Product Pricing Strategies <ul><li>Market Penetration </li></ul><ul><li>Set a low initial price in order to “penetrate” the market quickly and deeply. </li></ul><ul><li>Can attract a large number of buyers quickly and win a large market share. </li></ul><ul><li>When to use : </li></ul><ul><ul><li>Market must be highly price sensitive so a low price produces more market growth. </li></ul></ul><ul><ul><li>Production and distribution costs must fall as sales volume increases. </li></ul></ul><ul><ul><li>Must keep out competition and maintain low price or effects are only temporary. </li></ul></ul>
  30. 30. Figure 9.8 Skimming vs. Penetration Pricing Strategies
  31. 31. Figure 9.9 Comparison of Slow Skimming and Rapid Penetration Pricing Strategies
  32. 32. Product Line Pricing <ul><li>Involves setting price steps between various products in a product line based on: </li></ul><ul><ul><li>Cost differences between products </li></ul></ul><ul><ul><li>Customer evaluations of different features </li></ul></ul><ul><ul><li>Competitors’ prices </li></ul></ul>
  33. 33. Optional- and Captive-Product Pricing <ul><li>Optional-Product </li></ul><ul><ul><li>Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). </li></ul></ul><ul><li>Captive-Product </li></ul><ul><ul><li>Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). </li></ul></ul>
  34. 34. Pricing Strategies By-Product Pricing: Setting a price for by-products in order to make the main product’s price more competitive (e.g., sawdust and Zoo Doo) Product Bundle Pricing: Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access).
  35. 35. Discounts and Allowances Cash Quantity Functional Seasonal Trade-In Promotional Discounts Allowances
  36. 36. Segmented Pricing <ul><li>Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. </li></ul><ul><li>Types: </li></ul><ul><ul><li>Customer-segment </li></ul></ul><ul><ul><li>Product-form </li></ul></ul><ul><ul><li>Location pricing </li></ul></ul><ul><ul><li>Time pricing </li></ul></ul>
  37. 37. Psychological Pricing <ul><li>Considers the psychology of prices and not simply the economics. </li></ul><ul><li>Consumers usually perceive higher-priced products as having higher quality. </li></ul><ul><li>Consumers use price less when they can judge quality of a product. </li></ul>
  38. 38. Promotional Pricing Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties Free Maintenance Discounts Loss Leaders Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Approaches:
  39. 39. Promotional Pricing Promotional pricing is used to draw traffic into stores and increase the volume of purchases
  40. 40. Geographical Pricing <ul><li>FOB-origin pricing </li></ul><ul><li>Uniform-delivered pricing </li></ul><ul><li>Zone pricing </li></ul><ul><li>Basing-point pricing </li></ul><ul><li>Freight-absorption pricing </li></ul>
  41. 41. International Pricing <ul><li>Price depends on many factors, including: </li></ul><ul><ul><li>Economic conditions </li></ul></ul><ul><ul><li>Competitive situations </li></ul></ul><ul><ul><li>Laws and regulations </li></ul></ul><ul><ul><li>Development of the wholesaling and retailing system </li></ul></ul><ul><ul><li>Costs </li></ul></ul>
  42. 42. International Pricing Companies must decide what prices to charge in different countries.
  43. 43. Initiating Price Changes Excess Capacity Falling Market Share Dominate Market Through Lower Costs Cost Inflation Over-demand: Cannot Supply All Customers’ Needs Price Cuts Price Increases
  44. 44. Buyers’ Reactions to Price Changes What would you think if the price of Joy was suddenly cut in half?