The document discusses pricing strategy and considers several factors:
1) Pricing is a critical marketing variable that directly relates to supply and demand analysis and profitability.
2) To improve profits, firms can increase prices or volume to boost revenue, or cut variable or fixed costs.
3) Supply and demand curves shift based on factors like costs, income, and expectations.
4) Pricing objectives include survival, profit maximization, revenue maximization, and market skimming depending on a firm's goals and market conditions.
This document reviews best practice in pricing processes to provide a reference against which current practices and proposals can be tested. Our objectives have been: to research the attributes of world-class pricing through publications and academic sources; to investigate how these attributes are applied in practice to products and services; to assess pricing processes in successful businesses.
In recent years a new attitude toward pricing has emerged. Deregulation and international free trade agreements have increased competition. Price promotion has eroded the power of brand loyalty. Pricing has assumed greater importance to most businesses.
As markets increasingly assume a global dimension, customers can more easily compare prices between one region or country and another, using the internet or a fax machine. They can often locate the same product, or an
acceptable substitute, from another source. Customers are more demanding and fickle, and their expectations increasingly difficult to fulfil.
Price inflation in western economies is now at its lowest for decades. Price increases are no longer accepted without protest from customers, if at all.
The Chairman of General Electric has predicted the onset of the ‘Value Decade’. Global price competition will strengthen because of: reduced product differentiation; global over-capacity for production; significantly diminished trade barriers; efficient information and distribution systems; providing customers with easy access to the prices of suppliers; a growing lack of customers’ loyalty to individual suppliers. Choice will be increasingly driven by price.
This is a challenging scenario that reinforces the need for an integrated strategy and concerted managerial action on pricing.
Pricing processes have lagged behind developments in the market place. They are often characterised by internal conflict between accountants wishing to maximise profit per unit and marketing specialists who seek to maximise
throughput. They are also affected by the potential for strained relations with good customers.
Some companies have downsized their operations to a level where diminishing returns cause them to question the benefits of continuing to focus upon reducing costs. As they switch their attention from cost cutting to adding
value, pricing naturally assumes increased weight in the marketing mix.
We have found many companies reluctant to discuss their own processes.
Some may wish to avoid betraying a lack of sophistication.
Export marketing has two different types of costs:production costs and selling and delivery costs. Factors affecting pricing are international marketing objective, costs, competition, product differentiation, image and government factors. Besides supply conditions, demand and competitive conditions, cost is the other most important factor in export pricing.
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Over the years, many different methods have been used by individual companies to establish base prices for their products.
Most of these approaches are variations of following methods:
Prices are based on total cost plus a desired profit
Prices based on market demand and supply
Prices based on competitive market conditions
This document reviews best practice in pricing processes to provide a reference against which current practices and proposals can be tested. Our objectives have been: to research the attributes of world-class pricing through publications and academic sources; to investigate how these attributes are applied in practice to products and services; to assess pricing processes in successful businesses.
In recent years a new attitude toward pricing has emerged. Deregulation and international free trade agreements have increased competition. Price promotion has eroded the power of brand loyalty. Pricing has assumed greater importance to most businesses.
As markets increasingly assume a global dimension, customers can more easily compare prices between one region or country and another, using the internet or a fax machine. They can often locate the same product, or an
acceptable substitute, from another source. Customers are more demanding and fickle, and their expectations increasingly difficult to fulfil.
Price inflation in western economies is now at its lowest for decades. Price increases are no longer accepted without protest from customers, if at all.
The Chairman of General Electric has predicted the onset of the ‘Value Decade’. Global price competition will strengthen because of: reduced product differentiation; global over-capacity for production; significantly diminished trade barriers; efficient information and distribution systems; providing customers with easy access to the prices of suppliers; a growing lack of customers’ loyalty to individual suppliers. Choice will be increasingly driven by price.
This is a challenging scenario that reinforces the need for an integrated strategy and concerted managerial action on pricing.
Pricing processes have lagged behind developments in the market place. They are often characterised by internal conflict between accountants wishing to maximise profit per unit and marketing specialists who seek to maximise
throughput. They are also affected by the potential for strained relations with good customers.
Some companies have downsized their operations to a level where diminishing returns cause them to question the benefits of continuing to focus upon reducing costs. As they switch their attention from cost cutting to adding
value, pricing naturally assumes increased weight in the marketing mix.
We have found many companies reluctant to discuss their own processes.
Some may wish to avoid betraying a lack of sophistication.
Export marketing has two different types of costs:production costs and selling and delivery costs. Factors affecting pricing are international marketing objective, costs, competition, product differentiation, image and government factors. Besides supply conditions, demand and competitive conditions, cost is the other most important factor in export pricing.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/ZEcPAc
Over the years, many different methods have been used by individual companies to establish base prices for their products.
Most of these approaches are variations of following methods:
Prices are based on total cost plus a desired profit
Prices based on market demand and supply
Prices based on competitive market conditions
pricing involves the customer demand schedule, the cost function, and competitors’ prices. The question is how should a company integrate cost-, demand-, and competition-based pricing considerations? In setting a price the firm, for example Kodak, will have to consider the following cost-, demand-, and competition-based pricing decisions:
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5. Pricing Strategy
Shift in Supply Curve
change in cost
change in expectations of cost
change in price of other goods sold
6. Price Strategy
Shift in Demand Curve
change in income
change in price of related goods
change in price expectations
change in taste
Increase in demand versus increase in quantity demanded
7. Pricing Strategy
Set Pricing Objective
Estimate Demand
Estimate Costs
Analyze Competitors’ Prices
Select Pricing Policy/Method
Set Final Price
8. Pricing Strategy
Pricing Objectives
survival
cover fixed cost and some variable cost
very short-run….(avoid extinction)
profit maximization
requires accurate knowledge of demand, cost functions
9. Pricing Strategy
Pricing Objectives (cont.)
revenue maximization
costs hard to determine
assume increase in revenue leads to decrease in unit costs (…old BCG
model)
…both production and distribution costs fall
works if market is price sensitive
low price may discourage competition
…market penetration strategy
10. Pricing Strategy
Pricing Objectives (cont.)
market skimming
highest price that market will bear
benefits are barely worthwhile for some customers to buy
…then work down the demand curve
works if no cost benefit of increasing volume
image is important
may or may not discourage competition
11. Pricing Strategy
Estimate Demand (…curve)
unique value
awareness of substitutes
difficult to compare alternatives
price relative to income
inventory effect
Can customer hold inventory?
12. Pricing Strategy
Estimate Costs (supply curve)
cost structure at different levels of production
…old long run average cost curves
experience curves from BCG model
…profit is a function of market share.
penetration versus skimming
…How is supply curve affected?
13. Pricing Strategy
Analyze Competitors’ Prices
What is the structure of the market?
oligopoly versus pure competition
Select Pricing Policy/Method
single or multiple prices
administered pricing
ceiling and floor prices versus the level of competition
14. Pricing Strategy
Cost Based Pricing
cost plus, markup pricing
easy, costs known, minimizes price competition
ignores demand elasticity, not profit maximizing
target return of investment
use breakeven analysis to find a price to yield a target ROI
…use sales volume to derive price…?
15. Pricing Strategy
Demand Based Pricing
perceived value
requires detailed knowledge of buyer behavior and demand elasticity
only true profit maximizing strategy
ignores costs and competitors
16. Pricing Strategy
Demand Based Pricing (cont.)
demand differential
price discrimination
yield maximization pricing
sell at multiple prices to multiple segments
not based on marginal costs of dealing with each
daily, weekly, or seasonal pricing
geographic, physical, or electronic barriers
17. Pricing Strategy
Competition Based Pricing
going rate pricing
used when costs difficult to measure
competitors lack differential advantage
sealed bid
forces competitors to lowest price
18. Pricing Strategies
Select Final Price
psychological pricing, prestige pricing
know demand elasticity
start high, work toward costs
discounts
cash, trade, quantity, or seasonal
promotional pricing
loss leaders