pricing strategies(4210)

MARK4210, 2014 Spring, L1/L2
MARK4210: Strategic Marketing
2014 Spring, Section L1/L2
[Class #14]
Pricing Strategies

2
Agenda
 Role of Pricing
 Review of Pricing Factors
 New Products
 Established Products
 Differential Pricing

3
Communicating
Promotion
Communicating
value
Creating
Value
Product Price
Capturing
value
Distribution
Delivering
value
The Role of Pricing

4
The Role of Pricing – Profitability
Profit
Levers

5
Review of Pricing Factors
 Customers
 Company
 Cost
 Competition
 Context

6
Pricing Factors: Customer Value
 Value to customers sets the ceiling price – value to
customers is affected by available alternatives
 Different customers derive/perceive different values
– tangible & intangible
 How to determine value?
• Economic Value to Customers (EVC) analysis
• Market research to assess both tangible and intangible
benefits

7
Pricing Factors: Economic Value to
Customers (EVC)
 Customer buys a product only if its value outweighs
the value of existing product (or closest alternative)
 EVC concept: PriceA + ValueA = PriceB + ValueB
PriceA = PriceB + ValueB – ValueA
PriceA ≤ PriceB + DiffValueBA
• PriceA: price of ‘new’ product (includes differentiation value/cost
from the ‘new’ product)
• PriceB: price of existing product
• DiffValueBA: value/cost difference of existing & new product
Source: Pricing Economic Value to the Customer, Pricing, MIT OpenCourseWare, Sping 2010

8
Pricing Factors: Customer Demand
 Predicting the relationship between price level and
demand (while considering the effects of other
variables on demand)
 “Demand Elasticity” or “Price Sensitivity”
• Elastic = lowering prices substantially increases demand;
higher price sensitivity
• Inelastic = lowering prices has little effect on demand;
lower price sensitivity
Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009

9
Pricing Factors: Company
Objectives
 Common pricing objectives
Objective Description
Profit Price that enables adequate margin for
profit and reinvestment
Market
share
Price to gain market share or volume
Competition Price to discourage competitors from adding
capacity

10
Pricing Factors: Cost
 Fixed costs
 Variable costs
 Out-of-pocket costs: costs that require a cash
payment in the current period or during a project
 Opportunity costs: cost/value of an alternative not
selected

11
Pricing Factors: Analyzing Impact of
Costs
Parameter Key Points
Ratio of
Fixed:Variable Costs
• High FC ratio  leads to volume sensitive industries
 increase sales volumes to increase earnings
• High VC ratio  leads to price sensitive industries
 increase price to increase earnings
Economies of Scale • If scale economies are substantial, and/or expanded
operations lower costs, prices may be lowered to
gain market share
Firm cost structure
(high/low) vs.
competitors
• Lowest cost producer will earn additional profits by
maintaining competitive prices – earnings reinvested
back to aggressive promotions, increase market
share
• Cost-disadvantaged producer cannot effectively
lower price as it can trigger a losing price war

12
Pricing Factors: ‘First Mover
Advantage’ on Cost
Source: Pricing It Right: Strategies, Applications, and Pitfalls, Harvard Business School Press, 2006

13
Pricing Factors: Competitive Info --
Characteristics Impacting Pricing
Characteristics Key Points
Number of firms
in the industry
• Firms with no competition can set any price (if legal)
• Many active firms  fierce competition  limits pricing
discretion
• With few firms (especially undifferentiated industries),
pricing usually set by industry leader
Relative firm
size
• Firms with large market share (typically with lowest cost)
can usually initiate price changes without worrying about
competitors
Product
differentiation
• Product differentiation allows small firms with many
competitors to set prices, but often need heavy promotions
• Pricing differences limited within a certain range
Ease of entry • Low-barrier industries, existing firms have less discretion
• High-barrier industries, existing firms have greater control

14
Pricing Factors: Context
(Environment)
 Political
• Government policy or restrictions
 Economic situation
• Inflation/deflation
 Social
• Natural disasters/calamities
• Corporate social responsibility

15
Pricing Strategy for New Products
 Strategy should have desired impact on the market
while not attracting emergence of competition
 In general, price new products to gain market share,
to gain cost advantage versus competitors
• The lower the initial price set by the first producer, the
more rapidly volume builds up, and gain cost advantage
• But, needs more time & investments before profits
realized
 Two basic strategies: (a) Price skimming, (b)
Penetration pricing

16
New Products: Price Skimming
 Price skimming
establishes high initial
price for a product
 “Skimming the cream off
the market” at the upper
end of the demand curve
 Often accompanied by
heavy promotions
Pricing It Right: Strategies, Applications, and Pitfalls, Harvard Business School Press, 2006

17
New Products: Price Skimming (2)
 Recommended when:
• Nature of demand is uncertain
• Large investments on R&D
• Patents bar/limit competitors
• Competition will launch similar product in near future
• Innovative products that slows maturity of the market
 Prices found to be too high can be lowered – more
difficult to start low and raise prices

18
New Products: Penetration Pricing
 Entering the market with a low initial price to capture
a greater share of the market

19
New Products: Penetration Pricing –
Usual Situations
 Premium market does not exist
 Focus is on mass market
 Entire demand curve is elastic
 Ineffective patents
 Discouraging new competitive entrants
 Creating economies of scale

20
Pricing Strategy for Established
Products
 Changes in the marketing environment may require
a review of prices of products already on the market
• For example, a large firm announcing lower prices will
lead other firms in the industry to examine their prices
 Review of pricing strategy may also become
necessary because of shifts in demand

21
Established Products: Maintaining
Price – Main Reasons
 Though price change may be desirable, maintaining
price may be appropriate if reaction of customers
and competitors cannot be predicted
 Alternatively, price changes may have an impact on
product image or sales of other product lines that is
not practical to assess
 Maintaining prices may also be due to politics/
government, or corporate social responsibility

22
Established Products: Lowering
Prices – Main Reasons
 Defensive strategy – quickly respond to competition
 Offensive strategy – as costs decrease with more
sales and/or economies of scale, lowering prices
leads to higher market share which can again lead
to lower costs in the future
 Respond to customer needs/demand, especially if
price is critical

23
Established Products: Lowering
Prices – Critical Considerations
 Long term impact/competitiveness – ignores product
differentiation
 Price may convey higher quality or distinctive image
for certain brands – low price may lead to higher
price sensitivity, lower loyalty
 Impact to other products in the product line
 Impact to product profitability – low price is only
sustainable with low cost advantage

24
Established Products: Increasing
Prices – Main Reasons
 Maintain profitability during inflationary periods
 Product has monopoly in the market segment –
either via real or perceived uniqueness to customers
 Following industry practice, or the [powerful] industry
leader
 Segment the market – creating new premium
segment
[Note: Aside from actual price increases, can also be
from downsizing package sizes while maintaining
prices]

25
Differential Pricing Strategy
 Customers value the same product differently
 Differential pricing involves charging different prices
to different groups of customers (because
customers value products differently)
• Customers with higher valuations are willing to pay more
• Customers with lower valuations may buy if prices lower
 Offering a range of prices for the same product can
lead to increased sales and profits by targeting
unique customers
Source: The 1% Windfall: How Successful Companies Use Price to Profit and Grow , Rafi Mohammed, Harper Collins Publishers

26
Same Umbrella, Different Prices

27
Differential Pricing Strategy based
on “Hurdles”
Requires customers to demonstrate they want a lower
price – willingness to take extra steps (hurdles)
 Rebates: Customer willing to fill out form, mail & wait
weeks for lower price
 Sales: Customer waits for sale (e.g., Thanksgiving)
 Coupons: Customer cuts, organizes, carries &
redeems coupon for a lower price
 Price match guarantee: Customer takes up seller’s
offer to match discount offered by a rival

28
on “Customer Characteristics”
Identifiable customer characteristics communicate
different customer valuations
 Geographic location: Customers located in different
areas value product differently
 Readily available traits: For example, age – students
& seniors offered discounts
 Club affiliation: For example, to reach car owners
demographic, offer discounts to car clubs
 Customer history: Loyalty programs – Frequent flyer
discounts; lower insurance premium for
longstanding good insurees

29
on “Selling Characteristics”
Changing selling characteristics can SEGMENT
customers who have different valuations
 Quantity discount: Buy more, pay less – as more
product is consumed, the less value consumers
place on it
 Mixed Bundling
• Price break if two or more products bought – e.g., fast
food restaurant “Value Meals”
• Mixed-bundling results in sales and higher profits that
otherwise would not had occurred

30
on “Selling Techniques”
Techniques used to sell a product that can influence/
determine a customer’s valuation
 Negotiation: Customer lets seller know what he/she
is willing to pay
 Two-part pricing
• Low/high: Selling razor at low price, profit from razor
blades
• High/low: Wholesale clubs (i.e., Costco) charge high for
membership and low on products
 Dynamic pricing: Pricing changes automatically as
demand or circumstances changes (perishables)

31
Summary of Differential Pricing
Strategies

32
(Mar 28) Case Analysis Questions –
Optical Distortion, Inc. (ODI)
1.How would you describe chicken sociology? For chicken farmers, what is the
major problem associated with it, and how do they currently solve this?
2.What are the advantages of ODI lenses for chicken farmers over the current
alternative? What are the unappealing points of ODI lenses?
3.Cost sets the floor price (i.e., lowest price) for a product. For ease of calculation,
consider only variable cost. What is the variable cost for ODI contact lenses?
4.What is the max price ODI contact lenses can charge per pair? To figure this out:
• First, we need to think about all the cost components and calculate the total cost
associated with using the current alternative.
• Next, we need to think about all the cost components and calculate the total cost
associated with using the new alternative (i.e., ODI lenses).
• The maximum price ODI lenses can charge is the price level at which the cost of using
the current alternative and the cost of using the new alternative (i.e., ODI lenses) are
equal. At this price level, a customer who considers only economic benefits will be
indifferent between buying that product and buying the alternative.
5.Should ODI adopt a skimming or penetration strategy? Why?

pricing strategies(4210)

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to pricing strategies(4210)

Similar to pricing strategies(4210) (20)

More from welcometofacebook

More from welcometofacebook (20)

Recently uploaded

Recently uploaded (20)

pricing strategies(4210)