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17 pricing


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17 pricing

  1. 1. Pricing Strategy…critical marketing mix variable actually produces revenue shortest term marketing mix variable relates directly to microeconomics supply versus demand analysis breakeven analysis price elasticity
  2. 2. Pricing StrategyHow to improve profit performance? rev var. $ $ cost fixed cost Q Q Increase price Cut Variable Cost
  3. 3. Pricing Strategy …profit performance.$ $ Q Q Increase Volume Cut Fixed Cost
  4. 4. Pricing StrategySupply versus Demand S inelastic elastic P D D D Q Q Q
  5. 5. Pricing StrategyShift in Supply Curve change in cost change in expectations of cost change in price of other goods sold
  6. 6. Price StrategyShift in Demand Curve change in income change in price of related goods change in price expectations change in tasteIncrease in demand versus increase in quantity demanded
  7. 7. Pricing StrategySet Pricing ObjectiveEstimate DemandEstimate CostsAnalyze Competitors’ PricesSelect Pricing Policy/MethodSet Final Price
  8. 8. Pricing StrategyPricing Objectives survival cover fixed cost and some variable cost very short-run….(avoid extinction) profit maximization requires accurate knowledge of demand, cost functions
  9. 9. Pricing StrategyPricing 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. 10. Pricing StrategyPricing 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. 11. Pricing StrategyEstimate Demand (…curve) unique value awareness of substitutes difficult to compare alternatives price relative to income inventory effect Can customer hold inventory?
  12. 12. Pricing StrategyEstimate 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. 13. Pricing StrategyAnalyze Competitors’ Prices What is the structure of the market? oligopoly versus pure competitionSelect Pricing Policy/Method single or multiple prices administered pricing ceiling and floor prices versus the level of competition
  14. 14. Pricing StrategyCost 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. 15. Pricing StrategyDemand Based Pricing perceived value requires detailed knowledge of buyer behavior and demand elasticity only true profit maximizing strategy ignores costs and competitors
  16. 16. Pricing StrategyDemand 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. 17. Pricing StrategyCompetition Based Pricing going rate pricing used when costs difficult to measure competitors lack differential advantage sealed bid forces competitors to lowest price
  18. 18. Pricing StrategiesSelect Final Price psychological pricing, prestige pricing know demand elasticity start high, work toward costs discounts cash, trade, quantity, or seasonal promotional pricing loss leaders
  19. 19. Pricing StrategySelect Final Price (cont.) price lining odd pricing perception
  20. 20. Pricing StrategyPrice cuts excess capacity leads to margin squeezes (aka price wars) build market share not brand loyalty low cost producer will always win
  21. 21. Pricing Strategy• Price Increases » Before After • Price 10.00 10.10 +1% • Quantity x 100 x 100 • Revenue 1,000 1,010 • Total Cost 970 970 • Profit 30 40 +33%
  22. 22. Pricing StrategyIntense pressure to “inflate” prices reduce discounts decrease amount of product substitute cheaper materials reduce product features