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
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
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
Pricing StrategyEstimate Demand (…curve) unique value awareness of substitutes difficult to compare alternatives price relative to income inventory effect Can customer hold inventory?
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?
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
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…?
Pricing StrategyDemand Based Pricing perceived value requires detailed knowledge of buyer behavior and demand elasticity only true profit maximizing strategy ignores costs and competitors
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
Pricing StrategyCompetition Based Pricing going rate pricing used when costs difficult to measure competitors lack differential advantage sealed bid forces competitors to lowest price
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