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  1. 1. Pricing Strategy and Management
  2. 2. Pricing Considerations <ul><li>Objectives: </li></ul><ul><ul><li>Enhance brand image </li></ul></ul><ul><ul><li>Provide customer value </li></ul></ul><ul><ul><li>Obtain an adequate ROI </li></ul></ul><ul><ul><li>Maximize profits </li></ul></ul><ul><ul><li>Maintain price stability in an industry or market </li></ul></ul>
  3. 3. Factors Affecting Pricing Internal Factors Costs Product, Strategy Pricing Decisions External Factors Competitors Customers
  4. 4. Pricing Considerations <ul><li>Factors Effecting Pricing: </li></ul><ul><ul><li>Demand sets price ceiling </li></ul></ul><ul><ul><li>Cost sets price floor </li></ul></ul><ul><ul><li>Consumer value perceptions </li></ul></ul><ul><ul><li>Consumer price sensitivity </li></ul></ul><ul><ul><li>Government regulations </li></ul></ul>
  5. 5. Pricing Considerations <ul><li>Factors Effecting Pricing: </li></ul><ul><ul><li>Product/Service differentiation </li></ul></ul><ul><ul><li>Organization’s financial goals </li></ul></ul><ul><ul><li>Stage of Product Life Cycle </li></ul></ul><ul><ul><li>Marketing Channel margin impact </li></ul></ul><ul><ul><li>Prices of other products in mix </li></ul></ul>
  6. 6. Pricing Considerations <ul><li>Price as Indicator of Value </li></ul><ul><ul><li>Value = Perceived Benefits/Price </li></ul></ul><ul><ul><li>Value may be linked to meeting expectations of consumer </li></ul></ul><ul><ul><li>Price may shape the consumer’s perceptions of value </li></ul></ul><ul><ul><li>Price may affect consumer’s perception of prestige </li></ul></ul>
  7. 7. Customer Considerations PRICE SENSITIVITY <ul><li>Product categories are not uniformly responsive to prices -- some are more sensitive to price levels than others </li></ul><ul><li>Customers also may respond differently than one another to price levels </li></ul>Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price
  8. 8. Pricing Considerations PRICE SENSITIVITY Price Quantity Demanded per Period A. Inelastic Demand - Demand hardly changes with a small change in price P 2 P 1 Q 1 Q 2 Price Quantity Demanded per Period P  2 P  1 Q  1 Q  2 B. Elastic Demand - Demand changes greatly with a small change in price
  9. 9. Product-Based Pricing Approaches Product Line Pricing Setting price steps between product line items i.e. $299, $399 Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Source: Prentice Hall
  10. 10. Cost Considerations <ul><li>Recall that costs may depend on the production level </li></ul>Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials
  11. 11. Cost Based Pricing Strategies <ul><li>Full Cost Strategies </li></ul><ul><li>Variable Cost Strategies </li></ul><ul><li>New-Offering Strategies </li></ul><ul><li>Competitive Bidding </li></ul>
  12. 12. <ul><li>Full Cost Strategies </li></ul><ul><ul><li>Markup Pricing </li></ul></ul><ul><ul><li>Break-even Pricing </li></ul></ul><ul><ul><li>ROR Pricing </li></ul></ul>Cost Based Pricing Strategies
  13. 13. <ul><li>Variable Cost Strategies </li></ul><ul><ul><li>Stimulate Demand </li></ul></ul><ul><ul><li>Shift Demand </li></ul></ul>Cost Based Pricing Strategies
  14. 14. Cost-Based Pricing Approaches <ul><li>Cost-Plus Pricing - Adds a standard mark up to the cost of the product </li></ul><ul><ul><li>Useful when there are a great many products or demand is hard to forecast </li></ul></ul><ul><ul><li>Simple to implement </li></ul></ul><ul><li>Breakeven or Target Profit Pricing - Price is set to meet a specific profit target </li></ul><ul><ul><li>Also takes consumer demand into account </li></ul></ul>
  15. 15. Cost-Based Pricing COST-PLUS Minimizes price competition Perceived fairness for both buyers and sellers Sellers are more certain about costs than demand
  16. 16. Pricing Strategies <ul><li>Competitive Bidding </li></ul><ul><ul><li>Demand is Known & Constant </li></ul></ul><ul><ul><li>Marketing Mix Variables Uncontrollable </li></ul></ul><ul><ul><li>Sophisticated Mathematical Models </li></ul></ul><ul><ul><ul><li>Calculate Profit Levels </li></ul></ul></ul><ul><ul><ul><li>Calculate Probability of Winning at Different Price Levels </li></ul></ul></ul>
  17. 17. <ul><li>New-Offering Strategies </li></ul><ul><ul><li>Skimming </li></ul></ul><ul><ul><li>Penetration </li></ul></ul><ul><ul><li>Intermediate </li></ul></ul>Cost Based Pricing Strategies
  18. 18. New Product Intro Strategies <ul><li>Capture “cream” – less price sensitive buyers </li></ul><ul><li>High Profit Margin – sacrifice volume </li></ul><ul><li>Invite Competitors, Short-term Profits </li></ul><ul><li>Sell Whole Market – no “elite” market </li></ul><ul><li>High Volume – sacrifice profit margin </li></ul><ul><li>Keep Competition Out – E.O.S. </li></ul>INTENT FOCUS RESULT SKIMMING PENETRATION
  19. 19. <ul><li>Skimming Strategy </li></ul><ul><ul><li>Price High Initially </li></ul></ul><ul><ul><li>Reduce Over Time </li></ul></ul><ul><ul><li>Inelastic Demand - Buyers Price Range </li></ul></ul><ul><ul><li>Unique Offering </li></ul></ul>New Product Intro Strategies
  20. 20. <ul><li>Skimming Strategy </li></ul><ul><ul><li>Production or Marketing Costs Unknown </li></ul></ul><ul><ul><li>Limited Capacity to Deliver </li></ul></ul><ul><ul><li>Realistic Perceived Value </li></ul></ul>New Product Intro Strategies
  21. 21. <ul><li>Penetration Strategy </li></ul><ul><ul><li>Price Low Initially </li></ul></ul><ul><ul><li>Elastic Demand </li></ul></ul><ul><ul><li>Offering Not Unique </li></ul></ul><ul><ul><li>Competition Entering Quickly </li></ul></ul>New Product Intro Strategies
  22. 22. <ul><li>Penetration Strategy </li></ul><ul><ul><li>No Distinct Price Segments </li></ul></ul><ul><ul><li>Volume Increases Dramatically Impact Costs </li></ul></ul><ul><ul><li>Objective - Large Market Share </li></ul></ul>New Product Intro Strategies
  23. 23. <ul><li>Intermediate Strategy </li></ul><ul><ul><li>More Prevalent </li></ul></ul><ul><ul><li>Less Dramatic </li></ul></ul>New Product Intro Strategies
  24. 24. Customer Considerations PRICE AWARENESS <ul><li>Mindless Shopping : </li></ul><ul><ul><li>Average time between arriving and departing from product category is 12 seconds </li></ul></ul><ul><ul><li>In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size </li></ul></ul><ul><ul><li>21% could not offer a price estimate when asked </li></ul></ul><ul><ul><li>Only 50% were able to state correct price </li></ul></ul><ul><ul><li>93% did know relative price (i.e., higher, lower or the same as other brands in category) </li></ul></ul>Source: Dickson and Sawyer (1990)
  25. 25. Customer Considerations REFERENCE PRICES <ul><li>Consumers do not evaluate price absolutely, but rather relative to a convenient quantity for comparison </li></ul><ul><li> Context Matters! </li></ul><ul><li>Two kinds of reference prices </li></ul><ul><ul><li>External reference price </li></ul></ul><ul><ul><li>Internal reference price </li></ul></ul>
  26. 26. Customer Considerations REFERENCE PRICES <ul><li>External Reference Prices </li></ul><ul><ul><li>List prices/sale prices </li></ul></ul><ul><ul><li>Other products on the shelf or convenient for comparison </li></ul></ul>
  27. 27. Customer Considerations REFERENCE PRICES <ul><li>Internal Reference Prices </li></ul><ul><ul><li>One that is recorded in consumer’s memory </li></ul></ul><ul><ul><li>Memory of price may not be accurate </li></ul></ul><ul><ul><li>If brand is frequently promoted, consumers tend to lower their internal reference point </li></ul></ul><ul><ul><li>consumers have a notion of “fair price” </li></ul></ul><ul><ul><ul><li>acquisition utility - economic benefit of the product </li></ul></ul></ul><ul><ul><ul><li>transaction utility - getting a good deal </li></ul></ul></ul><ul><ul><li>Asymmetric response to price changes </li></ul></ul>
  28. 28. Customer Considerations PRICE AS A SIGNAL <ul><li>Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality </li></ul><ul><li>When is price used as a signal? </li></ul><ul><ul><li>When there is little information about product quality available </li></ul></ul><ul><ul><li>Primarily for experience or credence goods </li></ul></ul>
  29. 29. Customer Considerations VALUE PRICING Cost-Based Pricing Value-Based Pricing Source: Prentice Hall Product Cost Price Value Customers Customer Value Price Cost Product
  30. 30. General Price Adjustment Strategies <ul><li>Adjusting Prices for Psychological </li></ul><ul><li>Effect. </li></ul><ul><li>Price Used as a Signal </li></ul><ul><li>Temporarily Reducing Prices to </li></ul><ul><li>Increase Short-Run Sales. </li></ul><ul><li>i.e. Loss Leaders, Special-Events </li></ul><ul><li>Adjusting Prices to Account for the </li></ul><ul><li>Geographic Location of Customers. </li></ul><ul><li>i.e. FOB-Origin, Uniform-Delivered, </li></ul><ul><li>Zone Pricing, Basing-Point, & </li></ul><ul><li>Freight-Absorption. </li></ul><ul><li>Adjusting Prices for International </li></ul><ul><li>Markets. </li></ul><ul><li>Price Depends on Costs, Consumers, </li></ul><ul><li>Economic Conditions & Other Factors. </li></ul>Psychological Pricing Promotional Pricing Geographical Pricing International Pricing Source: Prentice Hall