Pricing Strategy

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Pricing Strategy



Pricing Strategy and Management

Professor Chip Besio Marketing 3340

Pricing Considerations
 Objectives:
 Enhance

brand image  Provide customer value  Obtain an adequate ROI  Maximize profits  Maintain price stability in an industry or market

Factors Affecting Pricing
Internal Factors Costs Product, Strategy

Pricing Decisions

External Factors Competitors Customers

Pricing Considerations
 Factors

Effecting Pricing:

 Demand

sets price ceiling  Cost sets price floor  Consumer value perceptions  Consumer price sensitivity  Government regulations

Pricing Considerations
 Factors

Effecting Pricing:

 Product/Service

differentiation  Organization’s financial goals  Stage of Product Life Cycle  Marketing Channel margin impact  Prices of other products in mix

Pricing Considerations
 Price

as Indicator of Value

 Value

= Perceived Benefits/Price  Value may be linked to meeting expectations of consumer  Price may shape the consumer’s perceptions of value  Price may affect consumer’s perception of prestige

Customer Considerations PRICE SENSITIVITY
 Product

categories are not uniformly responsive to prices -- some are more sensitive to price levels than others  Customers also may respond differently than one another to price levels
Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

Pricing Considerations PRICE SENSITIVITY
Price A. Inelastic Demand Demand hardly changes with a small change in price P2 P1

Q2 Q1 Quantity Demanded per Period B. Elastic Demand Demand changes greatly with a small change in price



Q 2 Q 1 Quantity Demanded per Period

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

Cost Considerations
Costs that don’t vary with sales or production levels.
Executive Salaries Rent

Fixed Costs (Overhead)

Variable Costs
Costs that do vary directly with the level of production.
Raw materials

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

 Recall

that costs may depend on the production level

Cost Based Pricing Strategies
 Full

Cost Strategies  Variable Cost Strategies  New-Offering Strategies  Competitive Bidding

Cost Based Pricing Strategies
 Full

Cost Strategies

 Markup

Pricing  Break-even Pricing  ROR Pricing

Cost Based Pricing Strategies
 Variable

Cost Strategies

 Stimulate

Demand  Shift Demand

Cost-Based Pricing Approaches

Cost-Plus Pricing - Adds a standard mark up to the cost of the product

Useful when there are a great many products or demand is hard to forecast Simple to implement

Breakeven or Target Profit Pricing - Price is set to meet a specific profit target

Also takes consumer demand into account

Cost-Based Pricing COST-PLUS
Sellers are more certain about costs than demand
Minimizes price competition Perceived fairness for both buyers and sellers

Pricing Strategies
 Competitive
 Demand


is Known & Constant  Marketing Mix Variables Uncontrollable  Sophisticated Mathematical Models
Calculate Profit Levels  Calculate Probability of Winning at Different Price Levels

Cost Based Pricing Strategies
 New-Offering
 Skimming  Penetration  Intermediate


New Product Intro Strategies


Capture “cream” – less price
sensitive buyers

Sell Whole Market – no
“elite” market


High Profit Margin – sacrifice

High Volume –sacrifice profit

RESULT  Invite

Competitors, Short-term Profits

Keep Competition Out – E.O.S.

New Product Intro Strategies
 Skimming
 Price


High Initially Over Time Demand - Buyers Price

 Reduce

 Inelastic

 Unique


New Product Intro Strategies
 Skimming

or Marketing Costs

 Production

 Limited

Capacity to Deliver Perceived Value

 Realistic

New Product Intro Strategies
 Penetration
 Price


Low Initially Demand Not Unique

 Elastic

 Offering

 Competition

Entering Quickly

New Product Intro Strategies
 Penetration
 No


Distinct Price Segments Increases Dramatically Impact

 Volume

 Objective

- Large Market Share

New Product Intro Strategies
 Intermediate
 More


Prevalent  Less Dramatic

Customer Considerations PRICE AWARENESS

Mindless Shopping:

  

Average time between arriving and departing from product category is 12 seconds In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size 21% could not offer a price estimate when asked Only 50% were able to state correct price 93% did know relative price (i.e., higher, lower or the same as other brands in category)

Source: Dickson and Sawyer (1990)

Customer Considerations REFERENCE PRICES

Consumers do not evaluate price absolutely, but rather relative to a convenient quantity for comparison

Context Matters!

Two kinds of reference prices  External reference price  Internal reference price

Customer Considerations REFERENCE PRICES
 External
 List

Reference Prices

prices/sale prices

 Other

products on the shelf or convenient for comparison

Customer Considerations REFERENCE PRICES
 Internal
 One

Reference Prices

that is recorded in consumer’s memory  Memory of price may not be accurate  If brand is frequently promoted, consumers tend to lower their internal reference point  consumers have a notion of “fair price”
acquisition utility - economic benefit of the product  transaction utility - getting a good deal

 Asymmetric

response to price changes

Customer Considerations PRICE AS A SIGNAL

Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality When is price used as a signal?  When there is little information about product quality available  Primarily for experience or credence goods

Customer Considerations VALUE PRICING
Cost-Based Pricing Value-Based Pricing



Cost Price
Value Customers

Value Price
Cost Product
Source: Prentice Hall

General Price Adjustment Strategies
Psychological Pricing
• Adjusting Prices for Psychological Effect. •Price Used as a Signal

Promotional Pricing

• Temporarily Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Source: Prentice Hall

Geographical Pricing

International Pricing

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