Chapter 8

Pricing Strategy and

Management

2

Conceptual Orientation to Pricing

Demand factors (Value to buyers)

(price ceiling)

Competitive factors

Final pricing Initial

discretion pricingCorporate objectives

discretionand regulatory constraints

Direct variable costs (price floor)

3

Price as an Indicator of Value

for a given price, value decreases as perceived benefits

decrease and vice versa

price also affects consumer perceptions of prestige; as

price increases, demand may also increase

Value = Perceived benefits

Price

4

Price Elasticity of Demand

if the % change in quantity demanded is greater than the %

change in price, demand is said to be elastic – E is greater

than 1.

if the % change in quantity demanded is less than the %

change in price, demand is said to be inelastic – E is less than

1.

E = Percentage change in quantity demanded

Percentage change in price

where E is the coefficient of elasticity

5

Factors that Influence Price Elasticity of Demand

the more substitutes a product or service has, the greater its

price elasticity

the more uses a product or service has, the greater its price

elasticity

the higher the ratio of the price of the product or service to

the income of the buyer, the greater the price elasticity

6

Product-Line Pricing

Product-Line Pricing involves determining:

1) the lowest-priced product and price

2) the highest-priced product and price, and

3) price differentials for all other products in the line

7

Pricing Strategies

full-cost price strategies – consider both variable and

fixed costs

variable-cost price strategies – consider only variable

costs, not total costs

8

Full-Cost Pricing

markup pricing : fixed amount added to the total cost of

the product

break-even pricing : per-unit fixed costs + per-unit

variable costs

rate-of-return pricing : set to obtain a desired ROI

9

Variable-Cost Pricing

Variable-cost pricing is demand-oriented pricing.

Two purposes:

stimulate demand

shift demand

Assumption is that variable-cost pricing will stimulate demand

and increase revenues.

10

New-Offering Pricing Strategies

• skimming pricing strategy

• penetration pricing strategy

• intermediate pricing strategy

11

Use Skimming Pricing Strategy when:

demand likely to be price inelastic

different price-market segments, appealing to buyers with a

higher acceptable price

offering is unique enough to be protected from competition

production or marketing costs are unknown

capacity constraint exists

organization wants to generate funds quickly

realistic perceived value of the product exists

12

Use Penetration Pricing Strategy when:

demand likely to be price elastic

offering is not unique enough to be protected from

competition

competitors expected to enter market quickly

no distinct price-market segments

possibility of cost savings with large volume of sales

organization’s major objective is to obtain a large

market share

13

Intermediate Pricing Strategy

• falls between skimming and penetration

• most prevalent in practice

• more likely to be used in majority of pricing decisions

14

Pricing and Competitive Interaction

the action and reaction of rival companies in setting and

changing prices for their offerings

managers should focus more on long-term – “look forward and

reason backwards”

Competitors’ goals and objectives ?

Assumptions competitor made about itself ?

Strengths and weaknesses of competitor ?

15

Industry Characteristics and Risk of Price Wars

CharacteristicsCharacteristics High Risk Low Risk

Product/Service Type undifferentiated differentiated

Market Growth Rate stable/decreasing increasing

Price Visibility to Competitors high low

Consumer Price Sensitivity high low

Overall Industry Cost Trend declining stable

Industry Capacity Utilization low high

Number of Competitors many few