Pricing Considerations and Strategies 9. 9-2 What is a Price? Narrowly, price is the amount of money...
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Transcript of Pricing Considerations and Strategies 9. 9-2 What is a Price? Narrowly, price is the amount of money...
Pricing Considerations and Pricing Considerations and StrategiesStrategies
9
9-2
What is a Price?
• NarrowlyNarrowly, price is the amount of , price is the amount of money charged for a product or money charged for a product or service.service.
• BroadlyBroadly, price is the sum of all the , price is the sum of all the _____ that consumers exchange for _____ that consumers exchange for the benefits of having or using the the benefits of having or using the product or service.product or service.
• Dynamic PricingDynamic Pricing::
9-3
Factors Affecting Pricing Decisions
9-4
Internal Factors Affecting Pricing Decisions
Marketing
Objectives
Survival
Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.
Market Share LeadershipLow as Possible Prices to Become
the Market Share Leader.
High Prices to Cover Higher Performance Quality and R&D.
9-5
Price
Product Design
Distribution
Promotion
NonpricePositions
Target Costing
Internal Factors Affecting Pricing Decisions: Marketing Mix Strategy
9-6
Internal Factors Affecting Pricing Decisions
• Costs:Costs:– Fixed Costs:Fixed Costs:
•Costs that do not vary with production or Costs that do not vary with production or sales level.sales level.
– Variable Costs:Variable Costs:•Costs that vary directly with the level of Costs that vary directly with the level of
production.production.
9-7
Internal Factors Affecting Pricing Decisions
• Organizational Considerations:Organizational Considerations:– Must decide who within the organization Must decide who within the organization
should set prices.should set prices.– This will vary depending on the size and This will vary depending on the size and
type of company.type of company.
9-8
Factors Affecting Pricing Decisions
9-9
External Factors Affecting Pricing Decisions
• The Market and Demand:The Market and Demand:– Costs set the lower limit of prices.Costs set the lower limit of prices.– The market and demand set the upper limit.The market and demand set the upper limit.
9-10
Pricing in Different Types of Markets
Pure Competition:Many buyers and sellers
where each has little effecton the going market price
Monopolistic Competition:Many buyers and sellers
who trade over a range of prices
Oligopolistic Competition:Few sellers who are
sensitive to each other’spricing/marketing strategies
9-11
Demand Curve
A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.
9-12
Major Considerations in Setting Price
9-13
General Pricing Approaches
1.1. Cost-Based PricingCost-Based Pricinga.a. Cost-plus pricingCost-plus pricing
b.b. Break-even pricingBreak-even pricing
2.2. Value-Based PricingValue-Based Pricing
3.3. Competition-Based PricingCompetition-Based Pricing
9-14
Cost-Based PricingCertainty About Costs
Pricing is Simplified
Price Competition Is Minimized
UnexpectedSituational
Factors
Attitudes of
Others
Ethical
Ignores Current
Demand & Competitio
n
Cost-Plus Pricing is an
Approach That Adds a
Standard Markup to the
Cost of the Product
Simplest Pricing Method
Fairer to Buyers & Sellers
9-15
Break-Even Chart
9-16
Value-Based Pricing
• Uses buyers’ perceptions of value, Uses buyers’ perceptions of value, not the seller’s cost, as the key to not the seller’s cost, as the key to pricing.pricing.
9-17
Cost-Based Versus Value-Based Pricing
9-18
Methods for Setting Prices
Going-Rate Company Sets Prices Based on
WhatCompetitors Are Charging
Sealed-BidCompany Sets Prices Based on What They Think Competitors
Will Charge??
Competition-Based Pricing
9-19
New-Product Pricing Strategies
Market-SkimmingMarket-Skimming
Set a high price for a Set a high price for a new product to new product to “skim” revenues “skim” revenues layer by layer from layer by layer from the market.the market.
• When to use:When to use:– Product’s quality and Product’s quality and
image must support its image must support its higher price.higher price.
– Costs of smaller volume Costs of smaller volume cannot be so high they cannot be so high they cancel the advantage of cancel the advantage of charging more.charging more.
– Competitors should not Competitors should not be able to enter market be able to enter market easily and undercut the easily and undercut the high price.high price.
9-20
New-Product Pricing Strategies
Market Market PenetrationPenetration
Set a low initial price Set a low initial price in order to in order to “penetrate” the “penetrate” the market quickly and market quickly and deeply.deeply.
• When to use:When to use:– Market must be highly Market must be highly
price sensitive so a low price sensitive so a low price produces more price produces more market growth.market growth.
– Production and Production and distribution costs must distribution costs must fall as sales volume fall as sales volume increases.increases.
– Must keep out Must keep out competition and maintain competition and maintain low price or effects are low price or effects are only temporary.only temporary.
9-21
Product Line Pricing
• Involves setting price Involves setting price steps between various steps between various products in a product products in a product line based on:line based on:– Cost differences Cost differences
between productsbetween products– Customer evaluations of Customer evaluations of
different features different features – Competitors’ pricesCompetitors’ prices
9-22
Optional- and Captive-Product Pricing
•Optional-ProductOptional-Product– Pricing optional or accessory products Pricing optional or accessory products
sold with the main product (e.g., ice sold with the main product (e.g., ice maker with the refrigerator).maker with the refrigerator).
•Captive-ProductCaptive-Product– Pricing products that must be used with Pricing products that must be used with
the main product (e.g., replacement the main product (e.g., replacement cartridges for Gillette razors).cartridges for Gillette razors).
9-23
Pricing Strategies
By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive
Product Bundle Pricing:Combining several products and offering the bundleat a reduced price
9-24
Discounts and Allowances
Cash
Quantity
Functional
Seasonal
Trade-In
Promotional
Discounts Allowances
9-25
Segmented Pricing
Custom er - Segm ent Location Pricing
Product - Form T im e Pricing
S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost
Custom er - Segm ent Location Pricing
Product - Form T im e Pricing
S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost
9-26
Psychological Pricing
• Considers the psychology Considers the psychology of prices and not simply of prices and not simply the economics.the economics.
• Consumers usually Consumers usually perceive higher-priced perceive higher-priced products as having higher products as having higher quality.quality.
• Consumers use price Consumers use price lessless when they can judge when they can judge quality of a product.quality of a product.
9-27
Promotional Pricing
Special-Event PricingSpecial-Event Pricing
Cash RebatesCash Rebates
Low-Interest FinancingLow-Interest Financing
Longer WarrantiesLonger Warranties
Free MaintenanceFree Maintenance
DiscountsDiscounts
Loss LeadersLoss Leaders
Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.
Approaches:
9-28
Geographical Pricing
• FOB-origin pricingFOB-origin pricing
• Uniform-delivered Uniform-delivered pricingpricing
• Zone pricingZone pricing
• Basing-point pricingBasing-point pricing
• Freight-absorption Freight-absorption pricingpricing
9-29
International Pricing
• Price depends on Price depends on many factors, many factors, including:including:– Economic conditionsEconomic conditions– Competitive Competitive
situationssituations– Laws and regulationsLaws and regulations– Development of the Development of the
wholesaling and wholesaling and retailing systemretailing system
– CostsCosts
9-30
Why?
Excess Capacity
Falling Market Share
Dominate Market Through Lower
Costs
Initiating Price Changes
Why?
Cost Inflation
Overdemand: Company Can’t
Supply All Customers’ Needs
9-31
Buyers’ Reactions to Price Changes
What would you think if the price of Joy was suddenly cut in half?
9-32
Being Replaced by Newer Models
Being Replaced by Newer Models
Current Models Are Not Selling Well
Current Models Are Not Selling Well
Company is in Financial TroubleCompany is in
Financial Trouble
Price Cuts Are Seen by Buyers As:
Reactions to Price Changes
Number of Firms is Small
Number of Firms is Small
Product is UniformProduct is Uniform
Buyers are Well Informed
Buyers are Well Informed
Competitors Mostly React When:
9-33
Assessing and Responding to Competitor Price Changes
9-34
Public Policy and Pricing
9-35
Price FixingPrice Fixing
Pricing Within Channel LevelsPricing Within Channel Levels
Predatory Pricing
Predatory Pricing
Public Policy Issues in Pricing
9-36
PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
Retail PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
Retail PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that are
not Available To Consumers
(Bait and switch)
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that are
not Available To Consumers
(Bait and switch)
Pricing Across Channel Levels