Chapter 7 Pricing Strategies

You dont sell through price. You sell the price.Pricing StrategiesSurvivalMaximum current profitMaximum market shareMaximum market skimmingProduct-quality leadership1.Pricing objectivesSetting Pricing Policy1.Selecting the pricingobjective2. Determining demand

3. Estimating costs

4.Analyzing competitorscosts, prices, and offers

5.Selecting a pricingmethod

6. Selecting final price

Types of CostsTotal CostsSum of the Fixed and Variable Costs for a Given Level of Production

Fixed Costs(Overhead)Costs that dontvary with sales or production levels.

Executive SalariesRent Variable Costs

Costs that do varydirectly with the level of production.

Raw materials

The Three Cs Modelfor Price SettingCostsCompetitorsprices andprices ofsubstitutesCustomersassessmentof uniqueproductfeaturesLow Price

No possibleprofit atthis priceHigh Price

No possibledemand atthis priceUtility: The attribute that makes it capable of want satisfactionValue: The worth in terms of other productsPrice: The monetary medium of exchange.Value Example: CaterpillarTractor is $100,000 vs. Market $90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount!Some important pricing definitionsMarket-skimming pricingMarket-penetration pricingExamples: new-product pricingSetting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales.Market-skimming pricingA sufficient number of buyers have a high current demand;The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;The high initial price does not attract more competitors to market;The high price communicates the image of a superior product.The conditions:Setting a low price for a new product in order to attract a large number of buyers and a large market share.Market-penetration pricingThe market is highly price sensitive,and a low price stimulates market growth;Production and distribution costs fall with accumulated production experience;A low price discourages actual and potential competition.The conditions:Price sensitivity

Product line pricingOptional-product pricingCaptive-product pricingBy-product pricingCash rebatesLow-interest,longer warranties,free maintenanceExamples: product mix pricingDiscount and allowance pricingSegmented pricingPsychological pricingPromotional pricingGeographical pricing2.pricing-adjustment strategiesCash discountQuantity discountFunctional discountSeasonal discount allowanceDiscount and allowance pricingDiscriminatory PricingTime

Product-form

Customer Segment

Location

Psychological PricingMost Attractive?Better Value?Psychological reason to price this way?A32 oz.$2.19B26 oz.$1.99Assume Equal QualityFOB-origin pricingUniform-delivered pricingZone pricingBasing-point pricingFreight-absorption pricingGeographical pricingLoss-leader pricingSpecial-event pricingCash rebatesLow-interest financingLonger payment termsWarranties & service contractsPsychological discountingPromotional PricingInitiating price cutsInitiating price increases3. Pricing changingPlease explain the reasons for price cuts.Please explain the reasons for price increases.Please describe the advantage and disadvantage of price cuts and increases.

DiscussionExcess capacityPrice competition

The reasons for price cutsCost inflationoverdemandThe reasons for price increasesCustomers reactionsCompetitors reactionsReactions to price changesMaintain priceMaintain price and add valueReduce priceIncrease price and improve qualityLaunch a low-price fighter lineResponding to competitors price changesPrice-Reaction Program for Meeting a Competitors Price CutHas competitorcut his price?NoHold our priceat present level;continue to watchcompetitorspriceIs the pricelikely tosignificantlyhurt our sales?YesIs it likely to bea permanentprice cut?YesBy more than 4%

Drop price tocompetitorspriceBy 2-4%

Drop price byhalf of thecompetitorsprice cutHow much hashis price beencut?YesNoNoBy less than 2%

Include acents-off couponfor the nextpurchase