Marketing strategy

Pricing StrategyMKT 460 (Strategic Marketing)Taufique Hossain1Consumer Psychology and PricingReference Prices: Comparing an observed price to an internal reference price they remember or to an external frame of reference such as posted regular retailed pricePrice-quality inferences: Consumers use price as an indicator of quality.Price Cues: Consumers perception of prices are also affected by alternative pricing strategies. 2Steps in Setting PriceSelect the price objectiveDetermine demandEstimate costsAnalyze competitor price mixSelect pricing methodSelect final price3Step 1: Selecting the Pricing ObjectiveSurvivalMaximum current profit Market penetration pricingMaximum market shareMaximum market skimmingProduct-quality leadership4Step 2: Determining DemandPrice SensitivityEstimating Demand CurvesPrice Elasticity of Demand

5Price sensitivityCustomers are less price sensitive when:There are few or no substitute or competitorsThey do not readily notice the higher priceThey are slow to change their buying habitsThey think that the higher prices are justifiedPrice is only a small part of the total cost of obtaining, operating and servicing the product over its lifetime.

Inelastic and Elastic Demand

7Estimating demand curvesSurveysPrice experimentsStatistical analysisExperience/past performance analysis

Estimating demand curves1-7th March15th -21st March22nd 28th MarchNo of subscribers 10,000 9,800 9,700 Rate 0.80 0.85 0.85 Mins Used 100 90 88 Revenue 800,000 749,700 725,560 ARPU 80 77 75 Migration 150 200 Churn 50 100 Churn %0.50%1.00%Step 3: Estimating Costs

Types of CostsTarget CostingAccumulated Production10Cost Terms and ProductionFixed costsVariable costsTotal costsAverage costCost at different levels of production

11Cost per Unit as a Function of Accumulated Production

12Step 5: Selecting a Pricing MethodMarkup pricingTarget-return pricingPerceived-value pricingValue pricingGoing-rate pricingAuction-type pricingProduct line pricing

13

Break-Even Chart

16Step 6: Selecting the Final PriceImpact of other marketing activitiesCompany pricing policiesGain-and-risk sharing pricingImpact of price on other parties

17Price-Adaptation StrategiesGeographical PricingDiscounts/AllowancesDifferentiated PricingPromotional Pricing18Price-Adaptation StrategiesCountertradeBarterCompensation dealBuyback arrangementOffsetDiscounts/ AllowancesCash discountQuantity discountFunctional discountSeasonal discountAllowance19Promotional Pricing TacticsLoss-leader pricingSpecial-event pricingCash rebatesLow-interest financingLonger payment termsWarranties and service contractsPsychological discounting

20Differentiated PricingCustomer-segment pricingProduct-form pricingImage pricingChannel pricingLocation pricingTime pricingYield pricing

21Initiating and responding to price changesInitiating price cutsLow quality trapFragile market share trapShallow pocket trapPrice war trapInitiating price increaseDelayed quotation pricingEscalating clausesUnbundlingReduction of discounts22Reactions to competitive price cuts

Reactions to competitive price cuts

Strategic OptionsReasoningConsequences

Maintain price and perceived quality. Engage in selective customer pruning.Firm has higher customer loyalty. It is willing to lose poorer customers to competitorsSmall market share, lowered profitability

Raise price & perceived qualityRaise price to cover rising costs. Improve quality to justify higher prices.Smaller market share, maintained profitability

Maintain price and raise perceived qualityIt is cheaper to maintain price and raise perceived quality.Smaller market shareShort term decline in profitabilityLong-term increase in profitability

Cut price partly and raise perceived qualityMust give customers some price reduction but stress higher value offerMaintained market shareShort term decline in profitabilityLong-term maintained profitability

Cut price fully and reduce perceived qualityDiscipline and discourage price competitionMaintained market shareShort term decline in profitability

Strategic OptionsReasoningConsequences

Cut price fully and reduce perceived qualityDiscipline and discourage price competition and maintain profit marginMaintained market shareMaintained marginReduced long term profitability

Maintain price and reduce perceived qualityCut marketing expense to combat rising costSmaller market share Maintained marginReduced long-term profitability

Introduce an economy modelGive the market what it wantsSome cannibalization but higher total volume