Review trait theory research, and discuss the idea of one best style of leadership using the Ohio...

Review trait theory research, and discuss the idea of one best style of leadership using the Ohio State studies and the Leadership Grid as points of reference.

Explain, according to Fiedler’s contingency model, how leadership style interacts with situational control.

Discuss House’s revised path-goal theory and Hersey and Blanchard’s situational leadership theory.

Describe the difference between transactional and transformational leadership and discuss how transformational leadership transforms followers and work groups.

Explain the leader-member exchange (LMX) model of leadership and the concept of shared leadership.

Review the principles of servant leadership and discuss Level 5 leadership

Leadership

Learning Objectives

Chapter Fourteen

Leaders Versus Managers

Leaders Innovate Develop Inspire Long-term view Ask what and why Originate Challenge the Status

Quo Do the right thing

Managers Administer Maintain Control Short-term view Ask how and when Initiate Accept the status quo Do things right

Leader trait: personal characteristics that differentiate leaders from followers.

Leadership prototype: mental representations of the traits and behaviors possessed by leaders.

14-1

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Trait Theory

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

http://www.youtube.com/watch?v=ghSJsEVf0pU

Historic Vs. Contemporary Trait Theories of Leadership

Stogdill’s and Mann’s findings

Intelligence Dominance Self-confidence Level of energy and

activity Task-relevant knowledge

Contemporary Trait Research

People tend to perceive that someone is a leader when he or she exhibits traits associated with intelligence, masculinity, and dominance

People want their leaders to be credible

Credible leaders are honest, forward-looking, inspiring and competent

Men and women were seen as displaying more task and social leadership, respectively

Women used a more democratic or participative style than men and men used a more autocratic and directive style than women

Men and women were equally assertive

Women executives, when rated by their peers, managers, and direct reports, scored higher than their male counterparts on a variety of effectiveness criteria

Men displayed more laissez-faire leadership

14-2


Gender and Leadership


The Ohio State Studies: identified two critical dimensions of leader behavior. Consideration: creating mutual respect and

trust with followers. Initiating structure: organizing and defining

what group members should be doing.

14-3


Behavioral Styles Theory


University of Michigan Studies identified two leadership styles that were similar

to the Ohio State studies--one style was employee centered and the other was job centered

The Leadership Grid © represents five leadership styles found by

crossing concern for production and concern for people

Impoverished management Country club management Authority-compliance Middle-of-the-road management Team management

14-4


Behavioral Styles Theory (Cont.)


1. Determine what needs to be done.

2. Determine the right thing to do for the welfare of the entire enterprise or organization.

3. Develop action plans that specify desired results, probably restraints, future revisions, check-in points, and implications for how one should spend his or her time.

4. Take responsibility for decisions.

5. Take responsibility for communicating action plans and give people the information they need to get the job done.

14-5


Skills & Best Practices: Peter Drucker’s Tips for Improving Leadership Effectiveness


6. Focus on opportunities rather than problems. Do not sweep problems under the rug, and treat changes as an opportunity rather than a threat.

7. Run productive meetings. Different types of meetings require different forms of preparation and different results. Prepare accordingly.

8. Think and say “we” rather than “I”. Consider the needs and opportunities of the organization before thinking of your own opportunities and needs.

9. Listen first, speak last.

14-6


Skills & Best Practices: Peter Drucker’s Tips for Improving Leadership Effectiveness (Cont.)


Situational theories: propose that leader styles should match the situation at hand.

Fiedler’s Contingency Model The performance of a leader depends on

two interrelated factors: The degree to which the situation gives the

leader control and influence The leader’s basic motivation

14-7


Situational Theories



14-8 Figure 14-1

Representation of Fiedler’s Contingency Model

McGraw-Hill

SituationalControl

High ControlSituations

Moderate Control Situations

Low Control Situations

Leader-memberrelations

Task Structure

Position Power

Good Good Good

High High High

Strong Weak Strong

Good Poor Poor

Low High High

Weak Strong Strong

Poor Poor

Low Low

Strong Weak

Situation I II III IV V VI VII VIII

Optimal Leadership

Style

Task Motivated Leadership

Relationship Motivated

Leadership

Task Motivated

Leadership

14-11 Figure 14-3

SituationalLeadership Model


SellingS2

Explain decisions and provide opportunity for

clarification

ParticipatingS3

Share ideas andfacilitate in

decision making

Follower-Directed Leader-DirectedFollower-Directed Leader-Directed

LowLow

LowLow

HighHigh

HighHigh

Leader BehaviorLeader Behavior

Task BehaviorTask Behavior

Follower ReadinessFollower ReadinessHighHigh Moderate Moderate Low Low R4 R4 R3 R3 R2 R2 R1R1

Rel

ati

on

ship

Beh

avio

rR

ela

tio

nsh

ip B

ehav

ior

(su

pp

ort

ive

beh

avi

or)

(su

pp

ort

ive

beh

avi

or)

DelegatingS4

Turn overresponsibility for

decisions andimplementation

TellingS1

Provide specificinstructions and closelysupervise performance


Transactional leadership: focuses on the clarifying employees’ roles and providing rewards contingent on performance.

14-12


Transactional Leadership


Transformational leaders: transforms employees to pursue organizational goals over self-interests.

14-13


Transformational (Charismatic) Leadership


14-14 Figure 14-4

A Transformational Model of Leadership


Individual andOrganizationalCharacteristics

Leaderbehavior

Effects onfollowers andwork groups

Outcomes


Charismatic leadership is most likely to be effective when The situation offers opportunities for “moral”

involvement Performance goals cannot be easily established or

measured Extrinsic rewards cannot be clearly linked to

individual performance There are few situational cues or constraints to guide

behavior Exceptional effort, behavior, sacrifices, and

performance are required of both leader and follower

1. Leadership development is a key business strategy

2. Leadership excellence is a definable set of standards

3. People are responsible for their own development

4. Johnson & Johnson executives are accountable for developing leaders

5. Leaders are developed primarily on the job

6. People are an asset of the corporation

7. Human resources is vital to the success of leadership development

14-15


Skills & Best Practices: Johnson & Johnson’s Seven Guiding Principles


This model is based on the idea that one of two distinct types of leader-member exchange relationships evolve, and these exchanges are related to important work outcomes. in-group exchange: a partnership characterized by

mutual trust, respect and liking out-group exchange: a partnership characterized by

a lack of mutual trust, respect and liking Research supports this model

14-16


The Leader-Member Exchange (LMX) Model of Leadership


1. Stay focused on your department’s goals and remain positive about your ability to accomplish your goals.

2. Do not fall prey to feeling powerless and empower yourself to get things done.

3. Exercise the power you have by focusing on circumstances you can control and avoid dwelling on circumstances you cannot control.

4. Work on improving your relationship with your manager.

5. Use an authentic, respectful, and assertive approach to resolve differences with your manager.

14-17


Tips for Improving the Quality of LMX


Shared leadership: simultaneous, ongoing, mutual influence process in which people share responsibility for leading.

14-18


Shared Leadership


14-19 Table 14-3

Key Questions to Consider WhenDeveloping Shared Leadership

What task characteristics call for shared leadership?

What is the role of the leader in developing shared leadership?

How can organizational systems facilitate the development of shared leadership?

What vertical and shared leadership behaviors are important to team outcomes?

What are the ongoing responsibilities of the vertical leader?

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Describe the four characteristics common to all organizations.

Explain the difference between closed and open systems, and contrast the military/mechanical, biological, and cognitive systems metaphors for organizations.

Describe the four generic organizational effectiveness criteria.

Explain what the contingency approach to organizational design involves.

Discuss Burns and Stalker’s findings regarding mechanistic and organic organizations.

Describe new-style and old-style organizations, and list the keys to managing geographically-dispersed employees in virtual organizations.

Designing Effective Organizations

Learning Objectives

Chapter Fifteen

Organization: system of consciously coordinated activities of two or more people. Coordination of effort Common goal Division of labor Hierarchy of authority

Unity of command principle: each employee should report to a single manager.

Organization chart: boxes-and-lines illustration showing chain of formal authority and division of labor.

15-1


What is an Organization?


15-2 Figure 15-1

Sample Organization Chart


15-2 Figure 15-1

Sample Organization Chart for a Hospital


Board of Directors

Chief ExecutiveOfficer

StrategicPlanningAdvisor

LegalCounsel

PresidentCost-

ContainmentStaff

ExecutiveAdministrative

Director

ExecutiveMedicalDirector


15-3 Figure 15-1

Sample Organization Chart for a Hospital (Cont.)


ExecutiveAdministrative

Staff

ExecutiveMedicalDirector

Dir.Of

HumanResources

Dir.Of

Admissions

Dir.Of

Accounting

Dir.Of

Nutrition& Food

Services

Dir.Of

Patient& PublicRelations

Dir.X-Ray &

LabServices

Dir.Of

Surgery

Dir.Of

Pharmacy

ChiefPhysician

Dir.Of

Out-Patient

Services


Span of control: the number of people reporting directly to a given manager.

Staff personnel: provide research, advice, and recommendations to line managers.

Line Managers: have authority to make organizational decisions.

15-4


Span of Control


15-5


Needed: Open-System Thinking

Open system: “Depends on constant interaction with the surrounding environment for survival.” (For example, the human body.)

Closed System: “A self-sufficient entity, closed to the surrounding environment.” (For example, a battery-powered clock.)


Bureaucracy: Max Weber’s idea of the most rationally efficient form of organization.

Weber’s Bureaucracy: four factors should make bureaucracies the epitome of efficiency Division of labor A hierarchy of authority A framework of rules Administrative personality

15-6


Organizations as Military/Mechanical Bureaucracies


15-7 Figure 15-2

The Organization as an Open System: The Biological Metaphor


Goals and Values Subsystem

Technical Subsystems

Psychological Subsystem

Structural Subsystem

Managerial Subsystem

Feedback

Inputs Outputs


“No single approach to the evaluation of effectiveness is appropriate to all circumstances or for all organization types.” Goal accomplishment Resource acquisition Internal processes Strategic constituencies satisfaction

Strategic constituency: any group of people with a stake in the organization’s operation or success.

15-8


Generic Effectiveness Criteria


15-9 Figure 15-3

Four Dimensions of Organizational Effectiveness


Goal Accomplishment

Resource Acquisition

Strategic Constituencies

Satisfaction

Internal Processes


Contingency approach to organization design: creating an effective organization-environment fit.

15-10


The Contingency Approach to DesigningOrganizations


15-11


Mechanistic versus Organic Organizations

Mechanistic organizations: “Rigid bureaucracies with strict rules, narrowly defined tasks, and top-down communication.” (Tend toward centralized decision-making.)

Organic organizations: “Flexible networks of multitalented individuals who perform a variety of tasks.” (Tend toward decentralized decision making.)


15-12 Table 15-1

New-Style versus Old-Style Organizations

Job requirements oriented

Hierarchical

Command/control oriented

Individual oriented

Job oriented

Functional

Large

Local

Information is scarce

Stable

Old

Customer oriented

Lateral/networked

Involvement oriented

Team oriented

Skills oriented

Product/customer oriented

Small and large

Global

Information rich

Dynamics learning

New


Discuss the external and internal forces that can create the need for organizational change.

Describe Lewin’s change model and the systems model of change.

Explain Kotter’s eight steps for leading organizational change.

Review the 10 reasons employees resist change. Identify alternative strategies for overcoming

resistance to change. Discuss the process organizations use to build their

learning capabilities.

Managing Change and Organizational Learning

Learning Objectives

Chapter Sixteen

External forces for change: originate outside the organization.

16-1


External Forces of Change


Demographic characteristics: The workforce is more diverse there is a business imperative to effectively manage

diversity Technological advancements:

organizations are increasingly using technology as a means to improve productivity and market competitiveness

Market changes: the emergence of a global economy is forcing companies to

be more competitive and to do business differently organizations are forging new partnerships and alliances

aimed at creating new products and services Social and political pressures:

society and its legislative bodies can put pressure onorganizations to change the way they do business--thetobacco industry is a good example

16-2


External Forces of Change (Cont.)


Internal forces for change: originate inside the organization.

16-3


Internal Forces of Change


16-4

Lewin’s Change Model


Unfreezing Creates the motivation to change Encourages the replacement of old behaviors and attitudes with

those desired by management Entails devising ways to reduce barriers to change Creates psychological safety

Changing Provides new information, new behavioral models, or new ways of

looking at things Helps employees learn new concepts or points of view Role models, mentors, experts, benchmarking results, and

training are useful mechanisms to facilitate change

Refreezing Helps employees integrate the changed behavior or attitude into their

normal way of doing things Positive reinforcement is used to reinforce the desired change Coaching and modeling help reinforce the stability of change


16-5 Figure 16-1

A Systems Model of Change


Target Elements of Change

OrganizingArrangements

GoalsSocial Factors

Methods

People

Internal* Strengths

* WeaknessesExternal

* Opportunities* Threats

* OrganizationalLevel

* Department/group level* Individual

level

Inputs Outputs

Str

ate

gy


16-6 Table 16-1

Steps to Leading Organizational Change

Create and implement a communication strategy that consistently communicates the new vision and strategic plan.

Communicate the change vision

Create a vision and strategic plan to guide the change process.

Develop a vision and strategy

Create a cross-functional cross-level group of people with enough power to lead the change.

Create the guiding coalition

Unfreeze the organization by creating a compelling reason for why change is needed.

Establish a sense of urgency

DescriptionStep


16-7 Table 16-1

Steps to Leading Organizational Change (Cont.)

Plan for and create short-term “wins” or improvements. Recognize and reward people who contribute to the wins.

Generate short-term wins

Eliminate barriers to change and use target elements of change to transform the organization. Encourage risk taking and creative problem solving.

Empower broad based action

DescriptionStep


16-8 Table 16-1

Steps to Leading Organizational Change (Cont.)

The guiding coalition uses credibility from short-term wins to create more change. Additional people are brought into the change process as change cascades throughout the organization. Attempts are made to reinvigorate the change process.

Consolidate gains and produce more change

Reinforce the changes by highlighting connections between new behaviors and processes and organizational success. Develop methods to ensure leadership development and succession.

Anchor new approaches in the culture

DescriptionStep


Organization Development: a set of techniques or tools that are used to implement organizational change. OD Involves Profound Change

Not just a Band-Aid OD is Value Loaded

i.e. cooperation over conflict Customer centered

OD is a Diagnosis/Prescription Cycle OD is Process-Oriented

Form and not content

16-9


Characteristics of Organization Development


Survey feedback Process consultation Team building Intergroup development Technostructural activities

16-10 Table 16-2


Some OD Interventions for Implementing Change


A meta-analysis of 18 studies indicated that employee satisfaction with change was higher when top management was highly committed to the change effort.

A meta-analysis of 52 studies provided support for the systems model of organizational change.

A meta-analysis of 126 studies demonstrated that multifaceted interventions using more than one OD technique were more effective in changing job attitudes and work attitudes than interventions that relied on only one human-process or technostructural approach.

A survey of 1,700 firms from China, Japan, the United States, and Europe revealed that 1) US and European firms used OD interventions more frequently than firms from China and Japan and 2) some OD interventions are culture free and some are not.

1. An individual’s predisposition toward change

2. Surprise and fear of the unknown

3. Climate of mistrust

4. Fear of failure

5. Loss of status and/or job security

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Why People Resist Change in the Workplace


6. Peer pressure

7. Disruption of cultural traditions and/or group relationships

8. Personality conflicts

9. Lack of tact and/or poor timing

10. Nonreinforcing reward systems

16-12


Why People Resist Change in the Workplace (Cont.)


16-13 Table 16-3

Six Strategies for OvercomingResistance to Change

Can be very time consuming if lots of people are involved

Once persuaded people will often help with the implementation of change

Where there is a lack of information or inaccurate information and analysis

Education

Drawbacks

Advantages

Commonly used in situations

Can be very time consuming if participators design an inappropriate change

People who participate will be committed to implementing change, and any relevant information they have will be integrated into the change plan

Where the initiators do not have all the information they need and where others have considerable power to resist

Participation & Involvement

Approach


16-14 Table 16-3

Six Strategies for OvercomingResistance to Change (Cont.)

Can be time consuming, expensive, and still fail

No other approach works as well with adjustment problems

Where people are resisting because of adjustment problems

Facilitation & Support

Drawbacks

Advantages


Can be too expensive in many cases if alerts others to negotiate for compliance

Sometimes it is a relatively easy way to avoid major resistance

No other approach works as well with adjustment problems

Negotiation & AgreementApproach


16-15 Table 16-3

Six Strategies for OvercomingResistance to Change (Cont.)

Can lead to future problems if people feel manipulated

It can be a relatively quick and inexpensive solution to resistance problems

Where other tactics will not work or are too expensive

Manipulation & Cooperation

Drawbacks

Advantages


Can be risky if it leaves people mad at the initiators

It is speedy and can overcome any kind of resistance

Where speed is essential and where the change initiators possess considerable power

Explicit & Implicit Coercion

Approach


16-16 Figure 16-2

Building an Organization’s LearningCapability


Facilitatingfactors

Learningmode

Culture and experience

Internalstructure and

processes

An organization’slearning capability

Customersatisfaction

Organizationalperformance

Salesgrowth

Profitability


16-17 Table 16-4


Factors that Facilitate OrganizationalLearning

1. Scanning imperative

2. Performance gap

3. Concern for measurement

4. Experimental mindset

5. Climate of openness

6. Continuous education

7. Operational variety

8. Multiple advocates

9. Involved leadership

10. Systems perspective


16-18


Six Dominant Modes of Learning

1. Analytical learning

2. Synthetic learning

3. Experimental learning

4. Interactive learning

5. Structural learning

6. Institutional learning


16-19


Skills & Best Practices: Characteristics of Teacher-Learners

1. Become actively involved in teaching and learning.

2. Demonstrate that you care about your coworkers’ well-being.

3. Develop relationships with as many people from different backgrounds, experience, and organizational positions as possible.

4. Reflect on what you have learned from a given situation.

5. Listen to others and try to learn something from social interactions with others.


Implement continuous improvement programs Increase employee competence through training,

or buy talent from outside the organization Experiment with new ideas, processes, and

structural arrangements Go outside the organization to identify world-

class ideas and processes Instill systems thinking throughout the

organization

16-20


Working to Generate Ideas with Impact


Measuring and rewarding learning Increasing open and honest dialog among organizational

members Reducing conflict Increasing horizontal and vertical communications Promoting teamwork Rewarding risk taking and innovation Reducing the fear of failure Increasing the sharing of successes, failures, and best

practices across organizational members Reducing stressors and frustration Reducing internal competition Increasing cooperation and collaboration Creating a psychologically safe and comforting

environment

16-21


Working to Generalize Ideas with Impact


Part EightPricing Decisions

21. Pricing Concepts

22. Setting Prices

Chapter 21Pricing Decisions

1. THE NATURE OF PRICE

The value exchanged for products in a marketing exchange

Barter

www.barter.net

Terms Used To Describe Price

Tuition Premium Fine Fee Fare Toll Rent

Commission Dues Deposit Tips Interest Taxes

Pricing at New Balance

2. PRICE AND NONPRICE COMPETITION

• Price Competition Emphasizes price as an issue and matches or

beats competitors’ price To compete effectively- firm should be the low-

cost seller Standardized products Frequent price changes Provides flexibility

Competitor Pricing

Nonprice Competition

Emphasizes distinctive product:• Features• Quality• Promotion• Packaging• Other

Distinction must be effective

Demand CurveSection Home

A graph of the quantity expected to be sold at various prices if other factorsremain constant

Demand Curve, Price-Quantity Relationship and Increase in Demand

Figure 21.1

Demand Curve, Relationship Between Price and Quantity for Prestige Products

Figure 21.2

Demand FluctuationsSection Home

Changes in buyers’ needs

Variations in effectiveness of other marketing mix variables

Presence of substitutes

Environment factors

Spending Habits WomenFind Hardest To Break

0% 10% 20% 30% 40% 50%

USA Today Snapshots, “Spending Habits Women Find Hardest to Break,” Feb. 6. 2006, p. B1

Assessing Price Elasticity of DemandSection Home

A measure of the sensitivity of demand to changes in pricePrice Elasticity

Price Elasticity of

Demand= (% Change In Quantity Demanded)

% Change in Price

Elasticity Of DemandFigure 21.3

Price/Demand Elasticity

Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue

Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue

Factors AffectingElasticity Of Demand

1) Availability of substitutes- for example, can consumers replace coffee with tea for caffeine?

2) Amount of income available to spend on good- with an increase in price but on a fixed consumer income will the consumer be forced to buy less?

3) Time- over time will a consumer cutback/quit smoking if price of cigarettes goes up?

Investopedia, “Economics Basics: Elasticity”, 2006, http://www.investopedia.com/university/economics/economics4.asp

4. DEMAND, COST, AND PROFIT RELATIONSHIPS

Marginal Analysis Fixed costs Average fixed cost Variable costs Average variable cost Total cost Average total cost Marginal cost (MC) Marginal revenue (MR)

Airlines, hotels, rental cars are dominated by which type of costs?

A) Fixed Costs

B) Variable Costs

Demand, Cost, and Profit Relationships Break-Even Analysis

Break-even point – point at which the costs of producing a product equal the revenue made from selling the product

Breakeven Point =

Fixed CostsPer-Unit Contribution to Fixed Costs

(Price – Variable Costs)

Determining TheBreak-Even Point

Figure 21.7

5. FACTORS THATAFFECT PRICING DECISIONS

Figure 21.8

Organizational AndMarketing Objectives Set prices consistent with organization’s

goals and mission Pricing decisions should be compatible with

firm’s marketing objectives

Costs

Why price below cost?

Match competition

Generate cash flow

Increase market share

Focus on cost reduction

Costs shared with others in product line

Pricing Decisions Influence Other Mix Variables

Demand

Distribution Intensive

Selective

Exclusive

Promotion Premium = little advertising, personal selling

Complex = potential buyer confusion

Customers

Interpretation - what price means or communicates

Response - closer to purchase and enhances satisfaction

Assessment of value

Reference Prices

Internal- developed in buyer’s mind through experience with product

External- comparison price provided by others

Duracell compare its quality to its direct competitors and justifies its

price. (Page 590)

Factors Affecting Consumer Acceptance Of Price Changes

1) Level of knowledge

2) Frequency of purchase

3) Brand loyalty

4) Perceptions of quality

Abstracts for the 1999 Leisure Research Symposium: Research Pathways in Leisure, Recreation and Tourism, “Generalizations Regarding

Participant Reaction To Reaction”, C. Bee, 1999, http://www.ahs.uwaterloo.ca/~garls/99abstracts/colleen.htm

Context Of Price-Buyers Characterized

Value-conscious - concerned about price and quality

Price-conscious - want to pay low prices

Prestige-sensitive - purchase products that signify prominence and status

Prestige Products (Page 592)

Advertisements that emphasize both quality and price are aimed at value-conscious customers

Reprinted with permission of Xerox Corporation

6. PRICING FOR BUSINESS MARKETS

Trade (Functional) Discount

A reduction off the list price by a producer to an intermediary for performing certain functions

Quantity Discount

Deduction from list price that reflect(s) the economies of purchasing in large quantities

Cumulative Non-Cumulative

Other Discounts

Cash Discounts Seasonal Discounts Allowance

Seasonal discounts allow sellers to maintain steadier results during the year

Reprinted with permission of Endless Fun Resorts

Geographic Pricing

F.O.B. Factory Destination

Uniform geographic (Postage-Stamp) Zone Base-point Freight Absorption

Stages For Establishing Prices

Figure 22.1

Pricing Objectives And Typical Actions To Achieve Them

High-quality products are usually priced to reflect the quality level

© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.

2. ASSESSMENT OF THE TARGET MARKET’S EVALUATION OF PRICE

Price depends on: Type of product Type of target market Purchase situation (e.g: price of concessions at

movies)

Examples Of PerceptionsOf Product Value

3. EVALUATION OF COMPETITORS’ PRICES

Regular function of marketing research Importance of customer view of pricing and

marketing mix variables Pricing above competition – creates an

exclusive image Pricing below competition – gains market share

Some prices are set higher than the competition to create an exclusive image

FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission

4. Selection of a Basis of Pricing

Cost Demand Competition

Other

Cost Based Pricing

Cost-based pricing – a dollar amount to the cost of the product

Cost-plus pricing – adding a specified dollar amount to the seller’s costs

Markup – Adding to the cost of the product a predetermined percentage of that cost

Markup as % of Cost = Markup

Cost= 15 45

= 33.3 %

Markup as %

of Selling Price= Markup

Selling Price= 15 60

= 25.0 %

Demand-Based Pricing

Customers pay a higher price when demand for the product is strong and a lower price when demand is weak

Non-Price FactorsAffecting Demand

Product

Quality

Range

Nature- essential/luxury

Substitutes

Support

Service at point of sale & after

Advertising/promotion

Distribution Methods

Market

Degree of competition

Competitor action/reaction

General economic conditions

“Demand based pricing”, N. Coulthurst, 4/3/02, http://www.accaglobal.com/publications/studentaccountant/404831

Point-of-sale service affects demand

Reprinted with permission of Lowe's Companies

5. SELECTION OF A PRICING STRATEGY

A few years ago Coca Cola was experimenting with a vending machine in Australia that had a mechanism for charging different prices for soda depending on demand and temperature. As it got hotter and as more people purchased soda, the price went up. Do you think this is a good idea for Coca Cola?

Differential Pricing Techniques

Negotiated – final price established through buyer/seller bargaining Secondary-market – one price for primary target market and

different price for another Periodic discounting – systematic temporary price reduction Random discounting – unsystematic temporary

price reduction

Poll and comments on differential pricing at Amazon.com.

New-Product Pricing

Price skimming – charging the highest possible price that buyers who most desire the product will pay

Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly

Product-Line Pricing Strategies

Captive – basic product in a product line low while related items higher

Premium – pricing highest-quality product higher than other models

Bait – low pricing on one item in line with intention of selling higher-priced item in the line

Price Lining – limited number of prices for selected lines of merchandise

For Premium Pricing,Engage The Emotions

1) Taking Care of Me - overstressed people want to pamper selves

2) Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc.

3) Questing - consumers appreciate adventure

4) Individual Style - personal taste, differentiate self from others

iBizResources, “For Premium Pricing, engage the Emotions”, 2006,

http://www.familybusinessstrategies.com/articles4/041404f.html

Psychological Pricing Techniques (1)

Reference pricing – moderate pricing positioned next to a more expensive brand

Bundles pricing – packaging multiple products to be sold at a single price

Multiple-unit pricing – packaging together two or more identical products to be sold at a single price

Everyday low prices (EDLP) – pricing products low on a consistent basis

Psychological Pricing Techniques (2)

Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions

Customary pricing – on the basis of tradition

Prestige pricing – setting prices at a high level to convey prestige

Consumers associate higher prices with higher quality

Reprinted with permission of Mannington Mills, Inc.

Sample Prestige Product Prices

Concept of Professional Pricing

Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers

Aetna Physician Pricing Transparency

Types OfPromotional Pricing

Price Leader- firm prices a few products below the usual markup, near cost, or below cost

Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event

Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price

Special events are often seasonal and employ special-event pricing

Reprinted with permission of Montage, Inc.

6. DETERMINATION OF PRICE: PRICING STRATEGY

Yields a certain price- may need refining

Helps in setting final price

In absence of government price controls, remains flexible and convenient to adjust the marketing mix

Review trait theory research, and discuss the idea of one best style of leadership using the Ohio...

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