ZUST-Marketing-Lecture-7_Pricing strategy.ppt
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Transcript of ZUST-Marketing-Lecture-7_Pricing strategy.ppt
8/14/2019 ZUST-Marketing-Lecture-7_Pricing strategy.ppt
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Pricing strategyModule 7
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Learning objectives
Define the term ‘price’ Distinguish profit-oriented, sales-oriented and
status quo pricing objectives
Explain the influence of supply and demand onprices
Apply the concept of price elasticity and discuss
the impact of price changes on total revenue Explain three methods of pricing based on cost
and discuss the advantages and limitations of
each method.
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Learning objectives
Briefly discuss some factors, other than costs,that influence pricing
Identify and explain the four steps in setting the
price for a product and apply the four-stepprocess to a real-word product or service
Use examples to differentiate price skimming,
penetration pricing and status quo pricing Identify and briefly discuss some of the legal and
ethical issues impacting on pricing.
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Importance of price
Revenue
price x quantity sold Profit
revenue minus costs
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Getting the price right is important
Getting it right can be difficult
Need to consider:
perceived value, costs, competitor’s prices reference prices, opportunity costs
Price is a cue to quality
People are becoming more price sensitive expect value for money
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Role of pricing objectives
Objectives should be S.M.A.R.T.
specific
measurable
attainable
realistic
time-framed
Provide a benchmark for measuring
effectiveness of pricing strategies
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Three categories of pricing
objectives
Profit-oriented objectives
Sales-oriented objectives Status quo objectives
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Profit-oriented pricing objectives
Profit maximisation
Satisfactory profits Target return on investment
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Profit maximisation objectives
Maximise the difference between total revenue
and total costs
So, why not set a very high price?
perceived value sets the ceiling
don’t want to attract new entrants
need to be competitive
avoid government intervention
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Satisfactory profits
Acceptable level of profit
Matches risk level higher risk leads to higher profit margins
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Return on investment objective
Return on total assets
ROI = net profit after tax/total assets Are we performing in line with industry ROI
average?
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Sales oriented pricing objectives
Market share
Sales maximisation
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Market share pricing objectives
Brand sales/total sales for product category
Penetration pricing may be used to gain large
market share
Large market share means higher production
volume which drives costs down
However, firms with a smaller market sharecan still be very profitable
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Sales maximisation objectives
Maximise sales volume
Does not consider cost of sales or profit
may not be profitable if cost of sales is high
Short-term focus
temporary strategy to improve cash flow
clear excess stock
end of year sales
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Status quo pricing objectives
Maintain existing price or match competitors
price
industry wisdom
follow the established price leader
Pricing stability
don’t rock the boat
avoid price wars
examples: airlines, pizza industry, video/DVD hire
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Demand impacts on price
Demand is the quantity of goods that will be
sold at various prices for a specified period
Demand curve
exhibit 11.1, p.395
shows the relationship between price and quantity
demanded
usually inverse relationship
as price increases, quantity demanded decreases
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Price elasticity of demand
How does quantity demanded respond to price
changes?
Price elasticity of demand
= % change in quantity demanded/% change in
price
i.e. if price increase of 2% creates a 10% fall in
demand then price elasticity of demand = -10/2 = -5
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Elasticity of demand
Elastic demand
Inelastic demand
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Impact on total revenue
Access to the Interactive elasticity diagram from module 7
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What factors affect elasticity?
Availability of substitutes
Price relative to purchasing power
if very cheap, price rise won’t affect demand
Product durability
fix it rather than replace it if prices are high
Product’s other uses greater number of uses leads to greater elasticity of
demand
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Costs impact on price
Costs set the floor for the price
Need to cover total costs
fixed costs plus variable costs
Fixed costs
do not vary with production volume
Variable costs vary proportionately with production volume
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Mark-up pricing
Add a standard mark-up to the cost of the product
First, calculate unit cost unit cost = variable cost + fixed costs/unit sales
variable cost = $10
fixed cost = $300 000
expected unit sales = 50 000 units unit cost = $10 + 300 000/50 000 = $16
Second, calculate mark-up price
= unit cost / (1- desired return on sales) desired return = 20%
unit cost = $16 then, mark up price = $16 / (1-0.2) = $20
so, profit to manufacturer is $4 per unit
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Profit maximisation pricing
Marginal revenue = marginal cost
Marginal revenue
the extra revenue associated with selling an extra
unit of output or the total change in total revenue
associated with one unit change in output
Marginal cost
change in total costs associated with a one unitchange in output
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Break-even pricing
Break-even point
total revenue = total costs
Break-even volume
= fixed costs /(unit selling price - unit variable cost)
= 300,000/(20 - 10) = 30,000 units
Target profit pricing - add target return (i.e.
plus 20%)
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Breakeven analysis
Dollar total revenue
1,200,000 target profit
10,00,000 total costs
800,000
600,000
400,000 fixed costs
200,000
10,000 20,000 30, 000 40,000 50,000
sales volume in units (quantity)
Break even point is 30,000 units
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Other external factors that influence
price
Stage in product lifecycle
exhibit 11.5, p.402
Competitors’ prices
Distribution strategy pay extra for convenience
Promotion strategy price may be used as a promotional tool
price must cover the costs of promotion Demands of large customers
Relationship of price to quality
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Steps in setting the price
1. Establish pricing goals
2. Estimate demand, costs and profits
3. Select pricing strategy to determine base price4. Determine pricing tactics to adjust base price
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Pricing for new products
New products can be innovative or ‘imitative’
Innovative products lead to price skimming Imitative products lead to penetration pricing
Price reflects positioning
Price changes over product life cycle
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Market penetration pricing
Suits standardised products
Low price
below the market
Large market share
High volume results in lower costs
production and distribution costs fall with volume
achieve even greater economies of scale Penetrate the market
Suits price sensitive market
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Status quo pricing
Meeting the competition
at the market price
Safe strategy
May mean that costs are not covered by firms
with smaller production runs
May mean that profits are not captured byfirms with a differentiated offering
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Pricing tactics
Used to adjust the base price
discounts and allowances
segmented pricing
psychological pricing
promotional pricing
value pricing
geographic pricing
international pricing
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Discounts and allowances
Reduction to the list price for:
quantity discount - larger quantity purchased
cumulative and non-cumulative
cash discount - early payment functional discount - performing a function (ie
returns or delivery)
seasonal discount - purchasing out of season promotional allowance (trade allowance)
rebate (cash refund)
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Value-based pricing
Price is based on consumers’ perceptions of value
what does the consumer consider to be value?
what value is placed on particular attributes/features?
what is the consumer prepared to pay? Sets the ceiling for the price
Non-price elements of the marketing mix are used to
create value
A more creative approach to pricing
can be very profitable
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Geographical pricing
FOB origin pricing
buyer pays freight from the shipping point
Uniform delivered pricing
same freight charged to all locations
Zone pricing
freight cost varies across zones
Freight absorption pricing
seller pays freight
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