Pricing Strategies
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Price Determination: An Overview
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Demand Curves
P
Q
D
Quantity
Pri
ce
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Price Elasticity of Demand
% Change in quantity demanded
Price Elasticity of Demand =
% Change in price
• Elastic Demand
• Inelastic Demand
• Cross Elasticity of Demand
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Costs, Volume, and Profits
• Fixed Costs (FC)
• Variable Costs (VC)
• Total Costs (TC)
• Marginal Cost MC)
• Marginal Revenue (MR)
• Total Revenue (TR)
TC = (VC X Q) + FC
Total Revenue = Price X Quantity
Profits = TR - TC
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Price Determination Methods
• Markup Pricing
Price = Unit Cost + Markup
Price = Unit Cost/(1-k)* *k = desired % markup
or
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Price Determination Methods
Break-Even Analysis
Total Revenue
Total Cost
Fixed Cost
BEP
$
Quantity (units)
Loss
Profit
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Price Determination Methods
• Target-Return Pricing
(Desired return X Invested capital) Price = Unit Cost + Expected Unit Sales
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Price Determination Methods
• Target-Cost Pricing 1. Define market segments for new product. 2. Product is designed based on competitive
advantages and disadvantages. 3. Position product in context of overall company
strategy. 4. Fine-tune product based on customer’s
preferences, perceived value and willingness to pay.
5. Estimate various price-responsiveness with simulations.
6. Estimate target costs between optimal price and desired margin.
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Price Determination Methods
• Income-Based Pricing
• Real Estate • Marketable Securities • Businesses
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Prices and Customer Value
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Pricing Strategies
Differential Pricing Second-market discounting Periodic discounting
Competitive Pricing Penetration pricing Price signaling Going-rate pricing
Psychological Pricing Odd-even pricing Customary pricing One-sided claims
Product Line Pricing Bundling Premium pricing Partitional pricing
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B2B Pricing Strategies
• New Product Pricing • Price Skimming
• Penetration Pricing
• Experience Curve Pricing
• Competitive Pricing • Leader Pricing
• Parity Pricing
• Low-Price Supplier
• Price Line Pricing • Complementary Product
Pricing
• Price Bundling
• Customer Value Pricing
• Cost-based Pricing • Cost-plus Pricing
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Adapting Prices: Decreases and Increases
• Price Reduction Traps:
1. Low-quality trap
2. Fragile market share trap
3. Shallow pockets trap
• Acceptable Price Range: • Prices the buyer is willing
to pay.
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Adapting Prices: Reacting to Competitive Price Changes
• Temporary retail price reductions substantially increase store traffic and sales.
• Large-market-share brands are hurt less by price changes from smaller competitors.
• Frequent price dealing lowers consumers’ reference prices, which may hurt brand equity.
• Price changes for high-quality brands affect weaker brands and private-label brands disproportionately.
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Adapting Prices: Price Discounts and Allowances
• Cash Discounts
• Trade Sales Promotion Allowances
• Quantity Discounts
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Adapting Prices: Geographical Pricing
FOB Origin Pricing
Uniform Delivered Price
Zone Pricing
Freight Absorption Pricing
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Competitive Bidding and Negotiated Pricing
• Sealed-bid Pricing
• Reverse Auctions
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Pricing Services
Price is influenced by the nature of the service involved.
The larger the market share, the higher the price that
can be charged.
Managing off-peak demand makes pricing services difficult.
Bundling services into a single package and price is a
common strategy. 4/28/2014
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