Download Pricing management

Formulating Strategic
Marketing Programs
Pricing Management
Pricing...
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Converts the underlying value of a product
offering or service into revenues and profits.
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Is a fundamentally important activity to the
firm--pricing power.
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Is not a simple process.
Basic Concepts & Jargon
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Marginal costs--the unit costs of production
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In a competitive market, establishes the lowest
feasible price a firm can set.
Value price--the highest price the market will
bear
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Establishes an upper bound on prices, though
competition usually prevents value prices from
being realized.
The Pricing Range
Value Price
Downward price pressure
From competitive substitutes
Upward price pressure
through marketing efforts
Our Price
Feasible
Price
Range
Marginal Cost
Our
Premium
0
Price Sensitivity
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How customers respond to price changes
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Price elasticity of demand
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Demand is less elastic when:
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Few or no substitutes or competitors
Buyers do not notice the higher price
Buyers are slow to change their buying habits
Buyers think the higher prices are justified
Pricing Methods
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Mark-up pricing
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Add a standard mark-up to the product’s costs
unit cost
Mark-up =
(1-desired return on sales)
price
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Target-return pricing
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The firm determines price based on desired target
rate of return on investment (ROI)
Target-return
Unit desired return x invested capital
= cost +
unit sales
price
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Perceived value pricing
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Base price on customers’ perceived value
Have to deliver more value than the competitor and
demonstrate this to prospective buyers
Value pricing
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Based on firm becoming a low-cost producer while
maintaining quality
Targets value-conscious consumers
Everyday low pricing
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Going-rate pricing
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Base prices primarily on competitors’ prices
The same, more, or less than major competitor
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Auction-type pricing
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Group pricing
Pricing Goals
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Determining pricing tactics depends on what
goals are to be accomplished
Effective Pricing Management
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Discriminate between customers according to
market segments.
Coordinate incentives across intermediaries
and consumers.
Effectively deal with competition.
Integrate with the firm’s other marketing
efforts.
Understand consumers’ willingness to pay.
Understand pricing effects throughout product
line.
Customer Discrimination
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Different segments of customers often have
different value prices for the same product.
Ideally, firms would like to charge each
customer his/her value price.
Discrimination, in the sense of charging
different prices for the same good to
reasonably identical customers is generally
considered illegal.
Discrimination (continued)
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There are legal exceptions to
discrimination:
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Price-customization opportunities
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Customers self-select into appropriate price
tiers
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Business-to-business, service relations
Choose between differently priced options
Quantity discounts
Loyalty programs
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Proactively shape customers into what is desired
Incentive Coordination
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Directly link incentives to desired behavior
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Three areas of incentive coordination:
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Salesperson incentives and price flexibility
Intermediary margins and push
End-user incentives and service pricing
Salesperson Incentives
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The degree of pricing flexibility allocated to the
salesperson directly affects selling behavior.
Direct link between incentives and
salesperson’s compensation plan.
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If commission is tied to volume, the salesperson will
discount heavily and frequently in order to maximize
quantity sold.
If commission is tied to profitability, the salesperson
will try to hold prices high in order to maximize
margins, but low sales volume may result.
Intermediary Incentives
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The margin built into a price provides
resellers with incentives to push the product.
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Trade promotions are another type of
incentive:
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Quantity discounts
Compensate marketing efforts
End-User Incentives
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Salient to services.
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To avoid over-utilization of services (e.g.,
health care), link cost savings to consumption
to encourage judicious consumption
behavior.
Dealing with Competition
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In a competitive environment, have to set prices
with competitor actions in mind.
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Commodity market: often use fluctuating prices
Mature products: high use of discounts and promotions
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Take price out of the equation
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Promotions can result in forward buying
Automatic Price Protection
Loyalty programs
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Useful in product categories marked by low
differentiation
Integration With Other Marketing
Efforts
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Price should reflect the value of the product
or service.
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High prices--skimming
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Obtain low market share with high margins.
Marketing program needs to communicate
product benefits.
Intensive selling.
Maximize intermediary push.
Integration (continued)
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Low prices—penetration
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Obtain high market share with low margins.
Marketing program should focus on generating
general awareness.
Focus on productive capacity.
Price differentiation
Consumers’ Willingness to Pay
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What is the impact of consumers’ willingness
to pay on demand and a firm’s net income?
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At various price levels
When price is changed
Behavioral price vs. objective price
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“How fair of a deal am I getting?” vs. “How good of
a deal am I getting?”
Psychological Update #1
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Willingness to pay is impacted by relative
incentives.
In determining willingness to pay, a consumer will
consider both absolute “economic utility” from the
transaction [i.e., perceived value - actual price]
and relative incentive to enter the transaction [i.e.,
(perceived value - actual price)/actual price].
Psychological Update #2
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Willingness to pay is impacted by a salient
reference price.
In determining willingness to pay, a consumer
will consider economic utility from the
transaction [i.e., perceived value - actual price]
and the consistency between the actual price
and a salient reference price [i.e., actual price reference price].
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The most common basis for a reference
price is the previous price paid for a
product.
Psychological Update #3
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Willingness to pay is impacted by cost of
goods sold.
In determining willingness to pay, a consumer will
consider his/her economic utility from the
transaction [i.e., perceived value - actual price]
and the economic utility of the firm [i.e., actual
price - cost of goods sold].
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Consumers do not want to be taken
advantage of.
Psychological Update #4
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Perceptions of fairness vary across product
categories.
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In determining willingness to pay, the degree to
which a consumer will rely upon economic utility
from the transaction [i.e., perceived value - actual
price] will vary across product categories.
Necessary vs. discretionary purchases.
Luxury vs. utilitarian products.
Managing Perceptions of Transaction
Fairness
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Strategy #1: Actively manage price
expectations.
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Establish credible reference prices.
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Customary prices
Odd prices
Manage product price trends.
Encourage favorable comparisons.
Avoid unfavorable comparison through product
differentiation.
Managing Perceptions...
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Strategy #2: Actively manage perceptions of
cost of goods sold.
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Focus attention of fully-loaded cost of goods sold.
Bundle products to obscure cost of goods sold.
Focus attention of consumer value.
Product Line Pricing
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The pricing of one product in product line
may affect sales of other products in product
line.
Price elasticity of demand
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The degree of responsiveness of demand to a
price change.
Cross-elasticity of demand
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The degree to which changing the price of one
product affects demand for another product.
Cross-elasticity of Demand
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Products with positive cross-elasticity
are substitutes.
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Lowering the price of Product A decreases
demand for Product B without any change in
the price of Product B.
Products with negative cross-elasticity
are complementary products.
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Lowering the price of Product A increases
demand for both Product A and Product B
without any change in the price of Product B.