Download MBA671_Chapter16_Price

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1+1=3!
Dr. S. Borna
MBA 671
Note:
A quick change in a single
element of the marketing mix
cannot overcome basic and
pervasive competitive
weakness in a poorly conceived
or poorly executed strategy.
Table analogy one more
time!
Strategy
Promotion
Price
Product
Place
Corporate Level
SBU Level
P.L.
Reasons for Price Emphasis
Historical Reasons
Technical Reasons
Social Reasons:
(Price mechanism as an
elegant rational for the
efficient competitive market
system)
During the 1960s, according
to a survey, marketing
executives did not rate
pricing among the top five
variables critical to a firm’s
marketing success.
PRICING AS AN ACTIVE ELEMENT
OF MARKETING MIX
TO PROMOTE EXISTING OR NEW
PRODUCTS
TO ENHANCE THE IMAGE
TO INCREASE SALES
Major considerations in setting a price
Price too high: Little or no demand
Price ceiling
Nature of demand in target
market
Business and marketing
strategy
Product differentiation
Competitors’ prices
Price Floor (too low, no profit)
In Setting price the manager should be
aware of the following constraints:
•SBU and marketing strategies
•Target market characteristics
•Product characteristics
•Competitor characteristics
•Economic trends, legal restrictions
Situations Where Price Decisions
Are of Great Importance:
1. When a firm must set a price
for the first time
2. When circumstances lead a
firm to consider a price
change
3. When competition initiates a
price change
A step-by-step procedure for
Setting Pricing Policy
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price
Possible Pricing Objectives
Target return
profit
oriented
Maximize profits
Dollars or unit
sales growth
growth oriented
Growth in market
share
Possible Pricing Objectives
cont.
status
quo
Meeting competition
Non-price competition
Social Objectives: Firm is not
a for-profit organization
Setting Price for the First Time
1. Setting Price in Theory
2. Setting Price in Practice
Three Approaches
-Cost orientation
-Demand orientation
-Competition orientation
Setting Price in Theory
The problem of determining the
demand curve
The problem of determining
the cost functions
Step two
Estimate Demand
and price elasticity
of demand
Methods for Estimating Demand
Some practical methods:
1. Estimating demand in a
laboratory setting
2. Estimating demand in an
actual retail setting
3. Estimating demand in
different test markets
Step Three
Determine Costs
and their relationship to volume
Estimating Cost
1. Fixed cost per unit
2. Variable cost
Step Four
Analyzing competitors’ costs, prices
and offers
Step Five
Select A Method
for Calculating
Price
The Problem of Objectives
1.
2.
3.
4.
Market Penetration
Market-Skimming
Product-Line Promotion
The Problem of Marketing Mix
Reaction
Setting Price in Practice
Cost Oriented Approach to
Pricing:
Markup on Cost
Markup on Price
Target-Return Pricing
An Example of Mark-up on
Cost
Purchase Price (Cost) $400
Markup on Cost 20%
Selling Price ?
400 x .20= 80 Markup on cost
400 + 80 =480 Final Price
An Example of Markup on Price
Purchase Price $1600
Markup on Price 30%
Selling Price?
70%
30%
1600
1600
P=
=
=2285.71
1-.30 .7
30% 685.71
2285.71
70%
1600
Competition-Oriented
Pricing
Going-Rate Pricing
Sealed-Bid Pricing
Step six
Select a final Price
Discount Policies
Quantity Discounts
Cumulative Discounts
Seasonal Discounts
Cash Discounts
Adapt price
structure to meet
variation in demand
and cost across
geographic territories,
market segments etc.
Geographic Pricing Policies
F.O.B.
Zone Pricing
Uniform Delivered Pricing
Freight Absorption Pricing
Basing-Point Pricing
Muncie
$10
$5
Louisville
NY
$13
$25
Chicago
Discriminatory Pricing
Customer Segment
Product-form
Location
Time
Promotional Pricing:
Cash Rebates
Low Interest Financing
Loss-Leader Pricing
When Circumstances Lead a
Firm Consider a Price Change
(initiating a Price Change)
Reasons for a price cut:
Excess capacity
Declining market share
Market domination
(AA as an example)
A reduction in price may lead to:
Low-quality trap
Fragile market share trap
(customers may switch)
Shallow-pockets trap
(Case of American Airlines)
Reasons for increasing price:
Overdemand
cost inflation
Methods for increasing price:
Reduction of discounts
Use of escalator clauses
delayed quotation pricing
etc.
Key Questions:
Customers’ reactions and
interpretation
Competitors’ response
Initiating Price Changes
Consumers’ Reactions to Price
Change
Price Elasticity of Demand
E
=
qp
Q2-Q1
Q1+Q2
P2-P1
P1+P2
Perceptual Factors in Buyer’s
Response
Application of Weber’s Law
jnd =
I
I
=K
Meeting Price Change
Do Nothing Policy (maintain p.)
Meet The Price Change
Other Alternatives
Increase quality and or price
Introduce low-price fighter
brand
Price-Reaction Program for Meeting a
Competitor’s Price Cut
Has competitor
cut his price?
No
Hold our price
at present level;
continue to watch
competitor’s
price
No
No
Yes
Is the price
Is it likely to be
How much has
likely to
permanent Yes his price been
significantly Yes aprice
cut?
cut?
hurt our sales?
By less than 2%
Include a
cents-off coupon
for the next
purchase
By 2-4%
Drop price by
half of the
competitor’s
price cut
By more than 4%
Drop price to
competitor’s
price
Legal Issues in Pricing
Price Fixing
Price Discrimination
Deceptive Pricing
Discrimination is permitted if:
1. There is cost differences
2. To meet lawful competition
3. Different uses of product,
sales at different time period
Bait and Switch Pricing
Review
Setting the Price
 Adapting the Price
 Initiating & Responding to Price
Changes
