Download Pricing Strategy and Management

Professor Chip Besio Cox
School of Business
Southern Methodist University
Pricing Considerations
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Objectives:
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Enhance brand image
Provide customer value
Obtain an adequate ROI
Maximize profits
Maintain price stability in an industry or
market
Factors Affecting Pricing
Internal Factors
Costs
Product, Strategy
Pricing
Decisions
External Factors
Competitors
Customers
Pricing Considerations
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Factors Effecting Pricing:
 Demand sets price ceiling
 Cost sets price floor
 Consumer value perceptions
 Consumer price sensitivity
 Government regulations
Pricing Considerations
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Factors Effecting Pricing:
 Product/Service differentiation
 Organization’s financial goals
 Stage of Product Life Cycle
 Marketing Channel margin impact
 Prices of other products in mix
Pricing Considerations
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Price as Indicator of Value
 Value = Perceived Benefits/Price
 Value may be linked to meeting expectations
of consumer
 Price may shape the consumer’s
perceptions of value
 Price may affect consumer’s perception of
prestige
Customer Considerations
PRICE SENSITIVITY
Product categories are not uniformly
responsive to prices -- some are more
sensitive to price levels than others
 Customers also may respond differently
than one another to price levels
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Price sensitivity (price elasticity) reflects how purchase
behavior changes with changes in price
Price
Pricing Considerations
PRICE SENSITIVITY
A. Inelastic Demand Demand hardly changes with
a small change in price
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
P2
B. Elastic Demand Demand changes greatly with
a small change in price
P1
Q 2
Q 1
Quantity Demanded per Period
Product-Based Pricing Approaches
Product Line Pricing
Setting price steps between product line items
i.e. $299, $399
Optional-Product Pricing
Pricing optional or accessory products sold with
the main product *** i.e. car options
Captive-Product Pricing
Pricing products that must be used with the main
Product***i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing low-value by-products to get rid of them
***i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing bundles Of products sold together
***i.e. season tickets, computer makers
Source:
Prentice Hall
Cost Considerations
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
 Recall
that costs may depend on the
production level
Cost Based
Pricing Strategies
Full Cost Strategies
 Variable Cost Strategies
 New-Offering Strategies
 Competitive Bidding
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Cost Based
Pricing Strategies
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Full Cost Strategies
 Markup Pricing
 Break-even Pricing
 ROR Pricing
Cost Based
Pricing Strategies
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Variable Cost Strategies
 Stimulate Demand
 Shift Demand
Cost-Based Pricing Approaches
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Cost-Plus Pricing - Adds a standard mark
up to the cost of the product
 Useful when there are a great many products or
demand is hard to forecast
 Simple to implement

Breakeven or Target Profit Pricing - Price
is set to meet a specific profit target
 Also takes consumer demand into account
Cost-Based Pricing
COST-PLUS
Sellers are more
certain about
costs than
demand
Minimizes
price
competition
Perceived
fairness for
both buyers
and sellers
Pricing Strategies

Competitive Bidding
 Demand is Known & Constant
 Marketing Mix Variables Uncontrollable
 Sophisticated Mathematical Models
○ Calculate Profit Levels
○ Calculate Probability of Winning at
Different Price Levels
Cost Based
Pricing Strategies
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New-Offering Strategies
 Skimming
 Penetration
 Intermediate
New Product Intro Strategies
SKIMMING
INTENT
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Capture “cream” –
PENETRATION
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less price sensitive
buyers
FOCUS
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High Profit Margin
– sacrifice volume
Sell Whole
Market – no
“elite” market
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High Volume
–sacrifice profit
margin
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RESULT
Invite
Competitors,
Short-term Profits
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Keep
Competition
Out – B.O.E.
New Product Intro Strategies
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Skimming Strategy
 Price High Initially
 Reduce Over Time
 Inelastic Demand - Buyers Price Range
 Unique Offering
New Product Intro Strategies
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Skimming Strategy
 Production or Marketing Costs
Unknown
 Limited Capacity to Deliver
 Realistic Perceived Value
New Product Intro Strategies
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Penetration Strategy
 Price Low Initially
 Elastic Demand
 Offering Not Unique
 Competition Entering Quickly
New Product Intro Strategies
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Penetration Strategy
 No Distinct Price Segments
 Volume Increases Dramatically Impact
Costs
 Objective - Large Market Share
New Product Intro Strategies
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Intermediate Strategy
 More Prevalent
 Less Dramatic
Customer Considerations
PRICE AWARENESS
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Mindless Shopping:
 Average time between arriving and departing
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from product category is 12 seconds
In 85% of purchases only the chosen brand was
handled, and 90% of shoppers inspected only
one size
21% could not offer a price estimate when
asked
Only 50% were able to state correct price
93% did know relative price (i.e., higher, lower
or the same as other brands in category)
Source: Dickson and Sawyer (1990)
Customer Considerations
REFERENCE PRICES
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Consumers do not evaluate price
absolutely, but rather relative to a
convenient quantity for comparison
Context Matters!
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Two kinds of reference prices
 External reference price
 Internal reference price
Customer Considerations
REFERENCE PRICES
 External
Reference Prices
 List prices/sale prices
 Other products on the shelf or
convenient for comparison
Customer Considerations
REFERENCE PRICES
 Internal Reference Prices
 One that is recorded in consumer’s memory
 Memory of price may not be accurate
 If brand is frequently promoted, consumers tend
to lower their internal reference point
 consumers have a notion of “fair price”
○ acquisition utility - economic benefit of the
product
○ transaction utility - getting a good deal
Customer Considerations
PRICE AS A SIGNAL
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Price not only has the traditional
economic role of negatively affecting
demand but also offers the customer
information about product quality
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When is price used as a signal?
 When there is little information about
product quality available
 Primarily for experience or credence goods
Customer Considerations
VALUE PRICING
Cost-Based Pricing
Value-Based Pricing
Product
Customer
Cost
Value
Price
Price
Value
Cost
Customers
Product
General Price Adjustment
Strategies
Psychological Pricing
• Adjusting Prices for Psychological
Effect.
•Price Used as a Signal
Promotional Pricing
•Temporarily Reducing Prices to
Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events
Geographical Pricing
• Adjusting Prices to Account for the
Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
International Pricing
• Adjusting Prices for International
Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.