Download Pricing Strategy

Pricing Decisions
Jeremy Kees, Ph.D.
Pricing Overview
• Price: the exchange value of a good or service
• Robinson-Patman Act
– Federal legislation prohibiting price
discrimination that is not based on a cost
differential
• Fair Trade Laws
– Allow manufacturers to stipulate minimum
prices for their products and force retailers to
adhere to them
The Importance of Pricing…
• Prices, and the resulting sales, determine
how much revenue a company receives
• Prices thus influence a firm’s profits
• Prices also influence the firm’s
employment of the factors of production:
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Natural resources
Capital
Human Resources
Entrepreneurship
Just a few strategic issues…
• How much focus should be on costs?
• Should we always strive for the industry’s
traditional margins
• How often should we revise price? (often
enough to capitalize on market changes)
• Should pricing decisions happen
independently or as an intrinsic element of
market-positioning strategy?
• How much should we vary price for
different products, segments, channels,
and purchase occasions?
Strategies
• “Freemium” strategy —giving some
offering away for free while profiting
from extras that are priced appropriately
– Skype
– Ryanair
• parody
Consumer Psychology and Pricing
• Reference Prices
– Internal
– External
• Price-Quality Inferences
– Moderated by category/product knowledge
• Price Cues
– “Psychological Pricing”
• Odd Pricing
• Unit Pricing
Setting the Price
Select the objective
Determine demand
Estimate costs
Analyze competitors
Select the final price
Objective
Purpose
Example
Profitability Objectives
Profit Maximization
Target Return
Low introductory interest rates
on credit cards with high
standard rates after 6 months.
Market Share
Objectives
Sales Maximization
Market Share
Dell’s low-priced PCs increase
market share and sales of
services
Value Objectives
Value Pricing
Per-song charges for music
downloads
Prestige Objectives
Lifestyle
Image
High-priced luxury autos such as
BMW and watches by Piaget
NFP Objectives
Cost Recovery
Market Incentives
Market Suppression
High prices for tobacco and
alcohol to reduce consumption
Determining Demand
• Price sensitivity
– Implications for branding!!
• Estimating demand curves
– Done primarily through marketing research
• Price elasticity of demand
– Elastic vs. Inelastic
Estimating Costs
• Types of Costs
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Fixed
Variable
Total
Average
Competitive Analysis
• Only after we determine market demand
and company costs
• We need to examine…
– Product features
– Perceived value
Select Pricing Method
• “3 Cs”
– Customer Demand
– Cost Function
– Competitors Prices
Pricing Strategies
• Skimming
– High-End Products
– Introduction Stage of the PLC
– Adidas / Fathead
• Penetration Pricing
– Generates Trials
Pricing Strategies
• Value Pricing - EDLP
– Wal-Mart
• Competitive Pricing
– Compete on other product attributes
Select Pricing Method
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Markup pricing (cost-plus)
Target-return pricing (breakeven analysis)
Perceived-value pricing
Going-rate pricing (customary)
Auction-type pricing
Select Final Price
• Factors to consider:
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Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties
Adapting the Price
• By geographic area
• Discounts and Allowances
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Cash Discount
Trade Discount
Quantity Discount
Allowances
Rebates
• Promotional Pricing
– Loss Leaders
• Differentiated Pricing
• Product Mix Pricing (Product-Line Pricing)
– Bundling
Risks of Making Price Adjustments
• Customers assume quality is low
• A low price buys market share but not
loyalty (remember relationship
marketing?)
• Higher-priced competitors match the
lower prices but have longer staying
power because of deeper cash reserves
• Trigger a price war
Responding to Low-Price
Competitors