Download week8-price - University of San Diego Home Pages

Week 8- 11.15.04
Pricing Considerations
and Strategies
Price ?
 The amount of money charged
for a product or service.
 The sum of values consumers
exchange for the benefits of the
product or service.
 Price in the mix, flexibility and
problems.
Factors Affecting Pricing
Decisions
Internal factors
Marketing
objectives
Marketing-mix
strategy
Costs
Organizational
considerations
Pricing
decisions
External factors
Nature of the
market & demand
Competition
Other environmental
factors (economy,
resellers,
government)
The Experience Curve
Cost per unit
$10
$8
$6
$4
$
2
100
200 000 300 000
000Accumulated production
400 000
External Factors Affecting Pricing:
Market and Demand
Sets the upper limit of price possibilities
Perceived value determined by perceived
benefits (not a product only) versus perceived
sacrifice

Elasticity
% change in quantity demand
=
% change in Price
Price
Demand Curves
P’2
P’1
P2
P1
Q2 Q1
Q’2
Q’1
Quantity demanded
per period
Quantity demanded
per period
A. Inelastic demand
B. Elastic demand
General Pricing Approaches
Major considerations in setting price
Low price
High price
Competitors prices Consumer
No possible
Product Other internal and Perceptions
profit at
Costs External factors
Of value
this price
No possible
demand at
this price
Cost-Based Pricing
Add a standard markup to cost of the product.
Very popular because of certainty and fairness.
What about markups ?
Evolution to profit pricing: Break-even analysis.
Dollars (thousands)
Break-Even Chart
Total revenue
6
Profit
B.E
5
Total cost
4
3
2
unit cost
Fixed cost
Loss
1
0
1000
2000
3000
4000
Sales volume in units
5000
Value-Based Pricing
Pricing developed early as part of overall
marketing program
Target price based on perceived value of the
extended product
Perceived value dictates design and cost
Value pricing strategies
Value-added - business markets
Everyday low pricing - consumer markets
Value versus cost based
Pricing
Cost-based pricing
Product
Cost
Price
Value
Customers
Customers
Value
Price
Cost
Product
Value-based pricing
Competition-Based Pricing
Consumers use competitors’ price as
reference for product’s value
Going Rate Pricing
Firm benchmarks on competitive price
Price differences small and constant
Going price as indirect measure of demand
Sealed-Bid Pricing
Lowest price wins - the winner loses?
New Product Pricing Strategies:
Market-Skimming Pricing
High price just worthwhile to some
segments fewer sales
Skim maximum
revenue layer by layer
more profit.
Conditions:
 Image and quality key
 Production economic for
segment size
 High barriers to entry
New Product Pricing Strategies:
Market-Penetration Pricing
Low initial price - win
many buyers and large
market share quickly
Conditions:
 Market is price sensitive
 Scale economies exist
 Low price an effective
market entry barrier
Product-Mix Pricing
Strategies
Strategy
Description
Product line pricing
Setting price steps between product items
Optional-product pricing Pricing optional or accessory products
sold with the main product
Captive-product pricing Pricing products that must be used with
the main product
Product-bundle pricing
Pricing bundles of products sold together
Price-Adjustment Strategies
Strategy
Discount and allowance
pricing
Segmented pricing
Psychological pricing
Promotional pricing
Description
Setting prices to reward customer
responses such as paying early or
promoting the product
Adjusting prices to allow for differences
in customers, products, or locations
Adjusting prices for psychological effect
Temporarily reducing prices to increase
short-run sales
Price Changes:
Reasons for Initiating Price Cuts
Excess capacity
Market share falling to competition
Exploit competitive advantage in costs
Anticipate buyer and competitor
reactions
Price Changes:
reasons for initiating price increases
Rising costs and falling profit margins
Demand exceeds ability to produce
What should a company do to justify ?
Avoid negative reactions
Communicate the reasons
Price Changes:
Buyer Reactions
Price cut :
 May be perceived as
negative
Price increase :
 Hot product?
 Exceptional value?
 Greedy seller?
Price Changes:
Competitor Reactions
Reaction likely when:
 Few competing firms
 Few product differences
 Buyers well informed
Reactions never certain:
Each competitor may react
differently
Assessing & Responding to Competitor’s Price Changes
Has competitor
cut price?
No
Yes
Hold current price;
continue to monitor
competitor’s price
Reduce price
No
Will lower price
negatively affect our
market share & profits? ?
Raise perceived
quality
Yes
No
Improve quality
& increase price
Yes
Launch low-price
“fighting brand”
Can/should effective
action be taken?