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Transcript
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?