Download Chapter 14 Pricing Strategies and Tactics

Price, forming of price on
drugs
Business Use
of Demand Curves
Firms can find analysis of their
products’ demand curves useful
as it helps them:
• Work out how changing their
prices will affect their revenue
• Assess how consumers will react
to changes in price
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Price and Demand
• In general, the higher the price
charged for a good or service,
the lower the quantity that will be
demanded of that product
• This relationship
is not necessarily simple
• Let’s look at an example
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Demand Analysis
50
Quantity
Demanded
1000
Total
Revenue
50000
100
800
80000
150
400
60000
200
300
60000
Price
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Demand Analysis
• At £100 per unit, the
firm earns £80000
revenue
• If price rises
to £150 per unit,
revenue falls
to £60000
• This helps the firm
find its revenue
maximising price
Price
Quantity
Demanded
Total Revenue
50
1000
50000
100
800
80000
150
400
60000
200
300
60000
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Demand Analysis
• At any price below £100
per unit, the firm earns
more by raising its price
• At prices over £100 per
unit, the firm’s revenue
falls
• The revenue maximising
price
is at around £100
per unit
Price
Quantity
Demanded
Total
Revenue
50
1000
50000
100
800
80000
150
400
60000
200
300
60000
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Pricing Strategy
• how does a company decide what price to
charge for its products and services?
• what is “the price” anyway? doesn’t price
vary across situations and over time?
• some firms have to decide what to charge
different customers and in different
situations
• they must decide whether discounts are to
be offered, to whom, when, and for what
reason
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Price vs. Nonprice
Competition
• In price competition, a seller regularly offers
products priced as low as possible and
accompanied by a minimum of services.
• In nonprice competition, a seller has stable
prices and stresses other aspects of
marketing.
• With value pricing, firms strive for more
benefits at lower costs to consumer.
• With relationship pricing, customers have
incentives to be loyal-- get price incentive if
you do more business with one firm.
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Nonprice Competition
• some firms feel price is the main competitive
tool, that customers always want low prices
• other firms are looking for ways to add value,
thereby being able to avoid low prices
• sometimes prices have to be changed in
response to competitive actions
• many firms would prefer to engage in
nonprice competition by building brand
equity and relationships with customers
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Relationship Pricing
• Uses price as a method to build
long-term relationships with the
best customers
• Focuses on giving better deals to
better customers
• Goal is to price relative to the value
of the customer to the firm, while
building loyalty and stimulating
repeat buying
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The Price Determination
Process
• In pricing, an organization first must decide on its
pricing goal.
• The next step is to set the base price for a product.
• The final step involves designing pricing
strategies that are compatible with the rest of the
marketing mix.
• Many strategic questions must be answered:
• Will our company compete on the basis of
price or other factors?
• What kind of discount schedule (if any) should
be adopted?
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The Process: An Illustration
SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
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Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance
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Pricing Strategies
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Penetration Pricing
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Penetration pricing strategy: involves the use of a
relatively low entry price as compared with
competitive offerings; based on the theory that this
initial low price will help secure market acceptance
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products – chocolate
bars, food stuffs, household goods, etc.
• Suitable for products with long anticipated life
cycles
• May be useful if launching into a new market
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Market Skimming
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Market Skimming
Many are predicting a fire sale in laptops
as supply exceeds demand.
• High price, Low volumes
• Skim the profit from the
market
• Suitable for products that
have short life cycles or
which will face competition
at some point in the future
(e.g. after a patent runs out)
• Examples include:
Playstation, jewellery, digital
technology, new DVDs, etc.
Copyright: iStock.com
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Value Pricing
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Value Pricing
• Price set in accordance
with customer
perceptions about the
value of the
product/service
• Examples include status
products/exclusive
products
Companies may be able to set prices according to
perceived value.
Copyright: iStock.com
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Loss Leader
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Loss Leader
• Goods/services deliberately sold below cost
to encourage sales elsewhere
• Typical in supermarkets, e.g. at Christmas,
selling bottles of gin at £3 in the hope that
people will be attracted to the store and buy
other things
• Purchases of other items more than covers
‘loss’ on item sold
• e.g. ‘Free’ mobile phone when taking on
contract package
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Psychological Pricing
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Psychological Pricing
• Used to play on consumer
perceptions
• Classic example - £9.99 instead of
£10.99!
• Links with value pricing – high
value goods priced according to
what consumers THINK should be
the price
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Going Rate (Price Leadership)
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Going Rate (Price Leadership)
• In case of price leader, rivals have difficulty in
competing on price – too high and they lose market
share, too low and the price leader would match
price and force smaller rival out of market
• May follow pricing leads of rivals especially where
those rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing
may be applicable – banks, petrol, supermarkets,
electrical goods – find very similar prices in all
outlets
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Tender Pricing
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Tender Pricing
• Many contracts awarded on a tender
basis
• Firm (or firms) submit their price for
carrying out the work
• Purchaser then chooses which
represents best value
• Mostly done in secret
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Price Discrimination
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Price Discrimination
Prices for rail travel differ for the same journey at
different times of the day
• Charging a different
price for the same
good/service in
different markets
• Requires each market to
be impenetrable
• Requires different price
elasticity of demand in
each market
Copyright: iStock.com
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Destroyer Pricing/Predatory
Pricing
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Destroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally
smaller and weaker) out of business or
prevent new entrants
• Anti-competitive and illegal if it can be
proved
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Absorption/Full Cost Pricing
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Absorption/Full Cost Pricing
• Full Cost Pricing – attempting to
set price to cover both fixed and
variable costs
• Absorption Cost Pricing – Price set
to ‘absorb’ some of the fixed costs
of production
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Marginal Cost Pricing
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Marginal Cost Pricing
• Marginal cost – the cost of producing ONE extra or
ONE fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs
may be relatively high
• Allows variable pricing structure – e.g. on a flight
from London to New York – providing the cost of the
extra passenger is covered, the price could be varied
a good deal to attract customers and fill the aircraft
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Marginal Cost Pricing
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) =
£15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the
seat than not fill it at all!
*All figures are estimates only
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Contribution Pricing
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Contribution Pricing
• Contribution = Selling Price – Variable (direct
costs)
• Prices set to ensure coverage of variable costs
and a ‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such
circumstances
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Target Pricing
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Target Pricing
• Setting price to ‘target’ a specified
profit level
• Estimates of the cost and potential
revenue at different prices, and
thus the break-even have to be
made, to determine the mark-up
• Mark-up = Profit/Cost x 100
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Cost-Plus Pricing
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Cost-Plus Pricing
• Calculation of the average cost
(AC) plus a mark up
• AC = Total Cost/Output
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Influence of Elasticity
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Influence of Elasticity
• Any pricing decision must be mindful of the
impact of price elasticity
• The degree of price elasticity impacts on the
level of sales and hence revenue
• Elasticity focuses on proportionate
(percentage) changes
• PED = % Change in Quantity demanded/%
Change in Price
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Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
• e.g. a 5% increase in price would be met by a
fall in sales of something less than 5%
• Revenue would rise
• A 7% reduction in price would lead to a rise
in sales of something less than 7%
• Revenue would fall
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Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > % change
in price
• e.g. A 4% rise in price would lead to sales
falling by something more than 4%
• Revenue would fall
• A 9% fall in price would lead to a rise in sales
of something more than 9%
• Revenue would rise
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Price Quotations
• List prices: Established prices
normally quoted to potential
buyers
• Market price: Price that an
intermediary or final consumer
pays for a product after subtracting
any discounts, rebates, or
allowances from the list price
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Discounts and Allowances
• Quantity discount: The more you buy,
the cheaper it becomes-- cumulative and
non-cumulative.
• Trade discounts: Reductions from list
for functions performed-- storage,
promotion.
• Cash discount: A deduction granted to
buyers for paying their bills within a
specified period of time, (after first
deducting trade and quantity discounts
from the base price)
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• Reductions from List Price
•Cash discount: price reduction
offered to a consumer, industrial user,
or marketing intermediary in return
for prompt payment of a bill
•2/10 net 30, a common cash discount
notation, allows consumers to subtract 2
percent from the amount due if payment
is made within 10 days
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Calculating a Cash Discount
3/10, NET 30
Percentage to be
deducted if bill is
paid within specified
time
Number of days from
date of invoice in
Number of days from
which bill must be
date of invoice after
paid to receive cash which bill is overdue
discount
1/7, NET 30
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• Trade Discounts: payment to a
channel member or buyer for
performing marketing functions;
also known as a functional
discount
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• Quantity discount: price reduction
granted for a large-volume purchase
•Justified on the grounds that large
orders reduce selling expenses,
storage, and transportation costs
•Cumulative quantity discounts
reduce prices in amounts determined
by purchases over stated time periods
•Non-cumulative quantity discounts
provide one-time reductions in the
list price
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• Allowances
•Trade-in: credit allowance given for a
used item when a new item is purchased
•Promotional allowance: advertising or
promotional funds provided by a
manufacturer to other channel members
in an attempt to integrate the
promotional strategy within the channel
• Rebates: refund for a portion of the
purchase price, usually granted by the
product’s manufacturer
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THANK YOU FOR
ATTENTION!
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