Download Pricing Making Profitable Decisions Third Edition

Pricing
Making Profitable Decisions
Third Edition
Kent B. Monroe
University of Illinois at Urbana
Champaign
Champaign, Illinois, U.S.A.
Chapter 1
Effective Pricing Management
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Russian Proverb
• There are two fools in any
market:
– One does not charge enough.
– The other charges too much.
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The Role of Price
Prices determine what products and
services should be produced and in what
amounts.

Prices determine how these products and
services should be produced.

Prices determine for whom the products
and services should be produced.

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The Definition of Price
quantity of money or goods and services
Price =
received by the seller
quantity of goods and services
paid by the buyer
Pricing Terms
Rate
Admission
Fees
User fees
Premiums
Minimum required balances
Rent
Interest charges
Tuition
Tariffs
Fares
Duties
Tolls
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Ways to Change Price
Change the quantity of money or goods and
services to be paid by the buyer

Change the quantity of goods and services
to be provided by the seller

Change the quality of goods and services
provided

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More Ways to Change Price
Change the premiums or discounts to be
applied for quantity reasons.

Change the time and place of transfer of
ownership.

Change the place and time of payment.

Change the acceptable form of payment.

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Faster Technological Progress
Has…
• Reduced the gap between invention and
innovation
• Reduced the average age of products
• Intensified competition from alternative
uses of income
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Proliferation of New Products

“Population explosion” of new products
Product lines have widened
Blurred market segments

Small price differentials may produce
relatively large shifts in demand

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Increased Demand for Services
• Increase in demand for services has led to
an increase in prices, which have led to
public concern and governmental activity
• There is also an increase in demand for
services built into products
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Increased Global Competition
• Increased foreign trade around the world
has increased the amount of price
competition faced by domestic producers
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The Changing Legal
Environment
• Deregulation and privatization of
companies have resulted in more complex,
more difficult, and more important pricing
decisions
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Economic Uncertainty
• Slowed or stopped inflation rates in other
countries’ economies has led to the need for
new approaches to developing pricing
strategies
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Five Factors to Consider
•
•
•
•
•
Demand
Costs
Competitive factors
Corporate profit and market objectives
Regulatory constraints
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Demand Implications
•
•
•
•
Market versus product elasticity
Derived demand for buyer’s output
Likelihood of competitive entry
Demand consequences of a product line
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Cost Implications
• Cost-plus pricing
• Maximizing margins
• Pricing with scarce resources
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Marketing and Distribution
Strategy Implications
• The product life cycle
• Sales force management
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How To Become a Proactive
Pricer
• 1. Understand how pricing works
• 2. Understand how customers perceive
prices and price changes
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The Three Levels of Pricing
Management
• 1. Understanding the economic and
competitive environment
– Factors that influence supply and demand
• 2. Developing product and market pricing
strategy
– Benefits, costs, and prices
• 3. Administering the pricing process
– Tactical pricing decisions
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Level One
• 1. Traditional Economic
• How will current and future supply and
demand dynamics affect overall market
price levels?
–
–
–
–
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Economic/market environment
Changes in competition, supply, capacity
Shifts in demand
New product developments
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Level Two
• 2. Product and Market Strategy
• Within each market segment, what is the
correct list or target price for each product?
–
–
–
–
Customers’ perceptions of price and value
Price research
Profitability analysis
Pricing strategy
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Concept Of Benefits
• A product or service must promise to:
– Perform identified functions,
– Solve identified problems, or
– Provide specified pleasure.
• Thus, a product or service is bought for what
it does, not what it is made of.
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Customer’s Perceptions Are
Important!
• The relative benefits customers perceive
the product or service provides;
• The relative total costs of acquiring,
installing, and using the product or
service over its lifetime;
• The tradeoff that customers perceive
between receiving the perceived benefits
compared to the total costs - perceived
value
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Model Of Price-value
Relationship
Perceived
quality
Actual
Price
Perceived
value
Willingness
to buy
Perceived
monetary
sacrifice
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Level Three
• 3. Price Structure Management
• How to determine the actual price to receive from
each transaction?
– Organizing for price administration
– Transaction management: setting discounts, allowances,
rebates…
– Establishing pricing tactics
– Maintaining feedback and control
– Legal and ethical issues
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Tactical Pricing Decisions
• Tactical pricing decisions concern day-to-day
management of the pricing function, including:
–
–
–
–
–
Timing of price changes
Amount of price changes
Direction of price changes
Administering price changes
Communicating price changes to
• sales force
• customers
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Topics Covered in Following
Sections!
• Section 1: Economic and competitive issues
• Section 2-3: Techniques to acquire and analyze relevant
information
• Section 4: How to develop prices for product life cycles
and multiple products/services
• Section 5: How to increase pricing flexibility
• Section 6: Techniques for pricing in a competitive
bidding situation
• Section 7: Guidelines for developing and implementing a
proactive approach to pricing
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