Download PPT 4

Chapter 13
Experience Curve Pricing
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Experience Curve
The experience curve shows that unit
costs of a product decline predictably over
time as volume increases.
The experience curve considers a broad
array of costs: acquisition, manufacturing,
distribution, marketing.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Cost/price Experience
Cost or
price per
unit
Cumulative volume
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Experience Curve
Logarithm
of cost or
price per
unit
Logarithm of cumulative volume
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Stable Experience Curve
Logarithm
of cost or
price per
unit
Price
Cost
Logarithm of cumulative volume
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Implications of Price-Cost
Relationships
The experience curve relates costs, prices,
volume, and profit margins over time
The ability to predict prices better than
one’s competition is a major strategic
advantage over the long term
The experience curve suggests the need to
develop marketing plans over the product
life cycle
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Sources Of Experience Effect
• Learning
– Developing skills that allow people to be
more efficient
• Technological improvements
– Changing the production process, changing
distribution methods
• Economies of scale
– Efficiencies due to size in most value-added
activities
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Experience Curves
• Firm’s cost experience curve- relates changes
in the firm’s costs to changes in cumulative
volume
• Competitive cost experience curves- show
the current costs of all direct competitors
relative to their cumulative volume experience
• Industry cost and price experience curvesrelate industry average costs and prices to
cumulative volume
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Price Reductions
• The use of price reductions to increase profits
requires not only market growth but accelerating
and large increments of growth
• When selling in mature markets, using price
reductions to increase market share should not be
considered if current profits margins are low or
negative, competitors will likely follow price
reductions, and there are no significant secondary
advantages
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 14
Pricing Over the Product Life
Cycle
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Product Life Cycles- The
Conceptual Model
• Development Stage- the product concept is
engineered from idea to actual design
– The accumulated cash investment grows to a
substantial amount before the product is
introduced for sale
• Introduction- the period of initial success or
failure for new products
– The firm’s marketing efforts are geared towards
stimulating primary demand (demand for the
product itself)
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Product Life Cycles- The
Conceptual Model
• Growth- the product begins to make rapid sales
gains as the rate of market acceptance accelerates
– Competitor’s marketing strategies focus on stimulating
secondary demand with emphasis on product
differentiation
• Maturity- the rate of the market acceptance
decreases as the number of new potential
customers diminishes
– Marketing strategies are designed to create customer
preference and loyalty, and continued growth requires
an increase in market share
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Product Life Cycles- The
Conceptual Model
• Saturation- products and production methods
have become standardized, and buyers are
generally well aware of similarities and
differences in products
– Competition for market share intensifies
• Shakeout- prices tend to decline faster than do
costs
– High-cost sellers tend to be forced out of the
market
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Product Life Cycles- The
Conceptual Model
• Decline- Sales begin to diminish as
customers turn to new or better products
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
New-product Pricing
• Throughout the cycle, changes occur in
promotional and price elasticity and in costs
of production and distribution
• Pricing over the cycle depends on:
– Technical maturity
– Market maturity
– Competitive maturity
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
New-product Pricing
• Value analysis- increasing perceived value by
increasing performance relative to customer
needs and willingness to pay for that
performance
• Rate-of-Return Pricing- reveals a price for a
given product that makes it an irresistibly good
investment to customers in view of their
alternatives and at the same time extracts from
the customers all that can safely be demanded
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
New-product Pricing
• Pricing the Superiority Differential- Determine
the price premium that the new product’s
superiority will most profitably warrant
– Depends on uncertainties for buyer, future costs,
and the dynamic demand schedule
• Estimating Costs- A value-oriented approach to
pricing begins with determining what the target
market would be willing to pay, and then design a
product using this target cost
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Whose Cost?
• Competitor’s costs– can be determined for products in the market by
estimating:
• Their staying power
• The floor of retaliation pricing
– can be determined for unborn competitive
products by:
• Forecasting the relationship between unit direct
costs and cumulative experience
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Whose Cost?
• Seller’s costs– 1. A new product must be pre-priced in the
R&D stage and then periodically as it
progresses toward market
– 2. Establish a price floor
– 3. Estimate total costs with and without the
new product
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Skimming vs. Penetration
• The speed with which a new product loses
its uniqueness and sinks to the level of just
another competitive product depends on:
– 1. Its total sales potential
– 2. The investment required for rivals to
manufacture and distribute the product
– 3. The strength of the patent and know-how
protection
– 4. The alertness and power of competitors
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Pricing During Growth
• Objective is to select a price that will help
generate a sales volume that enables the firm to
realize its target contribution
– 3 essential points for pricing during growth:
• 1. Range of feasible prices has narrowed
• 2. Unit variable costs have decreased due to
experience factor
• 3. Fixed expenses have increased due to
increased capitalization and period marketing
costs
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Pricing During Growth
• Responding to Lower-Priced Competitive
Offerings- The firm should introduce a
lower-priced version of the product before
competitors enter
• Prolonging the Growth Stage- The firm
can revitalize the product with “new and
improved” versions
• Pricing Next Generation Products
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Pricing During Maturity
• Pricing objective is to choose the price
alternative leading to maximum
contribution
– Follow competition’s reduced prices
– Try to reduce costs by using cheaper materials,
eliminating several labor operations, or
reducing period marketing costs
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Pricing A Declining Product
• Pricing objective is to maximize
contributions per sales dollar generated
– Most firms eliminate all period marketing costs
and remain in the market as long as price
exceeds direct variable costs
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Dynamic Pricing Models
• Diffusion effect refers to the increased
likelihood of purchase as market penetration
increases
• Saturation effect refers to the reduction in
the unfulfilled demand as market
penetration increases
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Focused Price Reductions
Pricing according to customers’
perceived values
Offering similar services to customers at
different prices shifts demand and enhances
volume from price sensitive segments
Price bundling
Offering two or more products or services at a
price that usually is lower than the sum of the
individual prices
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Focused Price Reductions
Product redesign
Unbundling the base product from the options
by changing it in some way (fewer features,
lower grade material, different brand name) and
then selling it as a separate, lower-priced
product
The objective is to appeal to price sensitive
customers who would normally not buy the
original product at its regular price
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 15
Product-line Pricing
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Nature of Decision Problem
• Demand interrelationships
– Complementarity
– Substitute relationships
• Cost interrelationships
– Common resources
– Common support structure
• Nature of marketing strategy
– Segmentation issues
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Behavioral Issues
• Acceptable price range(s)
– Low-price product (low absolute threshold)
– High-price product (high absolute threshold)
• Differential prices and positioning
– Segmentation strategy and tactics
• Consumer surplus
– Price bundling
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Pricing Decisions
Determining the lowest priced product
and its price (low-end product)
Determining the highest price product
and its price (high-end product)
Setting the price differentials for all
intermediate products
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Guidelines
• Segmented pricing strategy:
– Noticeable differences should be equivalent to
perceived value differences.
– Highest and lowest prices in line have a special
complementary relationship to other offerings –
priced to encourage desired buyer perceptions.
– Price differentials should get wider as price
increases over product line.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Guidelines
• Trading-up pricing strategy:
– Decide which products are to be designed and
priced similar to each other.
– Higher-priced product should have a feature or
observable benefit perceived to be of value, but
the incremental price is less than its perceived
value (a smaller price differential).
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Price Bundling
• Price bundling is the tactic of marketing two or
more products and/or services for a price below
the sum of the individual prices
• It creates an incentive for purchasers of one
product to also buy other(s).
• Examples:
–
–
–
–
Weekend hotel packages
Vacation packages
Cable TV plans
Season ticket plans
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Principle Of Price Bundling
Different buyers value each product offering
differently.
At any specific price, some buyers would be
willing to pay more, and some buyers would be
willing to spend less.
By packaging products at special prices, the
goal is to shift some of the consumers’ surplus
for products they would be willing to pay more
for to products they would be willing to pay
less for.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Developing A Price Bundling
Strategy
Four basic steps
– 1. Define customer segment targets
– 2. Determine bundling objectives
– 3. Determine demand conditions for each
objective
– 4. Determine profitability of alternative
strategies
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Price Bundling Decisions
• Pure bundle or mixed bundle?
– Mixed bundles generally more profitable unless bundle
purchase is “normal” or logical (e.g., Car options;
Furniture suites).
• Magnitude of price discounts?
– Sufficient to enhance transaction value (20% or more).
– For mixed joint bundles, provide some discount on
individual items and additional discounts for the bundle
(provides greater perceived transaction value).
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Yield Management
• Yield management operates on the principle
that different segments of the market have
different degrees of price sensitivity.
• On airline flights, seats are priced differently
depending on the time of day, day of the
week, length of stay at destination, when
purchased and other restrictions.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Conditions for Using Yield
Management
Feasible Condition
Requirement
Segmentable
markets
Price sensitive customers can be
identified and separated
Arbitrage
preventable
Customers who buy at low price
cannot resell to less price-sensitive
customers
Early purchase
feasible
Customers are willing and able to
purchase in advance of use
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Conditions for Using Yield
Management
Necessary
Condition
Requirement
Historical sales
data
Existing IT facilitates developing data
base to monitor sales response to
price and marketing
Accurate sales
forecast
Segment by segment demand
forecasts facilitate selective
discounting to improve revenues
Information
systems
Need sophisticated systems to utilize
yield management
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Benefits of Yield Management
• Continuous monitoring of demand.
• Facilitates use of proactive dynamic pricing.
• Focused price reductions offer leverage for
increasing profits.
• Focusing on revenue management shifts
performance measures from averages to
contributions per unit of resource.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.