Pricing Strategy and Management
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Transcript Pricing Strategy and Management
Professor Chip Besio Cox
School of Business
Southern Methodist University
Pricing Considerations
Objectives:
Enhance brand image
Provide customer value
Obtain an adequate ROI
Maximize profits
Maintain price stability in an industry or
market
Factors Affecting Pricing
Internal Factors
Costs
Product, Strategy
Pricing
Decisions
External Factors
Competitors
Customers
Pricing Considerations
Factors Effecting Pricing:
Demand sets price ceiling
Cost sets price floor
Consumer value perceptions
Consumer price sensitivity
Government regulations
Pricing Considerations
Factors Effecting Pricing:
Product/Service differentiation
Organization’s financial goals
Stage of Product Life Cycle
Marketing Channel margin impact
Prices of other products in mix
Pricing Considerations
Price as Indicator of Value
Value = Perceived Benefits/Price
Value may be linked to meeting expectations
of consumer
Price may shape the consumer’s
perceptions of value
Price may affect consumer’s perception of
prestige
Customer Considerations
PRICE SENSITIVITY
Product categories are not uniformly
responsive to prices -- some are more
sensitive to price levels than others
Customers also may respond differently
than one another to price levels
Price sensitivity (price elasticity) reflects how purchase
behavior changes with changes in price
Price
Pricing Considerations
PRICE SENSITIVITY
A. Inelastic Demand Demand hardly changes with
a small change in price
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
P2
B. Elastic Demand Demand changes greatly with
a small change in price
P1
Q 2
Q 1
Quantity Demanded per Period
Product-Based Pricing Approaches
Product Line Pricing
Setting price steps between product line items
i.e. $299, $399
Optional-Product Pricing
Pricing optional or accessory products sold with
the main product *** i.e. car options
Captive-Product Pricing
Pricing products that must be used with the main
Product***i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing low-value by-products to get rid of them
***i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing bundles Of products sold together
***i.e. season tickets, computer makers
Source:
Prentice Hall
Cost Considerations
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Recall
that costs may depend on the
production level
Cost Based
Pricing Strategies
Full Cost Strategies
Variable Cost Strategies
New-Offering Strategies
Competitive Bidding
Cost Based
Pricing Strategies
Full Cost Strategies
Markup Pricing
Break-even Pricing
ROR Pricing
Cost Based
Pricing Strategies
Variable Cost Strategies
Stimulate Demand
Shift Demand
Cost-Based Pricing Approaches
Cost-Plus Pricing - Adds a standard mark
up to the cost of the product
Useful when there are a great many products or
demand is hard to forecast
Simple to implement
Breakeven or Target Profit Pricing - Price
is set to meet a specific profit target
Also takes consumer demand into account
Cost-Based Pricing
COST-PLUS
Sellers are more
certain about
costs than
demand
Minimizes
price
competition
Perceived
fairness for
both buyers
and sellers
Pricing Strategies
Competitive Bidding
Demand is Known & Constant
Marketing Mix Variables Uncontrollable
Sophisticated Mathematical Models
○ Calculate Profit Levels
○ Calculate Probability of Winning at
Different Price Levels
Cost Based
Pricing Strategies
New-Offering Strategies
Skimming
Penetration
Intermediate
New Product Intro Strategies
SKIMMING
INTENT
Capture “cream” –
PENETRATION
less price sensitive
buyers
FOCUS
High Profit Margin
– sacrifice volume
Sell Whole
Market – no
“elite” market
High Volume
–sacrifice profit
margin
RESULT
Invite
Competitors,
Short-term Profits
Keep
Competition
Out – B.O.E.
New Product Intro Strategies
Skimming Strategy
Price High Initially
Reduce Over Time
Inelastic Demand - Buyers Price Range
Unique Offering
New Product Intro Strategies
Skimming Strategy
Production or Marketing Costs
Unknown
Limited Capacity to Deliver
Realistic Perceived Value
New Product Intro Strategies
Penetration Strategy
Price Low Initially
Elastic Demand
Offering Not Unique
Competition Entering Quickly
New Product Intro Strategies
Penetration Strategy
No Distinct Price Segments
Volume Increases Dramatically Impact
Costs
Objective - Large Market Share
New Product Intro Strategies
Intermediate Strategy
More Prevalent
Less Dramatic
Customer Considerations
PRICE AWARENESS
Mindless Shopping:
Average time between arriving and departing
from product category is 12 seconds
In 85% of purchases only the chosen brand was
handled, and 90% of shoppers inspected only
one size
21% could not offer a price estimate when
asked
Only 50% were able to state correct price
93% did know relative price (i.e., higher, lower
or the same as other brands in category)
Source: Dickson and Sawyer (1990)
Customer Considerations
REFERENCE PRICES
Consumers do not evaluate price
absolutely, but rather relative to a
convenient quantity for comparison
Context Matters!
Two kinds of reference prices
External reference price
Internal reference price
Customer Considerations
REFERENCE PRICES
External
Reference Prices
List prices/sale prices
Other products on the shelf or
convenient for comparison
Customer Considerations
REFERENCE PRICES
Internal Reference Prices
One that is recorded in consumer’s memory
Memory of price may not be accurate
If brand is frequently promoted, consumers tend
to lower their internal reference point
consumers have a notion of “fair price”
○ acquisition utility - economic benefit of the
product
○ transaction utility - getting a good deal
Customer Considerations
PRICE AS A SIGNAL
Price not only has the traditional
economic role of negatively affecting
demand but also offers the customer
information about product quality
When is price used as a signal?
When there is little information about
product quality available
Primarily for experience or credence goods
Customer Considerations
VALUE PRICING
Cost-Based Pricing
Value-Based Pricing
Product
Customer
Cost
Value
Price
Price
Value
Cost
Customers
Product
General Price Adjustment
Strategies
Psychological Pricing
• Adjusting Prices for Psychological
Effect.
•Price Used as a Signal
Promotional Pricing
•Temporarily Reducing Prices to
Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events
Geographical Pricing
• Adjusting Prices to Account for the
Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
International Pricing
• Adjusting Prices for International
Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.