© 2004 Mark H. Hansen

PRICING STRATEGYPRICING STRATEGY

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Pricing Strategy

Pricing and Value

Value = Perceived Benefits – Perceived Costs

Value to the Customer:

The Marketer Can:

• adjust the cost to customers (price)

• adjust the perceived benefits to customers(value-added)

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Pricing Strategy

Rational vs. Irrational Customer Response to Pricing

• rational assumes full information

• price decline = quantity increase

• irrational recognizes that people respond in ‘human’ ways

• price increase, sometimes, = quantity increase

When?

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Pricing Strategy

Pricing Objectives

• Survival

• Profit

• Sales

• Market Share

• Image

These objectives are not mutually exclusive!

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Pricing Strategy

Price Competition

• marketers realize that price competition issomething to be avoided in most cases

• price competition usually results in a downwardspiral that is difficult to stop

• marketers would typically prefer non-pricecompetition (service, convenience, selection, etc.)

• lower pricing is not always smarter pricing

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Pricing Strategy

Price Competition

• meet competition

• price above competition (premium pricing)

• price below competition

Pricing policy is easily copied!

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Pricing Strategy

New Product Pricing

Penetration vs. Skimming

• penetration = setting a low price to get quickacceptance and market share

• skimming = setting price high and attractingonly those customers that are willing to pay

• price discrimination

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Pricing Strategy

Price Lining & Price Points

• separate prices far enough to create cognitivedistance in consumers’ minds

• different price points indicate quality differences(real or perceived)

Does your kid have a $70 head or a $350 head?

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Pricing Strategy

Price Flexibility

Multiple ways to adjust price to influence behavior

• quantity discounts

• seasonal discounts

• cash discounts

• trade discounts

• personal discounts

• trade-in allowances

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Pricing Strategy

Psychology of Pricing

• prestige pricing

• odd prices vs. even prices

• customary prices

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Pricing Strategy

Setting Prices

• mark-ups

• mark-up on sales vs. mark-up on cost

• cost plus pricing

• break even analysis

• target rates of return

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Pricing Strategy

Setting Prices

• demand oriented pricing (predictor of sales)

• value-based pricing

• what the market will bear

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Pricing Strategy

Summary…

…pricing signals quality

…pricing influences perceptions of product andmarketer

…setting price is an art that may be influenced by science

… setting price is critical to success

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Pricing Strategy