developing pricing strategies
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Emran Malik
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Price
WHAT IS PRICE?
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Price is that which isgiven up in anexchange to acquirea good or service.
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THE IMPORTANCE OF PRICE
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Price allocates resourcesin a free-market economy
To the consumer...Price is the cost
of something
To the seller...Price is revenue
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THE IMPORTANCE OF PRICE TOMARKETING MANAGERS
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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? doesnt price vary across situations and over
time?some firms have to decide what to
charge different customers and indifferent situations they must decide whether discounts are to be offered, to whom, when, and for what reason
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THE MEANING OF PRICE
we generally think of price in monetary terms
may be more useful to think of what it costs us to acquire something of value
the costs may be monetary or non-monetary we need to think in terms of time and effort,as well as the monetary costs
the consumer often vows never to go back because its not worth the _______
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THE CUSTOMER WANTS VALUE
price is not always an important factor ininfluencing a sale; the customer wants more
than a low price, may be willing to pay more
the customer considers what he or she gets
for the price paid; the seller must offervalue
price of a product or service communicatesa message to the consumer about quality
what causes them to conclude that they
paid too much or got a great deal?
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THE CONSUMERS VIEW OF PRICE
some consumers are very interested in
getting a low price and pay closeattention to price; they are pricesensitive . But, this is variable andpersonalmany are interested in other elements of
the purchase, including brand, quality,etc. there is a tendency to link quality withpriceconsumers are often prepared to pay more if they expect to get added valueadding value doesnt mean dropping price
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MARKETING MIX
Product Price
PromotionPlace
RevenueProducer
Cost
Cost
Cost
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PRICING
Bargainin
$31.50
$33.50
Price
Forms
FunctionsComponents
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PROFIT MAXIMIZATION
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ProfitMaximization
Setting prices so that totalrevenue is as large as possible
relative to total costs.
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RETURN ON INVESTMENT
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Returnon
Investment
ROI = Net Profit after taxesTotal assets
Net profit after taxes divided bytotal assets.
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CHANGING PRICE ENVIRONMENT
Instant Price Comparisons
Ill pay$235.00
Name Your OwnPrice
Get ProductsFree
Buyers
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$29.99
$19.99
$24.99
CHANGING PRICE ENVIRONMENT
Sellers
Monitor Customers
SelectivePricing
Negotiate Prices
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HOW COMPANIES PRICE
PricingDe artment
Small Business Owner
Product-line Managers
(w/guidance)
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CONSUMER PSYCHOLOGY AND PRICING
Reference Prices
Price-Quality Inferences
Price Endings$1. 99
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A BLACK T-SHIRT
Armani - $275
Gap - $14.90
H&M - $7.90
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Price High Medium L o w
High
Low P r o
d u
c t Q u a l i
t y
Med
PremiumValue
MediumValue
Economy
Overcharging
Rip-Off FalseEconomy
HighValue
Super Value
Good-Value
PRICE - QUALITY STRATEGIES
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Select Final Price
SETTING THE PRICE
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Price Method
Competitor Analysis
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3
4
5
6
Estimate Costs
Determine DemandPricing Objective
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Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Fixed Costs (Overhead)
Costs that dont vary with sales or
production levels.Executive Salaries
Rent
Variable Costs
Costs that do varydirectly with the
level of production.Raw materials
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SELECTING THE PRICING OBJECTIVE
SurvivalMaximum Current ProfitMaximum Market ShareMaximum Market Skimming
Product-Quality LeadershipOther Objectives
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DEMAND AND SUPPLY
DemandThe quantity of a product that
will be sold in the market at various
prices for a specified period.
Supply
The quantity of a productthat will be offered to the market
by a supplier at various pricesfor a specific period.
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DETERMINING DEMAND
Price sensitivityEstimating demand curves
Price Elasticity of Demand
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Inelastic and Elastic Demand
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ELASTICITY OF DEMAND
ElasticDemand
Consumers buy more or lessof a product when theprice changes
InelasticDemand
An increase or decrease inprice will not significantlyaffect demand
UnitaryElasticity
An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged
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ELASTICITY OF DEMAND
Elasticity ( E ) =Percentage change in quantity
demanded of good A
Percentage change in price of good A
If E is greater than 1, demand is elastic.If E is less than 1, demand is inelastic.If E is equal to 1, demand is unitary.
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FACTORS THAT AFFECT ELASTICITY
Factors
That AffectElasticityof
Demand
Availability of Substitutes
Price relative toPurchasing Power
Product Durability
Products Other Uses
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HOW DEMAND AND SUPPLY ESTABLISHPRICE
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PriceEquilibrium
The price at which demandand supply are equal.
Elasticityof Demand
Consumers responsivenessor sensitivity to changesin price.
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EQUILIBRIUM PRICE
Quantity demanded
S
S
P r i c e
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
Surplus
Shortage
PriceEquilibrium
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ESTIMATING COSTS
Demand Price Ceiling
Costs
Profit
Price
Price Floor
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ESTIMATING COSTS
Fixed Costs(overhead) Variable Costs Total Costs
Types of costs
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Costs at Varying Levels of Production
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ESTIMATING COSTS
Accumulated Production
Experience Curve(Learning Curve)
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ESTIMATING COSTS
Target Costing
Market researchDesign engineers
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The Experience Curve
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ANALYZING COMPETITORS OFFERS
Worth to Customer
Costs Reaction
Price
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SELECTING A PRICING METHOD
Pricing Methods Markup Target-return Perceived-Value Value Going-rate Auction-type
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MARKUP PRICING
Variable cost per toaster
$10
Fixed costs
$300,000
Expected unit sales
50,000
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TARGET-RETURN PRICING
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FACTORS TO CONSIDER WHEN SETTINGPRICES
break-even= fixed costvolume (price-variable cost)
10-20
Break-Even Analysis and Target Profi t Pr icing
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Target-Return Pricing
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PERCEIVED-VALUE PRICING
Customers perceived -value
Performance $$$ Warranty $
Customer support $ Reputation $$
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VALUE PRICING
P1
P2
C1
C2
Level
of Quality
THOUSANDS OF
LOWPRICES
EVERY DAYthroughout the store
EDLP
High
LowPricing
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GOING-RATE PRICING
Follow the Leader
Commodities
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AUCTION PRICINGEnglish auction
(ascending bids)
Dutch auction(descending bids)
Sealed-bidauction
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DEFINITIONS
Market-Skimming PricingSetting a high pricefor a new product toskim maximumrevenues layer bylayer from segmentswilling to pay thehigh price.
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DEFINITIONS
Market-Penetration Pricing
Setting a low pricefor a new productin order to attract
a large number of buyers and a largemarket share.
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PRODUCT MIX
PRICING STRATEGIES
Product Line PricingSetting price steps between productline items.
Price points
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PRODUCT MIX
PRICING STRATEGIES
Optional-Product PricingPricing optional or accessoryproducts sold with the mainproductSupplemental software,digital cameras, and printerssold with a new PC areexamples
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PRODUCT MIX
PRICING STRATEGIES
Captive-Product PricingPricing products that must beused with the main product
High margins are oftenset for supplies
Services: two-part pricingstrategy
Fixed fee plus avariable usage rate
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PRODUCT MIX
PRICING STRATEGIES
By-ProductPricingPricing of low-valueby-productsto get rid of them
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PRODUCT MIX
PRICING STRATEGIES
Product BundlePricing
Pricing bundles of products sold
together Common in fastfood industry
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Three C s Model for
Price Setting
Ceiling priceCustomers assessment
of unique productfeatures
Orienting point
Competitors prices andprices of substitutes
CostsFloor Price
High Price(No possible
demand at this price)
Low Price(No possible
profit at this price)
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SETTING THE PRICE
Pricing Procedure
Select pr ic ing o bject ive
Determine demand Estimate costs
Analyze competition
Select pricing method Select final price
SurvivalMaximize current profitsMaximize market share
Penetration strategy
Market skimmingSkimming strategy
Product quality leadersPartial cost recovery
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SETTING THE PRICE
Pricing Procedure
Select pricing objectiveDetermin e dem and
Estimate costs Analyze competition
Select pricing method Select final price
Understand factorsthat affect pricesensitivityEstimate demandcurvesUnderstand priceelasticity of demand
ElasticityInelasticty
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MARKETING STRATEGIES
Product is more distinctiveBuyers are less aware of substitutesBuyers cannot easily compare quality of substitutesThe expenditure is a lower part of buyers totalincomeThe expenditure is small compared to the totalcost
Part of the cost is borne by another partyThe product is used with assets previouslyboughtThe product is assumed to have morequality, prestige, or exclusivenessBuyers cannot store the product
Conditions Under Which Consumers areLess Price Sensitive:
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MARKETING STRATEGIES
There are few or no substitutesBuyers do not readily
notice the higher price
Buyers are slow tochange their buyinghabits and search for
lower pricesBuyers think higher prices are justified
Conditions Under Which Demandis Less Elastic:
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SETTING THE PRICE
Pricing Procedure
Select pricing objectiveDetermine demand Est im ate cos ts
Analyze competition
Select pricing method Select final price
Types of costs and levelsof production must beconsidered
Accumulated productionleads to cost reductionvia the experience curveDifferentiated marketing
offers create differentcost levels
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SETTING THE PRICE
Key Pricing Terms:Fixed costs: do not vary directly with changes inlevel of production
Variable costs: vary with productionTotal costs: sum of fixed and variable costs agiven level of production
Average cost: cost per unit at a given level of production
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SELECTING THE FINAL PRICE
BrandQualit
y
Impact on others
PricingPolicies
Gain-and-risk-sharing
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SETTING THE PRICE
Pricing Procedure
Select pricing objectiveDetermine demand Estimate costsAn alyze com pet i tion
Select pricing method Select final price
Firms must analyze thecompetition with respectto:
CostsPricesPossible price reactions
Pricing decisions are
also influenced by qualityof offering relative tocompetition
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SETTING THE PRICE
Pricing Procedure
Select pricing objectiveDetermine demand Estimate costs
Analyze competition
Selec t p r ic ing m ethod Select final price
Price-setting begins withthe three Cs Select method:
Markup pricingTarget-return pricingPerceived-value pricingValue pricing
Going-rate pricing Auction-type pricingGroup pricing
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SETTING THE PRICE
Pricing Procedure
Select pricing objectiveDetermine demand Estimate costs
Analyze competition
Select pricing method Select f in al pr ice
Requires considerationof additional factors:
Psychological pricing
Gain-and-risk-sharingpricingInfluence of other marketing mix variablesCompany pricing policiesImpact of price on other parties
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ADAPTING THE PRICEGeographic
Pricing
Price Discounts
and Allowances
Promo tional Pricing
Differentiated
Pricing
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ADAPTING THE PRICE
Geographical PricingBarter Compensation deal
Buyback arrangementOffset
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PRICE CHANGES
Has excess capacityFaces falling marketshare due to pricecompetitionDesires to be amarket share leader
Initiating Price Cuts is DesirableWhen a Firm:
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PRICE CHANGES
Price Increases areDesirable:
If a firm canincrease profit,faces cost inflation,or faces greater demand than can besupplied.
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ADAPTING THE PRICE
CashdiscountsQuantitydiscountsTrade-inallowances
FunctionaldiscountsSeasonaldiscountsPromotionallowances
Price Discounts and Allowances:
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ADAPTING THE PRICE
Loss-leader pricingSpecial-eventpricing
Cash rebatesLow-interestfinancing
Longer paymenttermsWarranties andservice contracts
Psychologicaldiscounting
Promotional Pricing Tactics:
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ADAPTING THE PRICE
Customer segment pricingProduct-form
pricingImage pricing
ChannelpricingLocation
pricingTime pricing
Discriminatory Pricing Tactics:
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ADAPTING THE PRICE
Price discrimination works when:Market segments show different intensities of demand
Consumers in lower-price segments can notresell to higher-price segmentsCompetitors can not undersell the firm in higher-price segments
Cost of segmenting and policing the market doesnot exceed extra revenue
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ADAPTING THE PRICE
Product-linepricingOptional-featurepricingCaptive-productpricing
Two-part pricingBy-productpricing
Product-bundlepricing
Product-Mix Pricing Tactics:
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DEALING WITH PRICE CHANGES
Competitor Moves
Raising Prices
Cutting Prices
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PRICE CHANGES
Methods of Increasing Price
Eliminating discounts Adding higher-priced units to the productline
Alternatives to Increasing PriceReducing product sizeUsing less expensive materialsUnbundling the product
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PRICE CHANGES
Buyer reactions topricechanges
must beconsidered.
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PRICE CHANGES
Competitors are more likely to
react to price changes under certain conditions.
Number of firms is small
Product is uniformBuyers are well informed
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PRICE CHANGES
Respond To Price Changes Only If:
Market share / profits will be negativelyaffected if nothing is changed.Effective action can be taken:
Reducing priceRaising perceived qualityImproving quality and increasing priceLaunching low- price fighting brand
INITIATING AND RESPONDING
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INITIATING AND RESPONDINGTO PRICE CHANGES
Strategic Options Include:Maintain price and perceived quality;
selectively prune customersRaise price and perceived qualityPartially cut price and raise quality
Fully cut price, maintain perceived qualityMaintain price, reduce perceived qualityIntroduce an economy model
INITIATING AND RESPONDING
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INITIATING AND RESPONDINGTO PRICE CHANGES
Key Considerations
Ini t ia t ing pr ice cuts
Initiating price increasesReactions to pricechangesResponding tocompetitors pricechanges
Circumstances leading toprice cuts:
Excess plant capacityDeclining market share
Attempt to dominate themarket via lower costs
Price cutting traps:Price/quality perceptions
Low prices dont createmarket loyaltyCompetition may match or beat price cuts
INITIATING AND RESPONDING
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INITIATING AND RESPONDINGTO PRICE CHANGES
Key Considerations
Initiating price cuts
Ini t ia t ing p r ice increases Reactions to pricechangesResponding tocompetitors pricechanges
Circumstances leading toprice increases:
Cost inflationOverdemand
Methods of dealing withoverdemand:
Delayed quotation pricingEscalator clauses
UnbundlingReduction of discounts
INITIATING AND RESPONDING
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INITIATING AND RESPONDINGTO PRICE CHANGES
Key Considerations
Initiating price cuts
Initiating price increasesReact ion s to pr ice changes Responding tocompetitors pricechanges
Firms must monitor bothcustomer and competitor reactions
Competitor reactions arecommon when:
Few firms offer the productThe product ishomogeneousBuyers are highly informed
INITIATING AND RESPONDING
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INITIATING AND RESPONDINGTO PRICE CHANGES
Key Considerations
Initiating price cuts
Initiating price increasesReactions to pricechangesRespo nd ing to competitors pricechanges
The degree of product homogeneity affects howfirms respond to price
cuts initiated by thecompetitionMarket leaders canrespond to aggressive
price cutting by smaller competitors in severalways
INITIATING AND RESPONDING
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TO PRICE CHANGES
Maintain price andprofit marginMaintain price, addvalue
Increase price,improve qualityLaunch a low-pricefighter line
Market Leader Responses to Competitor Initiated PriceCuts:
Reduce price
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