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PricingPesewa
Presentat ions
Life Cycle StrategiesIntroduction
Maturity
Grow
th
Dec
line
Promotion
Place/DistributionPrice
Product
Price, the Lifecycle and Marketing Mix
Inelastic
SkimmingPremium
Elastic
Penetration
Competition lo
wer
Increasin
g to in
tense
competition
Promotion
Price
Product
Place
Pricing Best Practices• Develop pricing mentality
• Consistently deliver more value
• Price strategically, not opportunistically
• Know your competition
• Make pricing a process
Factors Affecting Pricing Decisions
External Factors• Nature of the market• Demand• Competitors’ costs,
prices, and offers• The economy• Reseller needs• Government actions• Social concerns
Internal Factors• Marketing objectives• Marketing mix strategy• Costs• Organizational
considerations• Target market• Positioning objectives
Pricing Products
• The meaning and use of price – Price—the amount of money a seller is willing to accept in exchange for a
product, at a given time, and under given circumstances. • Price functions as an allocator of goods and services among
those who are willing and able to buy them (customers). • Price also allocates financial resources among producers
according to how well the producers satisfy customers’ needs.
• Can firms control their prices? – Supply—the quantity of a product that producers are willing to sell at
each of various prices. – Demand—the quantity of a product that buyers are willing to purchase at
each of various prices.
60
50
40
30
20
10
0 5 10 15 20 25
Millions
D
0 5 10 15 20 25
Millions
0 5 10 15 20 25
Millions
Quantity Supplied Quantity Demanded QuantitySupplied/Demanded
DD S
E
SPrice
The upward slope means that producers will supply more
jeans at higher prices
The downward slope means that buyers will purchase more
jeans at lower prices
The point E indicates an equilibrium in quantity and price for sellers and buyers
Supply and Demand Curves
Pricing Products (cont’d)
• Can firms control their prices? (cont’d) – Differentiation—the process of developing and promoting differences
between one’s product and all similar products.
• Price and non-price competition – Price competition—an emphasis on setting a price equal to or lower than
competitors’ prices to gain sales or market share. – Non-price competition—competition based on factors other than price.
• Buyers’ perceptions of price – Buyers will accept different ranges of prices for different products.
Pricing Objectives
• Survival – Pricing the firm’s products (perhaps at a loss) in order to attract
customers to establish the firm in a market.
• Profit maximization – Pricing with the intent to reap profits as large
as possible from a market—usually an unattainable goal.
• Target return on investment (ROI)– Pricing that allows the firm to attain its profit
goal, which is a percentage of the investments the firm has made.
• Performing at par with competitors
Pricing Objectives (cont’d)•Market Share Goals
–Pricing that will create sales that are measured as a percentage of total industry sales.
• Status Quo Pricing
– Pricing the firm’s products so as to not disturb the stability
of prices in the industry.
Pricing Methods
• Cost-based pricing – Markup pricing—the amount a seller adds to the cost of a product to
determine its basic selling price. • Markup pricing can overprice or underprice a product for its
market, causing either lost sales or forgone profits. • Markup pricing separates pricing from other business functions
that impact on marketing decisions.
Product Cost Price Value Customers
Cost-based Pricing
• Breakeven analysis – Breakeven quantity—the number of units that must be sold for total
revenue (from all units sold) to equal the total cost (of all units). • Fixed costs—costs that are incurred no matter how many units are
sold or produced. • Variable costs—costs that vary with or depend on the number of
units produced.
Pricing Methods
Breakeven Analysis
$120,000
$80,000
$40,000
0 500 667
Quantity in units
1000
Breakevenquantity
Totalrevenue
Fixed costs
Variablecosts
Totalcost
Profit
Loss
Costs/Revenues
Breakeven analysis answers the question of what is the lowest level of production and sales at which a company can break even (incur no loss and not yet have made a profit) on a particular product.
Total fixed costsUnit selling price – Unit variable costs
Breakeven in units =
Pricing Methods (cont’d)
• Consumer-based pricing – Pricing of a product that is based on the level of customer demand for the
product and the value placed on a product by the consumer. Product prices are high when demand is high and low when demand is weak.
– Price differentiation—setting different prices in segmented markets based on segmental characteristics (e.g., time of purchase, type of customer, or distribution channel).
Customers Value Price Cost Product
Value-based Pricing
• Competition-based pricing – Product pricing that is based on meeting the challenge of
competitors’ prices in markets where products are quite similar or price is an important customer consideration (engaging in price war).
Pricing Methods (cont’d)
High Price
Low Price
Low EfficiencyHigh Cost
High EfficiencyLow Cost
Market shareDominance
CombativeStrength
CombativeWeakness
MarginErosion
Price skimming
Penetration
pricing
•
•Negotiated pricing
Secondary-marketpricing
Periodicdiscounting
Randomdiscounting
Odd-number
pricing
Multiple-unit
pricing
Reference pricing
Bundle pricing
Everyday low
prices
Customary pricing
Captive pricing
Premium pricing
Price lining
Price leaders
Special-event
pricing
Comparisondiscounting
New-ProductPricing
DifferentialPricing
PsychologicalPricing
Product-LinePricing
PromotionalPricing
PRICING STRATEGIES
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Types of Pricing Strategies
Pricing Strategies
• New-product strategies – Price skimming—charging the highest-possible price for a product during
the introduction stage of its life cycle. Helps recover R&D costs quickly. May encourage competitors to enter market
– Penetration pricing—setting a low price for a new product to quickly build market share and discourage competitors. Used when setting the standard is important. Used when the product is easily copied. May discourage competitors to enter market.
Low High
Low
High
Economye.g. Tesco spaghetti
Penetratione.g. Telewest cable phones
Skimminge.g. New film or album
Premiume.g. BA first class
Price
Quality
Pricing Strategies (cont’d)
• Differential pricing – Negotiated pricing—bargaining to establish a final price. – Secondary-market pricing—setting one price for the primary target
market and a different price for another market. – Periodic discounting—temporary reduction of prices on a patterned
or systematic basis. – Random discounting—temporary reduction of prices on an
unsystematic basis.
Pricing Strategies (cont’d)
• Psychological pricing – Odd-number pricing—setting unit prices using odd numbers that are
slightly below whole dollar/pound/euro amounts. – Multiple-unit pricing—setting a single price for two or more units of a
product. – Reference pricing—pricing a product at a moderate level and positioning
it next to a more expensive model or brand. – Bundle pricing—packing two or more complementary products and
selling them for a single price. – Everyday low prices (EDLP or also known as economy pricing)—setting a
low price for products on a consistent basis. – Customary pricing—pricing on the basis of tradition.
Pricing Strategies (cont’d)
• Product-line pricing – Captive pricing—pricing the basic product in a product line low, but
pricing related items at a higher level. – Premium pricing—pricing the highest-quality or most versatile products
higher than other models in the product line. – Price lining—setting a limited number of prices for selected groups or
lines of merchandise. • e.g. MARS 32p, Four-pack 99p, Bite-size £1.29
• Promotional pricing – Price leaders—products priced below the usual markup, near cost, or
below cost. – Special-event pricing—advertised sales or price cutting linked to a holiday,
season, or event. – Comparison discounting—setting a price at a specific level and comparing
it with a higher price.
Pricing Business Products
• Geographic pricing – FOB (free-on-board) origin pricing—
the seller’s pricing is exclusive of delivery costs; the buyer pays the product delivery costs.
– FOB destination pricing—the seller includes transportation costs in the product pricing.
• Transfer pricing – A company’s strategy for the pricing
of internally transferred products between organizational units.
Pricing Business Products (cont’d)
• Discounting – Trade discounts—discounts given intermediaries or middlemen. – Quantity discounts—discounts for large volume purchases. – Cash discounts—discounts for prompt payment (e.g., “2/10, net 30”: a 2%
discount for paying the full bill within 10 days). – Seasonal discounts—price reductions for buyers who purchase out of
season. – Allowances—price reductions to achieve
certain goals (i.e., to increase sales and/or to switch customers away from competing products) through dealer incentives or customer trade-ins.
Has competitorcut price?
Will lower pricenegatively affect our
market share & profits?
Can/should effectiveaction be taken?
Hold current price;continue to monitorcompetitor’s price
Reduce price
Raise perceivedquality
Launch low-price“fighting brand”
Yes
No
No
No
Yes
Yes
Responding to Competitor’s Price Changes
Public Policy Issues in Pricing
• Between manufacturers– Price-fixing– Predatory pricing
• Between manufacturers and retailers– Retail price maintenance– Discriminatory pricing
• Between retailers and consumers– Deceptive pricing
• Between manufacturers and consumers– Deceptive pricing
Ten ways to ‘increase’ prices without increasing price
• Revise the discount structure• Change the minimum order size• Charge for delivery and special services• Invoice for repairs on serviced equipment• Charge for engineering, installation• Charge for overtime on rushed orders• Collect interest on overdue accounts• Produce less of the lower margin models in the line• Write penalty clauses into contracts• Change the physical characteristics of the product
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