Prof. Bauer-Ramazani

MARKETINGMARKETING

Pricing StrategiesPricing Strategies

OverviewOverview

Definition of price Prices in BU113 companies Factors that influence the pricing decision Pricing objectives Three major pricing strategies and their

advantages and disadvantages Pricing strategies over the product life cycle Pricing tactics

Price -- Definition

• the amount of money charged for a product or service

• the sum of all the values that consumers exchange for the benefits of having or using the product or service

• Examples of “price?”– Tuition, rent, fare, retainer, toll, salary/wage, dues

Prices -- BU113 CompaniesPrices -- BU113 Companies

• What objectives did the managers have in mind when they set their prices?

Factors in Setting PriceFactors in Setting Price

Pricing ObjectivesPricing Objectives

Meet Business

Objectives

Volu

me

Sale

s M

axim

izat

ion

Mar

ket S

hare

Profitability

Profit-Maxim

ization

Target Return G

oals

Other Pricing Objectives Status Quo Image Social & Ethical Considerations

Price Strategies for New ProductsPrice Strategies for New ProductsPRICE

PRICE

PRICE

Skimming Penetration

Penetration Pricing

Skimming Pricing

Low price establish product in the market

High price/Prestige pricing appeal to early adopters; recover high R&D costs

Lower price over time

Move inventory, stimulate D, extend product life

Marketing Strategy Over the Product Life Cycle

INTRODUCTION GROWTH MATURITY DECLINEMarketing strategy Market development Increase market Defend market Maintain efficiency inemphasis share share exploiting product

Promotion Mount sales Appeal to Emphasize Reinforce loyal Strategy promotion for mass market brand differences, customers; reduce

product awareness benefits & loyalty promotion costs

Place strategy Distribute through Build intensive Enlarge Be selective in selective outlets network of distribution distribution, trim

outlets network unprofitable outlets

Pricing High price/unique Lower price Price at or below Set price to

strategy product / cover over time competition remain profitable production costs or

reduce toLow price/gain liquidatemarket share

Price-SettingToolsC

ost-O

rient

ed -

Varia

ble/

Fixe

d

Economic—Supply/Demand

Break-even

Analysis

Determining PricesDetermining Prices

Elasticity of DemandElasticity of Demand

measure of the sensitivity of demand to changes in prices

not price sensitive - no real change in demand price sensitive - changes in demand

Inelastic Demand

Q2 Q1 Quantity

PP11

PP22

ElectricityPri

ce

Elastic Demand

QQ22 Quantity

PP11

PP22

Fast food

Q1

Pri

ce

Market-based PricingMarket-based Pricing

� Pricing Existing Products/Services - 3 options

Pricing below market prices price wars

EX: airlines, store brand vs. manufacturer’s brand

Dumping

Pricing above prevailing market prices for

similar products

EX: Sony higher price = higher quality?

Pricing at or near market prices

Pricing TacticsPricing Tactics

� Price Lining • Price points: Setting a limited number of prices for

certain categories of products

� Psychological Pricing

• Odd-even

� Discounting • Quantity discounts

• Cash discounts (2/10 net 30)

Web programs: free!

Cost-based Pricing (Cost-Plus)Cost-based Pricing (Cost-Plus)

1. Cover costs costs Material Labor Capital resources Marketing

2.2. Mark-upMark-up Targeted return for shareholders

CostsCosts + mark-up mark-up = = Sales priceSales price

$1.00$1.00 + + $0.50 $0.50 = $1.50 = $1.50 (50% markup)(50% markup)

variable costs

fixed costs

Mark-up Calculation – ExerciseMark-up Calculation – Exercise

1. Price per product

2. Less the cost per product (what you paid the supplier, e.g. total cost paid / # of items purchased)

Price Sales

UpMarkDollar UPMARK %

−=−

Breakeven AnalysisBreakeven Analysis

TC = TR

Breakeven Point FormulaBreakeven Point Formula

(Contribution Margin)

cost/unit Variable– Price/unit

Costs Fixed QUANTITY BREAKEVEN =

Review

• 5 Factors that influence prices

• Pricing objectives• Pricing strategies at different stages of the

Product Life Cycle (advantages/disadvantages)

• Methods of Determining Prices– Elasticity of demand– Mark-up– Breakeven Analysis