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Pricing Strategy

critical marketing mix variable

actually produces revenue

shortest term marketing mix variable

relates directly to microeconomics

supply versus demand analysis

breakeven analysis

price elasticity

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Pricing Strategy

How to improve profit performance?

$

Q

Increase price

$

Q

Cut Variable Cost

rev

var.

cost

fixed

cost

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Pricing Strategy

$

Q

$

Q

Cut Fixed Cost

profit performance.

Increase Volume

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Pricing Strategy

Supply versus Demand

D

S

P

Q

D

Q

inelastic

Q

elastic

D

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Pricing Strategy

Shift in Supply Curve

change in cost

change in expectations of costchange in price of other goods sold

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Price Strategy

Shift in Demand Curve

change in income

change in price of related goodschange in price expectations

change in taste

Increase in demand versus increase in quantity demanded

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Pricing Strategy

Set Pricing Objective

Estimate Demand

Estimate CostsAnalyze Competitors Prices

Select Pricing Policy/Method

Set Final Price

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Pricing Strategy

Pricing Objectives

survivalcover fixed cost and some variable cost

very short-run.(avoid extinction)

profit maximization

requires accurate knowledge of demand, cost functions

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Pricing Strategy

Pricing Objectives (cont.)

revenue maximizationcosts hard to determine

assume increase in revenue leads to decrease in unit costs (old BCG

model)

both production and distribution costs fall

works if market is price sensitive

low price may discourage competition

market penetration strategy

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Pricing Strategy

Pricing Objectives (cont.)

market skimminghighest price that market will bear

benefits are barely worthwhile for some customers to buy

then work down the demand curve

works if no cost benefit of increasing volume

image is importantmay or may not discourage competition

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Pricing Strategy

Estimate Demand (curve)

unique value

awareness of substitutesdifficult to compare alternatives

price relative to income

inventory effect

Can customer hold inventory?

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Pricing Strategy

Estimate Costs (supply curve)

cost structure at different levels of productionold long run average cost curves

experience curves from BCG model

profit is a function of market share.

penetration versus skimming

How is supply curve affected?

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Pricing Strategy

Analyze Competitors Prices

What is the structure of the market?

oligopoly versus pure competition

Select Pricing Policy/Method

single or multiple prices

administered pricing

ceiling and floor prices versus the level of competition

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Pricing Strategy

Cost Based Pricing

cost plus, markup pricingeasy, costs known, minimizes price competition

ignores demand elasticity, not profit maximizing

target return of investment

use breakeven analysis to find a price to yield a target ROIuse sales volume to derive price?

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Pricing Strategy

Demand Based Pricing

perceived valuerequires detailed knowledge of buyer behavior and demand elasticity

only true profit maximizing strategy

ignores costs and competitors

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Pricing Strategy

Demand Based Pricing (cont.)

demand differential

price discriminationyield maximization pricing

sell at multiple prices to multiple segments

not based on marginal costs of dealing with each

daily, weekly, or seasonal pricing

geographic, physical, or electronic barriers

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Pricing Strategy

Competition Based Pricing

going rate pricingused when costs difficult to measure

competitors lack differential advantage

sealed bid

forces competitors to lowest price

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Pricing Strategies

Select Final Price

psychological pricing, prestige pricingknow demand elasticity

start high, work toward costs

discounts

cash, trade, quantity, or seasonal

promotional pricing

loss leaders

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Pricing Strategy

Select Final Price (cont.)

price lining

odd pricing

perception

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Pricing Strategy

Price cuts

excess capacity leads to margin squeezes (aka price wars)

build market share not brand loyalty

low cost producer will always win

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Pricing Strategy

Price Increases Before After

Price 10.00 10.10 +1%

Quantity x 100 x 100 Revenue 1,000 1,010

Total Cost 970 970

Profit 30 40 +33%

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Pricing Strategy

Intense pressure to inflate prices

reduce discounts

decrease amount of product

substitute cheaper materials

reduce product features