2866054 Pricing Strategies

7/31/2019 2866054 Pricing Strategies

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Lecture 6

Pricing Strategy



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Price

Price is the only element in the marketing

mix that produces revenues; all othersrepresent costs.



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Pricing Objectives Profit Oriented:

To achieve a target return

To maximize profit Sales Oriented:

To increase sales volume

To maintain or increase market share

Status Quo Oriented: To stabilize prices

To meet competition



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(1) Profit Oriented Goals

• Achieve a target return : a firm may price itsproduct to achieve a target return – a specified

percentage return on its sales or on itsinvestment. They add an amount to the cost of the product, called a markup, to cover anticipatedoperating cost and provide a desired profit.

• Maximize profit : the goal of the firm is profitmaximization.



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(2) Sales Oriented

• Increase sales volume : this pricing goal is toachieve rapid growth in the industry or to

discourage other firms from entering a market.

• Increase market share : companies for large marketshare in order to drive down production cost, reacheconomies of scale, or to project a dominanceappearance to consumers. They accept small profitmargins and reduce their costs so that they could

lower their selling prices.



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(3) Status Quo Goals

• Stabilize prices and meeting competition : a firmmaintains its current standing in the market, andtherefore, seeks to avoid competition.

• Price stabilization often is the goal in industrieswhere (a) the product is highly standardized (e.gsteel) and (b) one large firm, acts as a leader insetting prices for smaller firms.

• A price cut by any one firm is likely to be matchedby all other firms in order to remain competitive.These firms are not competing on the basis of prices, but other marketing mix elements.



Factors Affecting Price Decisions

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational

considerations

External Factors

Nature of the marketand demand

CompetitionOther environmentalfactors (economy,

resellers, government)

PricingDecisions



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Internal Factors AffectingPricing Decisions:



Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit Maximization Choose the Price that Produces the

Maximum Current Profit, Etc.

Market Share Leadership

Low as Possible Prices to Becomethe Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R & D.

1. Marketing Objectives



Marketing Objectives (contd)o Other specific objectives include:

Set prices low to prevent competition from entering

the market, Prices might be reduced temporarily to create

excitement or draw more customers.

o Nonprofit and public organization may have other

pricing objectives such as: University aims for partial cost recovery,

Hospital may aim for full cost recovery,

Theater may price to fill maximum number of seats.



Price

Product Design

Distribution

Promotion

NonpricePositions

2. Marketing Mix



Marketing Mix Elements

A product‟s base price is influenced considerably byother ingredients in the marketing mix: Product: changes over the life cycle of the product,

brand image, extra-ordinary features.

Distribution: channels and types of middlemenselected will influence the pricing. The firm sellingboth through wholesalers and directly to retailers

often set a different factory price for these two classesof customers.

Promotion: the extent to which a product ispromoted by the producer/middleman and the

methods used are added considerations in pricing.



3. Types of Cost Factors that

Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Fixed Costs(Overhead)

Costs that don‟t vary with sales or

production levels.

Executive Salaries, Rent



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Types of Cost Factors that

Affect Pricing Decisions

As a firm gains experience in production, it

learns how to do it better.

The experience curve (or the learning

curve) indicates that average cost dropswith accumulated production experience.



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External Factors AffectingPricing Decisions:



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Pure CompetitionMany Buyers and Sellers

Who Have LittleEffect on the Price

MonopolisticCompetition

Many Buyers and SellersWho Trade Over a

Range of Prices

Pricing in Different Types of Markets

1. Market and Demand Factors

Affecting Pricing Decisions

OligopolisticCompetition

Few Sellers Who AreSensitive to Each Other‟s

Pricing/ MarketingStrategies

Pure MonopolySingle Seller



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2. Demand Curves and PriceElasticity of Demand

A Demand Curve is a Curve that Shows theNumber of Units the Market Will Buy in a Given

Time Period at Different Prices that Might beCharged.

Price Elasticity Refers to How ResponsiveDemand Will be to a Change in Price.



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Price Elasticity of Demand

P r i c e

Quantity Demanded per Period

A. Inelastic Demand -Demand Hardly Changes Witha Small Change in Price.

P 2

P 1

Q 1 Q 2

P r i c e

Quantity Demanded per Period

P‟ 2

P‟ 1

Q 1 Q 2

B. Elastic Demand -

Demand Changes Greatly Witha Small Change in Price.



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Estimated Demand

Inverse demand – the higher the price the greaterthe unit sales.

If the price is much lower than what the marketexpects, sales may be lost. Shoppers would besuspicious about product quality, or their self-conceptmight not let them buy such low-prices products.

A sharp drop in revenue occurring when the price israised above the prevailing market level indicates thatthe seller faces a „Kinked Demand ’



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3. Cost-Based Pricing

U n e x p e c t e d S i t u a t i o n a l F a c t o r s

Attitudes

of Others

Ethical

IgnoresCurrent

Demand & Competition

Cost-PlusPricing is an

Approach That Adds aStandard

Markup to theCost of theProduct.

Simplest

PricingMethod



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4. Breakeven Analysis

2

4

6

8

10

12

200 400 600 800 1,000

Total Revenue

Total Cost

Fixed Cost

Target Profit($2 million)

Sales Volume in Units (thousands)

C o s t i n

D o l l a r s

( m i l l i o n s )

Tries to Determine the Price at Which a FirmWill Break Even or Make a Certain Target Profit.



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New Product Pricing

StrategiesMarket Skimming

Setting a High Price fora New Product to “Skim” MaximumRevenues from theTarget Market.

Results in Fewer, ButMore Profitable Sales.

Use Under TheseConditions:

Product‟s Quality andImage Must Support ItsHigher Price.

Costs Can‟t be so High thatThey Cancel the Advantage

of Charging More. Competitors Shouldn‟t be

Able to Enter Market Easilyand Undercut the High

Price.



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New Product Pricing

StrategiesMarket Penetration

Setting a Low Price for aNew Product in Order to “Penetrate” the MarketQuickly and Deeply.

Attract a Large Number of Buyers and Win a LargerMarket Share.

Use Under TheseConditions: Market Must be Highly

Price-Sensitive so a LowPrice Produces MoreMarket Growth.

Production/ DistributionCosts Must Fall as Sales

Volume Increases. Must Keep Out Competition

& Maintain Its Low PricePosition or Benefits MayOnly be Temporary.



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Product Mix- Pricing

Strategies Optional-Product

Pricing optional or

accessory products soldwith the main product.i.e camera bag.

Captive-Product Pricing products that

must be used with themain product. i.e. film.



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Product Mix- PricingStrategies

By-Product

Pricing low-value by-products to getrid of them andmake the main

product‟s pricemorecompetitive.

i.e. sawdust,Zoo Doo

Product-

Bundling Combining

several productsand offering the

bundle at areduced price.

i.e. theaterseason tickets.



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Discount and Allowance

Pricing

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allowance

Functional Discount Promotional Allowance

Adjusting Basic Price to Reward Customers

For Certain Responses



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Discounts and Allowances(a) Quantity Discount:

Deductions from the sellers‟ list price intended toencourage customers to buy in large amounts.

To buy most of what they need from the selleroffering the deduction.

Discounts are based on the size of the purchase,either in dollars or in units.

A non-cumulative discount is based on the size of anindividual order of one or more products.

A cumulative discount is based on the total volumepurchased over a specified period.



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(b) Trade Discount:

Reductions from the list price offered to buyers inpayment for marketing functions the buyer will

perform Storing, promoting, and selling the product are

examples of these functions.

(c) Cash Discount:

Deduction granted to buyers for paying their billswithin a specified time.

It includes the percentage discount and the period isspecified.



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(d) Seasonal Discounts:

Discount given to a customer who places an

order during the slack period. Off-season orders enables manufacturers to

better use their production facilities, which helpsto avoid inventory/carrying costs.

This Sprint ad offersf ree long distance on Fridays.



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Special-Event Pricing

Cash Rebates

Low-Interest Financing

Longer Warranties

Free Merchandise

Discounts

Loss Leaders Temporarily PricingProducts Below List

Price to IncreaseShort-Term Sales

Through:

Promotional Pricing

WhycanSprint affordt ooffer thispromotion on Fridaysr at her



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Initiating Price Changes

Why?

Excess Capacity

Falling Market Share

Dominate MarketThrough Lower Costs

Why?

Cost Inflation

Overdemand:

Company Can‟tSupply All Customer‟s

Needs



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Being Replaced byNewer Models

Current Models Are NotSelling Well

Company is in FinancialTrouble

Quality Has BeenReduced

Price Comes DownFurther

Price Cuts Are Seen by Buyers As:Reactions to Price ChangesNumber of Firms is

Small

Product is Uniform

Buyers are WellInformed

Competitors Reactions When:



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Assessing/Responding to Competitor‟s

Price Changes

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