Pricing Strategies Ppt

7/31/2019 Pricing Strategies Ppt

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Pricing StrategiesBy:

Jon Celso K. Apuyan, CPA


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Pricing Strategies

One of the four major elements of the marketingmix is price. Pricing is one of the importantstrategic issue because it is related to productpositioning. Furthermore, pricing affects othermarketing mix elements such as product

features, channel decisions (place), andpromotion.


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The following is a general sequence of steps

that might be followed for developing the

pricing of a new product:1. Develop Marketing Strategyperform

marketing analysis, segmentation, targeting, andpositioning.

2. Make Marketing Mix Decisions

define theproduct, distribution, and promotion tactics.

3. Estimate the Demand Curve understand howquantity demanded varies with price.

4. Calculate Cost

include fixed and variable costsassociated with the product.

5. Understand Environmental Factors evaluate likely competitors actions, understanding

legal constrains, etc.


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Continuation..

6. Set Pricing Objectives for example, profitmaximization, or price stabilization (status quo).

7. Determining Pricing using informationcollected in the above steps, select a pricingmethod, develop the pricing structure, and define

discounts.


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Estimate the Demand Curve

Because there is a relationship between priceand quantity demanded, it is important tounderstand the impact of pricing on sales byestimating the demand curve for the product.

For the existing products, experiments can be

performed at prices above and below the currentprice in order to determine the price elasticity ofdemand.


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Calculate Cost If the firm has decided to launch the product, there

likely is at least a basic understanding of the cost

involved, otherwise, there might be no profit to bemade. The unit cost of the product sets the lowerlimit of what the firm might charge, and determinesthe profit margin at higher prices.

The total unit cost of a product is composed ofvariable cost of producing each additional unit andfixed cost that are incurred regardless of quantityproduced. The pricing policy should consider bothtypes of cost.


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Environmental Factors

Pricing must take into account the competitive andlegal environment in which the company operates.

From competitive stand point, the firm mustconsider the implications of its pricing on thepricing decisions of competitors. For example,setting the price too low may risk a price war that

may not be in the best interest of either side. Settingthe price too high may attract a large number ofcompetitors who want to share in the profits.


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Continuation.

From legal stand point, a firm is not free to priceits products at any level it chooses. For example,

there may be price controls that prohibit pricinga product too high. Pricing too low may beconsidered predatory pricing or dumping inthe case of international trade. Offering a

different price for different consumers mayviolate laws against price discrimination. Finally,collusion with competitors to fix prices at anagreed level is illegal in many countries.


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Pricing Objective The firms pricing objectives must be identified in order

to determine the optimal pricing:1. Current profit maximization seeks to maximize

current profit, taking into account revenue and cost.2. Current revenue maximization seeks to

maximize current revenue with no regard to profitmargins.

3. Maximize quantityseeks to maximize the number

of units sold or the number of customer served in orderto decrease long-term cost as predicted by theexperience curve.

4. Maximize profit margin attempts to maximize theunit profit margin, recognizing that quantities will be

low.


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Continuation5. Quality leadership use price to signal highquality in an attempt to position the product as thequality leader.

6. Partial cost recovery

an organization that hasother revenue sources may seek only partial costrecovery.7. Survival in situations such as market decline and

overcapacity, the goal may be to select price that willcover costs and permit the firm to remain in themarket.8. Status quo the firm seek price stabilization inorder to avoid price wars and maintain a moderate but

stable level of profit.


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Price Strategies for New Products:

For new products, the pricing objective often is

either to maximize profit margin or to maximizequantity (market share). Too meet thisobjectives, skim pricing and penetrationpricing often are employed.


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Skim Pricing

Skim Pricing attempts to skim the cream offthe top of the market by setting a high price andselling to those customer who are less pricesensitive. Skimming is a strategy used to pursuethe objective of profit margin maximization.


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Skimming is most appropriate when:

1. Demand is expected to be relatively inelastic;the customers are not highly price sensitive.

2. Large cost savings are not expected at highvolumes, or it is difficult to predict the costsavings that would be achieved at high volume.

3. The company does not have the resources tofinance the large capital expenditure necessaryfor high volume production with initially lowprofit margin.


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Penetration Pricing Pursues the objective of quantity maximization

by means of a low price.

It is most appropriate when:

Demand is expected to be highly elastic; that is,customers are price sensitive and the quantitydemanded will increase significantly as pricedeclines.

Large decreases in cost are expected as cumulativevolume increases.

The product is of the nature of something that cangain mass appeal fairly quickly.

There is a treat of impending competition.


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Price Methods

To set the specific price level that achieves theirpricing objective, managers may make use of severalpricing methods. These methods include:

Cost-plus pricing set the price at the production

cost plus certain profit margin. Target return pricing set the price to achieve atarget return-on-investment.

Value-based pricing base the price on the

effective value to the customer relative to alternativeproducts.

Psychological pricing base the price on factorssuch as signals product quality, popular price points,and what the consumer perceives to be fair.


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Price Discounts

The normal quoted price to end users is knownas the list price. This price usually is discounted

for distribution channel members and some endusers.


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Types of Price Discounts: Quantity discount offered to customers who

purchase in large quantities. Cumulative quantity discount a discount that

increases as the cumulative quantity increases. Seasonal discount

based on the time that the

purchase is made and design to reduce seasonalvariation in sale.

Cash discount extended to customers who pay

their bill before a specified date. Trade discount a functional discount offered to

channel members for performing their roles. Promotional discount a short-term discounted

price offered to stimulate sales.


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Other Pricing Strategies:

Predatory pricing - Setting a very low price toknock out all the other competition.

Competitor pricing - Setting a price based oncompetitors prices.

Price discrimination - Setting different prices forthe same good, but to different markets e.g. peakand off peak mobile phone calls.

Product Line Pricing - Pricing different productswithin the same product range at different price

points. An example would be a video manufactureroffering different video recorders with differentfeatures at different prices. The greater the featuresand the benefit obtained the greater the consumerwill pay. This form of price discrimination assists

the company in maximizing turnover and profits.


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Continuation..

Captive Product Pricing Where products havecomplements, companies will charge a premium

price where the consumer is captured. For examplea razor manufacturer will charge a low price andrecoup its margin (and more) from the sale of theonly design of blades which fit the razor.

Geographical Pricing - Geographical pricing isevident where there are variations in price indifferent parts of the world. For example rarityvalue, or where shipping costs increase price.


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Date post:	05-Apr-2018
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Pricing Strategies Ppt

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