pricing strategies(4210)

MARK4210, 2014 Spring, L1/L2

MARK4210: Strategic Marketing

2014 Spring, Section L1/L2

[Class #14]

Pricing Strategies

2 MARK4210, 2014 Spring, L1/L2

Agenda

Role of Pricing

Review of Pricing Factors

New Products

Established Products

Differential Pricing


Communicating

Promotion

Communicating value

Creating Value

Product Price

Capturing value

Distribution

Delivering value

The Role of Pricing


The Role of Pricing – Profitability

Profit

Levers


Review of Pricing Factors

Customers

Company

Cost

Competition

Context


Pricing Factors: Customer Value

Value to customers sets the ceiling price – value to

customers is affected by available alternatives

Different customers derive/perceive different values

– tangible & intangible

How to determine value?

• Economic Value to Customers (EVC) analysis

• Market research to assess both tangible and intangible

benefits


Pricing Factors: Economic Value to

Customers (EVC)

Customer buys a product only if its value outweighs

the value of existing product (or closest alternative)

EVC concept: PriceA + ValueA = PriceB + ValueB

PriceA = PriceB + ValueB – ValueA

PriceA ≤ PriceB + DiffValueBA • PriceA: price of ‘new’ product (includes differentiation value/cost

from the ‘new’ product)

• PriceB: price of existing product

• DiffValueBA: value/cost difference of existing & new product

Source: Pricing Economic Value to the Customer, Pricing, MIT OpenCourseWare, Sping 2010


Pricing Factors: Customer Demand

Predicting the relationship between price level and

demand (while considering the effects of other

variables on demand)

“Demand Elasticity” or “Price Sensitivity”

• Elastic = lowering prices substantially increases demand;

higher price sensitivity

• Inelastic = lowering prices has little effect on demand;

lower price sensitivity

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009


Pricing Factors: Company

Objectives

Common pricing objectives

Objective Description

Profit Price that enables adequate margin for

profit and reinvestment

Market

share

Price to gain market share or volume

Competition Price to discourage competitors from adding

capacity


10 MARK4210, 2014 Spring, L1/L2

Pricing Factors: Cost

Fixed costs

Variable costs

Out-of-pocket costs: costs that require a cash

payment in the current period or during a project

Opportunity costs: cost/value of an alternative not

selected


11 MARK4210, 2014 Spring, L1/L2

Pricing Factors: Analyzing Impact of

Costs

Parameter Key Points

Ratio of

Fixed:Variable Costs

• High FC ratio leads to volume sensitive industries

increase sales volumes to increase earnings

• High VC ratio leads to price sensitive industries

increase price to increase earnings

Economies of Scale • If scale economies are substantial, and/or expanded

operations lower costs, prices may be lowered to

gain market share

Firm cost structure

(high/low) vs.

competitors

• Lowest cost producer will earn additional profits by

maintaining competitive prices – earnings reinvested

back to aggressive promotions, increase market

share

• Cost-disadvantaged producer cannot effectively

lower price as it can trigger a losing price war


12 MARK4210, 2014 Spring, L1/L2

Pricing Factors: ‘First Mover

Advantage’ on Cost

Source: Pricing It Right: Strategies, Applications, and Pitfalls, Harvard Business School Press, 2006

13 MARK4210, 2014 Spring, L1/L2

Pricing Factors: Competitive Info --

Characteristics Impacting Pricing

Characteristics Key Points

Number of firms

in the industry

• Firms with no competition can set any price (if legal)

• Many active firms fierce competition limits pricing

discretion

• With few firms (especially undifferentiated industries),

pricing usually set by industry leader

Relative firm

size

• Firms with large market share (typically with lowest cost)

can usually initiate price changes without worrying about

competitors

Product

differentiation

• Product differentiation allows small firms with many

competitors to set prices, but often need heavy promotions

• Pricing differences limited within a certain range

Ease of entry • Low-barrier industries, existing firms have less discretion

• High-barrier industries, existing firms have greater control


14 MARK4210, 2014 Spring, L1/L2

Pricing Factors: Context

(Environment)

Political

• Government policy or restrictions

Economic situation

• Inflation/deflation

Social

• Natural disasters/calamities

• Corporate social responsibility

15 MARK4210, 2014 Spring, L1/L2

Pricing Strategy for New Products

Strategy should have desired impact on the market

while not attracting emergence of competition

In general, price new products to gain market share,

to gain cost advantage versus competitors

• The lower the initial price set by the first producer, the

more rapidly volume builds up, and gain cost advantage

• But, needs more time & investments before profits

realized

Two basic strategies: (a) Price skimming, (b)

Penetration pricing


16 MARK4210, 2014 Spring, L1/L2

New Products: Price Skimming

Price skimming

establishes high initial

price for a product

“Skimming the cream off

the market” at the upper

end of the demand curve

Often accompanied by

heavy promotions


Pricing It Right: Strategies, Applications, and Pitfalls, Harvard Business School Press, 2006

http://www.google.com.hk/url?sa=i&rct=j&q=price skimming&source=images&cd=&cad=rja&docid=yci0lwPRlo3pAM&tbnid=Off3Yh0OEsPAWM:&ved=0CAUQjRw&url=http://www.witiger.com/marketing/pricingobjectives.htm&ei=pLNPUaTLKa-ziQeUr4DIBg&psig=AFQjCNGmfHs9Hy4npMZWgWuvj9Lt0vwIMg&ust=1364262136057158

17 MARK4210, 2014 Spring, L1/L2

New Products: Price Skimming (2)

Recommended when:

• Nature of demand is uncertain

• Large investments on R&D

• Patents bar/limit competitors

• Competition will launch similar product in near future

• Innovative products that slows maturity of the market

Prices found to be too high can be lowered – more

difficult to start low and raise prices


18 MARK4210, 2014 Spring, L1/L2

New Products: Penetration Pricing

Entering the market with a low initial price to capture

a greater share of the market


http://www.google.com.hk/url?sa=i&rct=j&q=price skimming&source=images&cd=&cad=rja&docid=yWD9qmwSBJ9dRM&tbnid=T5he74aSIwS14M:&ved=&url=http://revenue-management-2010.blogspot.com/2011/02/ins-and-outs-of-penetration-pricing.html&ei=FbRPUe3HCuiOiAemqYCoBw&psig=AFQjCNGmfHs9Hy4npMZWgWuvj9Lt0vwIMg&ust=1364262136057158

19 MARK4210, 2014 Spring, L1/L2

New Products: Penetration Pricing –

Usual Situations

Premium market does not exist

Focus is on mass market

Entire demand curve is elastic

Ineffective patents

Discouraging new competitive entrants

Creating economies of scale


20 MARK4210, 2014 Spring, L1/L2

Pricing Strategy for Established

Products

Changes in the marketing environment may require

a review of prices of products already on the market

• For example, a large firm announcing lower prices will

lead other firms in the industry to examine their prices

Review of pricing strategy may also become

necessary because of shifts in demand


21 MARK4210, 2014 Spring, L1/L2

Established Products: Maintaining

Price – Main Reasons

Though price change may be desirable, maintaining

price may be appropriate if reaction of customers

and competitors cannot be predicted

Alternatively, price changes may have an impact on

product image or sales of other product lines that is

not practical to assess

Maintaining prices may also be due to politics/

government, or corporate social responsibility


22 MARK4210, 2014 Spring, L1/L2

Established Products: Lowering

Prices – Main Reasons

Defensive strategy – quickly respond to competition

Offensive strategy – as costs decrease with more

sales and/or economies of scale, lowering prices

leads to higher market share which can again lead

to lower costs in the future

Respond to customer needs/demand, especially if

price is critical


23 MARK4210, 2014 Spring, L1/L2

Established Products: Lowering

Prices – Critical Considerations

Long term impact/competitiveness – ignores product

differentiation

Price may convey higher quality or distinctive image

for certain brands – low price may lead to higher

price sensitivity, lower loyalty

Impact to other products in the product line

Impact to product profitability – low price is only

sustainable with low cost advantage Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009

24 MARK4210, 2014 Spring, L1/L2

Established Products: Increasing

Prices – Main Reasons

Maintain profitability during inflationary periods

Product has monopoly in the market segment –

either via real or perceived uniqueness to customers

Following industry practice, or the [powerful] industry

leader

Segment the market – creating new premium

segment

[Note: Aside from actual price increases, can also be

from downsizing package sizes while maintaining

prices]


25 MARK4210, 2014 Spring, L1/L2

Differential Pricing Strategy

Customers value the same product differently

Differential pricing involves charging different prices

to different groups of customers (because

customers value products differently)

• Customers with higher valuations are willing to pay more

• Customers with lower valuations may buy if prices lower

Offering a range of prices for the same product can

lead to increased sales and profits by targeting

unique customers

Source: The 1% Windfall: How Successful Companies Use Price to Profit and Grow , Rafi Mohammed, Harper Collins Publishers

26 MARK4210, 2014 Spring, L1/L2


Same Umbrella, Different Prices

27 MARK4210, 2014 Spring, L1/L2

Differential Pricing Strategy based

on “Hurdles”

Requires customers to demonstrate they want a lower

price – willingness to take extra steps (hurdles)

Rebates: Customer willing to fill out form, mail & wait

weeks for lower price

Sales: Customer waits for sale (e.g., Thanksgiving)

Coupons: Customer cuts, organizes, carries &

redeems coupon for a lower price

Price match guarantee: Customer takes up seller’s

offer to match discount offered by a rival


28 MARK4210, 2014 Spring, L1/L2


on “Customer Characteristics”

Identifiable customer characteristics communicate

different customer valuations

Geographic location: Customers located in different

areas value product differently

Readily available traits: For example, age – students

& seniors offered discounts

Club affiliation: For example, to reach car owners

demographic, offer discounts to car clubs

Customer history: Loyalty programs – Frequent flyer

discounts; lower insurance premium for

longstanding good insurees


29 MARK4210, 2014 Spring, L1/L2


on “Selling Characteristics”

Changing selling characteristics can SEGMENT

customers who have different valuations

Quantity discount: Buy more, pay less – as more

product is consumed, the less value consumers

place on it

Mixed Bundling

• Price break if two or more products bought – e.g., fast

food restaurant “Value Meals”

• Mixed-bundling results in sales and higher profits that

otherwise would not had occurred


30 MARK4210, 2014 Spring, L1/L2


on “Selling Techniques”

Techniques used to sell a product that can influence/

determine a customer’s valuation

Negotiation: Customer lets seller know what he/she

is willing to pay

Two-part pricing

• Low/high: Selling razor at low price, profit from razor

blades

• High/low: Wholesale clubs (i.e., Costco) charge high for

membership and low on products

Dynamic pricing: Pricing changes automatically as

demand or circumstances changes (perishables)


31 MARK4210, 2014 Spring, L1/L2


Summary of Differential Pricing

Strategies

32 MARK4210, 2014 Spring, L1/L2

(Mar 28) Case Analysis Questions –

Optical Distortion, Inc. (ODI)

1.How would you describe chicken sociology? For chicken farmers, what is the

major problem associated with it, and how do they currently solve this?

2.What are the advantages of ODI lenses for chicken farmers over the current

alternative? What are the unappealing points of ODI lenses?

3.Cost sets the floor price (i.e., lowest price) for a product. For ease of calculation,

consider only variable cost. What is the variable cost for ODI contact lenses?

4.What is the max price ODI contact lenses can charge per pair? To figure this out:

• First, we need to think about all the cost components and calculate the total cost

associated with using the current alternative.

• Next, we need to think about all the cost components and calculate the total cost

associated with using the new alternative (i.e., ODI lenses).

• The maximum price ODI lenses can charge is the price level at which the cost of using

the current alternative and the cost of using the new alternative (i.e., ODI lenses) are

equal. At this price level, a customer who considers only economic benefits will be

indifferent between buying that product and buying the alternative.

5.Should ODI adopt a skimming or penetration strategy? Why?

Date post:	28-Jan-2015
Category:	Marketing
Upload:	welcometofacebook
View:	119 times
Download:	0 times