The STRATEGIC PRICING PROCESS
I. SELECT A TARGET MARKET
(Fundamental = the chosen target market responds in particular way)
How about this target market?
What level of quality would he expect?
What price would he be willing to pay?
The STRATEGIC PRICING PROCESS (continued.)
II. STUDY CONSUMER BEHAVIOR(What are the customer’s buying motives? PRESTIGE? UTILITY?)(What is the customer’s PRICE ELASTICITY?)
Price elasticity can be the basis for: PRICE DISCRIMINATION!!
PRICE DISCRIMINATION
The practice under which goods are sold at price differences which do not reflect the proportional difference in marginal costs
PRICE DISCRIMINATION
FOUR forms of Price discrimination.Can be based on:
CUSTOMER (Can be based on knowledge of intensity of demand)
(e.g. INNOVATORS, Lawyers,...)
PRICE DISCRIMINATION(continued)
PRODUCT VERSION (Different versions, higher price reflecting psychological demand)(e.g., “Standard”, “Deluxe”)
PRICE DISCRIMINATION(continued)
PLACE (A form of utility) (e.g., a baseball stadium, at resorts, theatre seats, neighborhood,...)
If you can wait, when are the best times to buy auto tires?
Memorial Day weekend (week)Labor Day weekend (week)
The STRATEGIC PRICING PROCESS (continued.)
III. IDENTIFY COMPETITION(Look at their marketing policies - for each of the 4 P’s;
What is the structure of their industry?
What are their price inputs?)
The STRATEGIC PRICING PROCESS (continued.)
IV. ASSIGN PRICE A ROLE IN THE MARKETING MIX
Objectives (6):(1) Market Penetration - low initial price
(2) Market Skimming - high initial price (gain a premium from initial buyers)
Market Penetration - low initial price
Useful if:
Market appears price sensitive,
Economies of scale available,
Low price discourages competition.
Market SKIMMING - HIGH initial price
Useful if:
Demand is relatively price INELASTIC,
No scale economies exist,
Rival firms are not likely to enter,
High price encourages prestige perception.
Objectives (continued.)
(3) Early Cash Recovery (need for funds - high or low price) Depends on: price elasticity and economies of scale
(4) Satisficing Objective (typically a fear of a government reaction - aims at a satisfactory ROI - no need to maximize ROI since this can keep competition out)
Objectives (continued.)(5) Product Line Promotion Pricing
(Consider the entire line, may underprice one item, to improve the overall line’s profitability)(e.g., LOSS LEADER - or Sear’s GOOD, BETTER, BEST)
(6) Develop the distribution system
Let us consider two competing brands..
Unicaps are advertised heavily and are well known vitamins from a respected company.
Unidose vitamins by Schultz - Schultz makes cosmetics and perfumes (with names like Evening in Bayonne) and decided to mix the ingredients to make vitamins.
Example of Developing the Distribution System (All prices per bottle of 100)
Unicap vitamins by Upjohn
AdvertisedRetail price =
$4.95Wholesale price =
$3.95Resulting margin
to retailer = $1.00
Unidose vitamins by Schultz
Not advertisedRetail price = $4.25Wholesale price =
$2.25Resulting margin to
retailer = $2.00
Example of Developing the Distribution System - Why Stock Schultz’s Vitamins?
If a customer asks for advice, the pharmacist can say - the two brands are equivalent - but Schultz will cost you less.
He does NOT say - and I make and extra $1.00 per bottle on Schultz.
The STRATEGIC PRICING PROCESS (continued.)
V. RELATE COSTS AND DEMAND
(Estimate the costs for producing at several levels of output)
(Perhaps graph the functional relationships)
PRICE SETTING IN PRACTICE
Cost Based Pricing MARKUP-PRICING - adding some fixed % to unit
costs: Why use this???
SimpleLeads to price similaritySocial Fairness
Benefits: Seller does not take advantage of a buyer with an acute demand problem - seller earns a fair return.
PRICE SETTING IN PRACTICE (continued.)
TARGET PRICING - Determine the price given a specified target rate of return
Limitation: Demand may be influenced by price.
PRICE SETTING IN PRACTICE (continued.)
Competition-oriented Pricing GOING RATE PRICING - Set price
about the average level in the industry
(May depend on the market structure - Perfect competition: No decision
Oligopoly - it is wise to check industry prices.)Other Pricing alternatives: Sealed bid pricing
Initiating Price Changes
Must consider
Buyer reactions, e.g., elasticity and perceptions.
Competitive reactions.
Meeting price changes of competitors ?? Sometimes no decision.
Darn competitors….
Tylenol owned the acetominaphen market
Tylenol kept a high price
Datril entered - competing on price
Tylenol cut their price immediately
When a new competitor uses price to gain a foothold in the marketplace, established companies should react quickly with their own reductions. AT&T and Kodak DIDN'T; thus Fuji and MCI became marketplace fixtures. Tylenol DID, and the upstart Datril never got more than a 1-percent
market share.
The Game No One Wins: Price CompetitionPrice Competition
Datril is just like Tylenol - only cheaper
After McNeil laboratories cut price
Few people switchedBristol Myers lost
millions..
Product Line Pricing Objective: A set of prices that maximizes demand from
the entire line.(e.g., Good, Better, Best)
Must consider:Interrelationship of demand (substitutes, complements, unrelated factors).
Interrelationship of costs (production, scheduling).
Effect of competition.
Types of PRICE ADJUSTMENTS - 6 TYPES
1. FUNCTIONAL DISCOUNT (to other channel members - offer price which allows retailers and wholesalers traditional markups)
2. QUANTITY DISCOUNT - price reduction based on amount of purchase.
3. GEOGRAPHICAL DIFFERENCES - Based on location of the buyer
4. SEASONAL DISCOUNTS 5. BUYER’S PERSONAL SITUATION - Often
a reason for an adjustment - e.g., to keep a buyer in business.
Types of PRICE ADJUSTMENTS CONT
6. CASH DISCOUNT (reflects the savings -avoiding finance and interest costs)
Four IntroductoryMarketing Strategies
Rapid-Rapid-skimmingskimmingstrategystrategy
Rapid-Rapid-penetrationpenetrationstrategystrategy
Slow-Slow-penetrationpenetrationstrategystrategy
Slow-Slow-skimmingskimmingstrategystrategy
PricePrice
LowLow
HighHigh
PromotionPromotionHighHigh LowLow