Transcript Pricing
Chapter 13 Pricing Topics: – Determinants of Pricing Strategy – Cost Issues – Competition Issues – Customer Value and Pricing – The Pricing Plan using Marketingorientated pricing. – Hansen (A) case Dr Martens moves to China The makers of Dr Martens boots have announced the company is moving production to China with the loss of more than 1,000 jobs. A spokesman for the company said the decision was made because it was far cheaper to produce footwear in China. It plans to cease all production in the UK, but will continue to employ a number of office and design staff. 'Positive direction' "Dr Martens will remain a brand true to its heritage and deliver footwear of the highest quality. "The offshore strategy is the first step in moving the company and the brand forward in a positive direction." Paul Gates, general secretary of KFAT, said: "It may be cheaper in China, but this is an issue of added value and quality. "It does not matter if the boots are cheap if nobody is going to buy them (because of their poorer quality)." Pricing methods Cost Pricing methods Competition Marketing Ceiling and Floor of Price – Pricing’s ‘Black Box’ COMPETITOR PRICES Low Price High Price No Possible Profit at this Price No Possible Demand at this Price COSTS USP’s DIFFERENTIATION Price The demand curve Does the Demand Curve Always look like this?? P1 What of Luxury Goods – so called ‘Giffen’ goods P2 What may cause an ‘inelastic’ market/demand curve? Q1 Q2 Quantity Determining the break even point Money (£) Total revenue Total cost Break even point Profits Total variable costs Fixed costs Losses Units of Production Cost-oriented Pricing Full Cost Pricing Direct Costs (per unit) £2 Fixed Costs £200,000 Expected Sales 100,000 Costs per Unit Direct Costs £2 Fixed Costs (200K/100K) £2 Full Costs Mark-up (10%) £0.4 Price (costs + mark-up) £4.4 Direct (Marginal) Cost Pricing Costs are taken into account only when they are directly attributable to the production of a particular product. Fixed costs or overheads are not included in the marginal cost. Marginal cost for the example given: £4 Fixed Costs £200,000 Expected Sales 100,000 Marginal Cost £2 Mark-up (10%) £0.2 Marginal Price £2.2 4 Evaluating Cost-Plus Pricing Benefits – Cost-plus is easy and quick to evaluate. It is perceived by firms to be inexpensive. – It might be required or desired by customers. Evaluating Cost-Plus Pricing Disadvantages – Often delegated to inappropriate management levels. – In the initial calculations, there are obvious difficulties in allocating appropriate figures for contribution to fixed costs. – Such calculations are meaningless if estimated volume levels are greatly above/below actual levels achieved. – No consideration of competitive prices or response. – Does not systematically evaluate demand. – Logically corrupt. Uses estimate of volume to calculate price. In competitive markets price determines volume. – Opportunities to charge a higher price may be missed. Competitor-oriented Pricing Going-rate Pricing: With no product differentiation producers are forced to accept the going rate. In reality there is almost no situation in which no differentiation occurs. Competitive bidding: The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered. Statistical modelling has resulted in the following basis for calculating expected profits. Expected profit = Profit X Probability of winning Pricing Plans Premise: Experience of pricing decisions in a range of companies suggests that the biggest gains are likely to result not from additional knowledge or insights concerning specific aspects of pricing, but from a more consistent and rational application of what is already known. More specifically, there is a need to ensure that the decisions that are taken concerning the many different aspects of a company’s price structure form part of a coherent plan. Marketing-orientated pricing Value to customer Marketing strategy Price-quality relationships Explicability Competition Marketing-oriented pricing PLAN Effect on distributors/ retailers Product line pricing Negotiating margins Costs Political factors EVC Analysis 40000 Added Value Life Cycle Cost Purchase 50000 Price Start-up Costs EVC = 90000 EVC = 80000 30000 30000 20000 PostPurchase 120000 Costs Reference Product 100000 New Product X 120000 New Product Y Nine Marketing-Mix Strategies on Price/Quality Price High High Product Quality Medium Low 1. Premium strategy 4. Overcharging strategy 7. Rip-off strategy Medium 2. High-value strategy 5. Average strategy 8. False economy strategy Low 3. Superb-value strategy 6. Good value strategy 9. Economic strategy The Product Life Cycle Introduction stage 0 Time Growth stage Maturity stage Decline stage New product launch strategy Promotion High High Rapid skimming Low Rapid penetration Low Slow skimming Price Slow penetration When To Use a Penetration or a Skimming Strategy for Pricing New Products Dimension Penetration Strategy Low Level of Desire in Market High Similar Distinctiveness from Competitive Products Distinctive Important Importance of Price to Market Not Important Easy Ease of Duplicating Product Not Easy Gradual Return on Investment Objective Fast Skimming Strategy Source: Hise, R, Gillett, P and Ryans, J, (1979), Basic Marketing Concepts and Decisions, Winthrop Publishers, Cambridge, Massachusetts, p 450. Initiating Price Changes Circumstances Increases Cuts Value greater than price Value less than price Rising costs Excess supply Excess demand Build objective Harvest objective Price war unlikely Pre-empt competitive entry Initiating Price Changes Tactics Increases Cuts Price jump Price fall Staged price increases Staged price reductions Escalator clauses Fighter brands Price unbundling Price bundling Lower discounts Higher discounts Initiating Price Changes Increases Estimating Competitor Reaction Strategic objectives Self-interest Competitive situation Past experience Cuts Reacting to Competitors’ Price Changes When To Follow Increases Cuts Rising costs Falling costs Excess demand Excess supply Price insensitive customers Price sensitive customers Price rise compatible with brand image Price fall compatible with brand image Harvest or hold objective Build or hold objective Reacting to Competitors’ Price Changes When To Ignore Increases Cuts Stable or falling costs Rising costs Excess supply Excess demand Price sensitive customers Price insensitive customers Price rise compatible with brand image Price fall incompatible with brand image Build objective Harvest objective Reacting to Competitors’ Price Changes Increases Cuts Quick response Margin improvement urgent Offset competitive threat Slow response Gains to be made by being customer’s friend High customer loyalty Tactics Hansen Bathrooms (A) case What other factors should be taken into account with regards Rob Vincent’s proposal? Suggest alternative pricing strategies and the likely sort of price to the customer this would lead to What impact would this have on the rest of the mix?