Transcript MARKETING STRATEGY

Pricing Strategy
Chapter 10
Slides developed by:
Peter Yannopoulos
4/2/2016
© 2006 by Nelson, a division of Thomson Canada Limited
10-1
Essence of Pricing
Strategic pricing involves finding a
balance between the customer’s desire to
obtain good value and the firm’s need to
cover costs and earn profits
Thomas T. Nagle and Reed K. Holden,
The Strategy and Tactics of Pricing
© 2006 by Nelson, a division of Thomson Canada Limited
10-2
Strategic Influences on Price
Perceived
Customer Value
Single Versus
Multiple Product
Line
Cost
Strategic Influences
on Price
Pricing
Objectives
© 2006 by Nelson, a division of Thomson Canada Limited
Competition
Marketing
Strategy
10-3
Price Elasticity of Demand
Price
P2
P1
Quantity
Q2
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Q1
10-4
The Price Elasticity of Demand
Equation
Q/Q
E=-
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P/P
10-5
Price Elasticity of Demand
Example
(500 000 – 400 000)/500 000
E=(100-108)/100
= -2.5
© 2006 by Nelson, a division of Thomson Canada Limited
10-6
Cost and Price Dynamics
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10-7
A Typical Experience Curve
Log Cost
per Unit
(in real dollars)
Industry Costs
Log Cumulative Industry Output
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10-8
Sources of the Experience Curve Effect
Learning
Technological
advances
Sources of the
Experience
Curve Effect
Economies
of scale
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Product redesign
and
standardization
10-9
Product Life Cycle Stages, Industry
Price, and Experience Curve
Introduction
Log Price
or Cost per
Unit
(in constant
dollars)
and Annual
Sales (units)
Growth
Shakeout
Maturity
Average Industry Prices
Average
Costs
Annual sales
Log Cumulative Industry Output, (‘000s)
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10-10
Pricing Implications of the
Experience Curve
Log Price or
Cost per Unit
(in real dollars)
Company Industry
Price
Costs
Current
Price
C
B
A
Log Cumulative Output, Units
© 2006 by Nelson, a division of Thomson Canada Limited
10-11
Pricing Strategies for New
Products
Price Skimming
New Product
Pricing
Penetration Pricing
Parity Pricing
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10-12
Strategic Factors Influencing the Choice Between Penetration
Pricing and Price Skimming
Penetration
Pricing
Strategic Factors
Price
Skimming
Market factors
Large
Market size
Small
Elastic
Elasticity of demand
Inelastic
Product factors
Low
Product differentiation
High
Long
Product life span
Short
No
Product protected by a patent
Yes
Price factors
Yes
High price will attract competition
No
No
Customers use higher prices as an indicator of higher quality
Yes
Cost factors
No
Substantial margins are required to recover product development and
other costs
Yes
Yes
Substantial cost reductions are expected due to economies of scale
No
Competitive factors
Yes
Little chance that competitors will enter market shortly with a similar
product
© 2006 by Nelson, a division of Thomson Canada Limited
No
10-13
Pricing Existing Products
Value
Pricing
Promotional
Pricing
Cost-plus
Pricing
Pricing
Existing
Products
Randomized
Pricing
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Prestige
Pricing
Everyday
Low
Pricing
10-14
Value Pricing
1. Determine target price based on
consumer, competitive, and other
factors
2. Subtract desired channel intermediary
markup
3. Subtract desired manufacturer margin
4. Target cost to be recouped
5. Produce product
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10-15
Cost-Plus Pricing
1. Produce product with appropriate
features and service level
2. Compute full unit cost
3. Add desired manufacturer margin
4. Add desired channel intermediary
margin
5. Retail price
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10-16
Product Line Pricing
Cross-Subsidization
Pricing
Price Bundling
Product Line
Pricing
Two-Part
Pricing
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10-17
Responding to Competitors’ Prices
Follow-the-Leader
Pricing
Responding
to Competitors’
Prices
Price
Matching
Trigger
Pricing
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10-18
Price Customization Strategies
Price
Customization
by Customer
Price
Customization
Strategies
Price
Customization
by Time
Price
Customization
by Location
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10-19
Conditions for Price
Customization to Work
Firm must be able to divide the
market into segments with
different price sensitivities
People must not be able to transfer
between segments
Different prices must be perceived
to be fair by customers
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10-20
Price-Profitability Analysis
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10-21
Break-Even Analysis Example
Assume:
Fixed cost = $9,000
Price = $10
Variable Cost = $2
Expected company sales = 1,500
Market size = 5,000
Fixed cost
Break-even (units) =
$9,000
=
Price – variable cost
$10 - $2
= 1,125 units
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10-22
Break-Even Market share
Break-even unit sales
Break-even market share = [
] × 100
Market size
=[
1,125
5,000
] × 100
= 22.5 %
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10-23
Safety Margin
Expected company sales – Break-even unit sales
Safety = [
margin
=[
Expected company sales
1,500 – 1,125
1,500
] × 100
] × 100
= 25 %
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10-24
Break-Even Sales Change Example
Assume :
Price = $8
Price change = -$1
Contribution margin = $4
Expected company sales = 1,500
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10-25
Break-Even Sales Change Example
(concluded)
-Price change
% Break-even = [
] × 100
sales change Contribution + Price change
margin
=[
-(-$1)
$4 + (-$1)
= 33.3 %
Break-even sales change
© 2006 by Nelson, a division of Thomson Canada Limited
] × 100
= 0.33 × 1,500
= 500 units
10-26