Transcript pricing strategy and management

CHAPTER 8
Pricing Strategy
and Management
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-1
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
1. Identify the factors that determine
price.
2. Describe how price is an indicator
of demand.
3. Explain the concept of price elasticity.
4. Estimate the profit impact from
changes in price.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-2
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
5. Describe the pricing strategies
available to a marketing manager.
6. Discuss how pricing is affected by
competitive interactions.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-3
PRICING DECISIONS
“Pricing is an art, a game played for
marketing strategists, it is the moment of
truth. All of marketing comes to focus in
the pricing decision.”
 Pricing decisions determine the types of
customers and competitors a firm attracts
 A single pricing error can effectively nullify
all other marketing mix activities
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-4
PROFIT EQUATION
Price affects the quantity sold and hence
profit because it directly affects both
revenues and costs:
Profit
=
Total
Revenue
–
Total
Costs
Total
Costs
Total
Revenue
Profit
=
(
Unit
Price
×
Quantity
Sold
) [
–
Fixed
Costs
+
© 2013 Pearson Education, Inc. publishing as Prentice Hall
(
Unit
Variable
Costs
×
Quantity
Sold
)]
Slide 8-5
CHAPTER 8: PRICING STRATEGY AND
MANAGEMENT
PRICING CONSIDERATIONS
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-6
PRICING CONSIDERATIONS
Pricing Objectives
 Be consistent with a firm’s overall
marketing objectives
 Objectives include:
• Enhancing brand image
• Providing customer value
• Obtaining an adequate ROI or cash flow
• Maintaining price stability in an industry or market
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-7
EXHIBIT 8.1: CONCEPTUAL
ORIENTATION TO PRICING
(Value to Buyers)
Demand Factors
(Price Ceiling)
Competitive Factors
Final
Pricing
Discretion
Corporate Objectives
Initial
Pricing
Discretion
Regulatory Constraints
Direct Variable Costs
(Price Floor)
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-8
PRICING CONSIDERATIONS
Pricing Factors
 Demand for an offering sets the price ceiling
 Costs, particularly variable costs, determine the price
floor
 Consumer value perceptions and price sensitivity
determines the maximum price charged
 The price must at least cover unit variable costs;
otherwise, a loss will result for each offering sold
 Government regulations, such as predatory pricing
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-9
PRICING CONSIDERATIONS
Price as an Indicator of Value
 Consumers pair price with the perceived benefits
derived from an offering to determine value
 Value is the ratio of perceived benefits to price:
Perceived Benefits
Value
=
Price
 This shows that for a given price, value increases as
perceived benefits increase and vice versa
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-10
PRICING CONSIDERATIONS
Price as an Indicator of Value
 For some offerings, price influences
consumers’ perception of quality—
and ultimately value
 Price affects consumer perceptions of
prestige: As the price for an item
increases, the demand for it rises
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-11
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
 Measures how responsive consumer demand
is to changes in an offering’s price
 Is the ratio of the percentage change in quantity
demanded relative to a percentage change in price
Price
Elasticity
of Demand
Percentage Change in
Quantity Demanded
=
E
=
Percentage Change in Price
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-12
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Elastic Demand
The percentage change in quantity demanded is
greater than the percentage change in price ( E > 1)
 A small price reduction will result in a large
increase in the quantity purchased
 As a result, total revenue will rise significantly
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-13
PRICING CONSIDERATIONS
Price Elasticity of Demand (E)
Inelastic Demand
The percentage change in quantity demanded is
less than the percentage change in price ( E < 1)
 A small price reduction will result in a small
increase in the quantity purchased
 As a result, total revenue will rise very little
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-14
PRICING CONSIDERATIONS
Product-Line Pricing
Involves determining the:
Lowest-Priced
Product Price
Is the traffic builder designed to capture the
attention of the hesitant or first-time buyer
Highest-Priced
Product & Price
Is typically positioned as the premium item
in quality and features
Price Differentials
for All Other
Products in the Line
• Should reflect differences in their
perceived value of the products offered
• Should get larger from less to more
expensive items as one moves up the
product line
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Slide 8-15
Product-Line Pricing
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Slide 8-16
Price-Benefits Strategy Matrix
• The value proposition is the full positioning of a
brand—the full mix of benefits upon which it is
positioned.
6 - 17
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-17
NEW-OFFERING PRICING STRATEGIES
Conceptual new-offering pricing strategies are:
Skimming
Pricing Strategy
The price for a new offering is
set very high initially and is
typically reduced over time
Penetration
Pricing Strategy
An offering is introduced at a
low price
Intermediate
Pricing Strategy
The price is set between the two
extremes and is used in the vast
majority of initial pricing decisions
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-18
NEW-OFFERING PRICING STRATEGIES
Skimming Pricing Strategy
Is appropriate for a new offering if:
1. Demand is likely to be price inelastic
2. There are different price-market segments, of which one will pay a
higher price for it
3. It can be protected by patent or copyright
4. Production or marketing costs are unknown
5. Production capacity is constrained
6. The firm wants to quickly recoup its investment or fund other projects
7. There is a realistic perceived value in it
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-19
NEW-OFFERING PRICING STRATEGIES
Penetration Pricing Strategy
Is appropriate for a new offering if:
1. Demand is likely to be price elastic in the target market
segments at which the product or service is aimed
2. It is neither unique nor protected by patent or copyright
3. Competitors are expected to quickly enter the market
4. There are no distinct and separate price-market segments
5. There is a possibility of large savings in production and
marketing costs if a large sales volume can be generated
6. The firm’s major objective is to obtain a large market share
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-20
PRICING AND COMPETITIVE
INTERACTION
Marketers rarely look beyond an
initial pricing decision to consider:
 Competitor countermoves
 Their own subsequent moves
 The outcomes of these maneuvers
Remedy #1:
Long-Term Focus
Remedy #2:
Competitor Focus
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-21
PRICING AND COMPETITIVE INTERACTION:
LOOKING BEYOND THE INITIAL DECISION
Long-Term Focus
 Competitive interactions are rarely confined to
one period—an action followed by a reaction
 The consequences of actions and reactions are
not always immediately observable
 Marketers are advised to “look forward and
reason backward” by envisioning patterns of:
• Future pricing moves
• Likely outcomes
• Competitor countermoves
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-22
PRICING STRATEGIES AND
COMPETITIVE INTERACTION
Competitive interaction refers to
the sequential action and reaction
of rival companies in:
 Setting and changing prices for their
offering(s)
 Assessing likely outcomes, such as
sales, unit volume, and profit for
each company and an entire market
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-23
PRICING AND COMPETITIVE INTERACTION:
LOOKING BEYOND THE INITIAL DECISION
Competitor Focus
 Answer these questions to avoid misjudgments
about prices set or changed by competitors:
1. What are competitors’ goals and objectives?
2. How are they different from our goals and objectives?
3. What differing assumptions do we and each competitor
make about our companies, offerings, and the market?
4. What strengths and weaknesses does each competitor
believe it has and we have?
 Misreading the situation can result in price wars!
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-24
Initiating Price Changes
Initiating
Price Cuts
Initiating
Price
Increases
Buyer
Reactions to
Price Changes
Competitor
Reactions to
Price Changes
9- 25
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Responding to Price Changes
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-26
PRICING AND COMPETITIVE
INTERACTION
Price War
Involves successive price cutting by
competitors to increase or maintain
their unit sales or market share
 If competitors match the lower price, market
share, sales, and profit gains could be lost
 The overall price level resulting from the
lower price benefits none of the competitors
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-27
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
© 2013 Pearson Education, Inc. publishing as Prentice Hall
Slide 8-28