Transcript What is a Price?

7
Pricing Considerations and
Strategies
ROAD MAP: Previewing the Concepts
• Identify and explain the external and internal
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factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
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Synonyms for Price
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Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
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Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax
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Possible Consumer Reference
Prices
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“Fair price”
Typical price
Last price paid
Upper-bound price
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Lower-bound price
Competitor prices
Expected future price
Usual discounted
price
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What is a Price?
• Narrowly, price is the amount of money
charged for a product or service.
• Broadly, price is the sum of all the values
that consumers exchange for the benefits
of having or using the product or service.
• Dynamic Pricing: charging different prices
depending on individual customers and
situations.
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The Internet and Pricing Effects
Buyers can:
-Get instant price comparisons from vendors: PriceScan.com
-Name their price and have it met: Priceline.com
Sellers can:
-Monitor customer behavior and tailor offers to individuals.
-Giver certain customers access to special prices: CDNOW
Both buyers and sellers can:
-Negotiate prices in online auctions and exchanges: eBay
Kotler and Keller (2006)
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ROAD MAP
• Identify and explain the external and internal
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•
•
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•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-7
Factors Affecting Pricing Decisions
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Internal Factors Affecting Pricing Decisions
• Marketing Mix Strategy:
• Marketing Objectives:
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– Company must decide on its
strategy for the product.
– General Objectives:
• Survival, current profit maximization,
market share leadership, and
product quality leadership.
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Price decisions must be coordinated
with product design, distribution, and
promotion decisions to form a
consistent and effective marketing
program.
Target costing:
• Pricing that starts with an ideal selling
price, then targets costs that will ensure
that the price is met.
• Organizational Considerations:
• Costs:
– Fixed Costs:
• Costs that do not vary with
production or sales level.
– Variable Costs:
• Costs that vary directly with the
– Must decide who within the
organization should set prices.
– This will vary depending on the
size and type of company.
level of production.
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Product Quality Leadership
Four Seasons starts
with very highquality service—”we
await you with the
perfect sanctuary.”
It then charges a
price to match.
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External Factors Affecting Pricing Decisions
Market and Demand
Pricing in Different Types of Markets
Pure Competition:
Monopolistic Competition:
Many buyers and sellers
where each has little effect
on the going market price
Many buyers and sellers
who trade over a
range of prices
Oligopolistic Competition:
Few sellers who are
sensitive to each other’s
pricing/marketing strategies
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Pure Monopoly:
Market consists of a
single seller
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Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
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Demand Curve
Upward Sloping Demand Curve
Gibson was surprised to learn that its high-quality
instruments did not sell as well at lower prices.
Price Elasticity of Demand
Elastic demand
Inelastic demand
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Inelastic and Elastic Demand
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ROAD MAP
• Identify and explain the external and internal
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•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-15
Major Considerations in Setting Price
Cost-based pricing
Cost-plus pricing
Break-even pricing
(Target profit pricing)
Competition-based pricing
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Value-based pricing
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Cost-Plus Pricing
• Adding a standard markup to the cost of
the product.
• Popular because:
– Sellers more certain about cost than demand
– Simplifies pricing
– When all sellers use, prices are similar and
competition is minimized
– Some feel it is more fair to both buyers and
sellers
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Step 3: Estimating Costs
Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
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Cost Terms and Production
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Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels
of production
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Cost per Unit as a Function of
Accumulated Production
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Target Profit Pricing
(Break-Even Analysis)
At break even: Total revenue=Total cost
Total revenue = Price ($15)*Quantity sold
Total cost = Fixed cost + Variable cost ($5 per unit)* units sold
What is the sales volume to break even?
If price is raised to $20, how does this change affect the above analysis?
If the company decides to increase advertising by $1million, how does this affect
the break even point?
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Value-Based Pricing
Uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
– Wal-Mart, EDLP
• What does value mean?
– Does “value” mean the same thing as “low
price”?
– How do these concepts differ?
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Competition-Based Pricing
• Going-Rate Pricing:
– Firm bases its price largely on competitors’
prices, with less attention paid to its own
costs or to demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks
competitors will price rather than on its own
costs or on demand.
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Price Tiers in the Ice Cream Market
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ROAD MAP
• Identify and explain the external and internal
•
•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-25
New-Product Pricing Strategies
Market-Skimming
Market Penetration
 Set a high price for a new product
to “skim” revenues layer by layer
from the market.
 Company makes fewer, but more
profitable sales.
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“penetrate” the market quickly and
deeply.
 Can attract a large number of buyers
quickly and win a large market share.
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 Set a low initial price in order to
Product’s quality and image must
support its higher price.
Costs of smaller volume cannot be so
high they cancel the advantage of
charging more.
Competitors should not be able to enter
market easily and undercut the high
price.
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Market must be highly price sensitive so a
low price produces more market growth.
Production and distribution costs must fall
as sales volume increases.
Must keep out competition and maintain
low price or effects are only temporary.
Which strategy is employed by Sony, Dell, Wal-Mart, and Apple iPod?
Why?
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ROAD MAP
• Identify and explain the external and internal
•
•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-27
Product Mix Pricing Strategies
• Product line pricing
• Optional-product pricing
• Captive-product pricing
• By-product pricing
• Product bundle pricing
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Product Mix Pricing Strategies
Product Line Pricing
• Involves setting price steps between various products in
a product line based on:
– Cost differences between products
– Customer evaluations of different features
– Competitors’ prices
Optional- and Captive-Product Pricing
• Optional-Product
– Pricing optional or accessory products sold with the main product
(e.g., ice maker with the refrigerator).
• Captive-Product
– Pricing products that must be used with the main product (e.g.,
replacement cartridges for Gillette razors).
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Product Mix Pricing Strategies
By-Product Pricing:
Setting a price for by-products in order to make the main
product’s price more competitive (e.g., sawdust and
Zoo Doo)
Product Bundle Pricing:
Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access).
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ROAD MAP
• Identify and explain the external and internal
•
•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-31
Price-Adjustment Strategies
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Discounts and allowances
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
International pricing
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Discounts and Allowances
Discounts
Allowances
Cash
Trade-In
Quantity
Promotional
Functional
Seasonal
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Segmented Pricing
• Selling a product or service at two or
more prices, where the difference in
prices is not based on differences in
costs.
• Types:
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Customer-segment
Product-form
Location pricing
Time pricing
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Psychological Pricing
• Considers the psychology of
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prices and not simply the
economics.
Consumers usually perceive
higher-priced products as
having higher quality.
Consumers use price less
when they can judge quality
of a product.
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Promotional Pricing
Temporarily pricing products below list price and
sometimes even below cost to create buying excitement
and urgency.
Approaches:
Loss Leaders
Low-Interest Financing
Special-Event Pricing
Longer Warranties
Cash Rebates
Free Maintenance
Discounts
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Geographical Pricing
• FOB-origin pricing
• Uniform-delivered
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pricing
Zone pricing
Basing-point pricing
Freight-absorption
pricing
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International Pricing
• Price depends on
many factors,
including:
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Economic conditions
Competitive situations
Laws and regulations
Development of the
wholesaling and
retailing system
– Costs
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ROAD MAP
• Identify and explain the external and internal
•
•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-39
Initiating Price Changes
Price Cuts
Price Increases
Excess Capacity
Cost Inflation
Falling Market
Share
Overdemand:
Cannot Supply
All Customers’
Needs
Dominate Market
Through Lower
Costs
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Interactive Student
Assignment
• Choose a partner and consider the
following.
– What would you think if Mercedes suddenly
lowered its prices on its cars?
– What would you think if Mercedes suddenly
raised its prices on its cars?
– Why?
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Assessing and Responding to
Competitor Price Changes
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Price-Reaction Program for Meeting
Competitor’s Price Cut
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Public Policy and Pricing
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Rest Stop: Reviewing the Concepts
1. Identify and define the external and internal factors
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affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take
into account different types of customers and
situations.
Discuss the key issues related to initiating and
responding to price changes.
Professor Takada
7-45