4.3. Pricing Products - Pricing Considerations & Strategies
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Pricing Products: Pricing Considerations & Strategies By Dr. Kevin Lance Jones 11
Factors Factors to to Consider Consider When When Setting Setting Prices Prices Price is the Amount of Money Charged for a Product or Service.
Internal Internal Factors Factors
Pricing Pricing Decisions Decisions
External External Factors Factors 22
Internal Internal Factors Factors Affecting Affecting Pricing Pricing Decisions Decisions Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations 33
Marketing Marketing Objectives Objectives that that Affect Affect Pricing Pricing Decisions Decisions Survival Survival Low LowPrices Pricesto toCover CoverVariable VariableCosts Costsand and Some Fixed Costs to Stay in Business. Some Fixed Costs to Stay in Business.
Current CurrentProfit ProfitMaximization Maximization
Marketing Marketing Objectives Objectives
Choose Choosethe thePrice Pricethat thatProduces Producesthe the Maximum MaximumCurrent CurrentProfit, Profit,Cash CashFlow Flowor orROI. ROI.
Market MarketShare ShareLeadership Leadership Low Lowas asPossible PossiblePrices Pricesto toBecome Become the Market Share Leader. the Market Share Leader.
Product ProductQuality QualityLeadership Leadership High HighPrices Pricesto toCover CoverHigher Higher Performance Quality and Performance Quality andRR&&D. D. 44
Marketing Marketing Mix Mix Variables Variables that that Affect Affect Pricing Pricing Decisions Decisions Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be Coordinated With: Product ProductDesign Design
Non-Price Non-Price Factors Factors
Marketing-Mix Strategy
Distribution Distribution
Promotion Promotion 55
Types Types of of Cost Cost Factors Factors that that Affect Affect Pricing Pricing Decisions Decisions Fixed Costs (Overhead)
Variable Costs
Costs that don’t vary with sales or production levels.
Costs that do vary directly with the level of production.
Executive Salaries Rent
Raw materials
Total Total Costs Costs
Sum Sumof ofthe theFixed Fixedand andVariable VariableCosts Costsfor foraaGiven Given Level Levelof ofProduction Production 66
External External Factors Factors Affecting Affecting Pricing Pricing Decisions Decisions Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns
77
Market Market and and Demand Demand Factors Factors that that Affect Pricing Decisions Affect Pricing Decisions Monopolistic Competition Pure Competition Pure Pure Competition Competition
Many ManyBuyers Buyersand andSellers SellersWho Who Have HaveLittle LittleEffect Effecton onthe thePrice. Price.
Monopolistic Competition
Many ManyBuyers Buyersand and Sellers SellersWho Who Trade TradeOver OveraaRange Rangeof of Prices. Prices.
Pricing Pricing in in Different Different Types Types of of Markets Markets
Oligopolistic Oligopolistic Competition Competition
Few FewSellers SellersWho WhoAre AreSensitive Sensitiveto toEach Each Other’s Other’sPricing/ Pricing/Marketing MarketingStrategies Strategies
Pure Pure Monopoly Monopoly Single SingleSeller Seller
88
Price Price Elasticity Elasticity of of Demand Demand Price
A. Inelastic Demand Demand Hardly Changes With a Small Change in Price. P2 P1
Price
Q2 Q1 Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price. P’2 P’1
Q2 Q1 Quantity Demanded per Period 99
Major Major Considerations Considerations in in Setting Setting Prices Prices No Possible Profit at This Price
Low Factory Price
Product Costs
Existing Products
Consumer Perceptions of Value
Selling and Promoting
No Possible Demand at This Price
Profits through Volume
High Price
Competitors’ Price and Other External & Internal Factors
10 10
What What is is Cost-Plus Cost-Plus Pricing Pricing and and Why Why is is itit Popular? Popular? Adding a Standard Markup to the Cost of the Product.
Sellers SellersAre AreMore More Certain Certain About About Costs CostsThan Than Demand Demand
Minimizes Minimizes Price Price Competition Competition
Perceived Perceived Fairness Fairnessto to Both BothBuyers Buyers and and Sellers Sellers 11 11
Breakeven Breakeven Analysis Analysis or or Target Profit Pricing to Determine TargetTries Profit Pricingthe Price at Which a Firm Will Cost in Dollars (millions)
Break Even or Make a Target Profit
Total Revenue Target Profit ($2 million)
12 10 8 6 4 2 0
Total Cost Fixed Cost
200
400
600
800
1,000
Sales Volume in Units (thousands)
12 12
Cost-Based Cost-Based Vs. Vs. Value-Based Value-Based Pricing Pricing Cost-Based Pricing
Value-Based Pricing
Product Product
Customer Customer
Cost Cost
Value Value
Price Price
Price Price
Value Value
Cost Cost
Customers Customers
Product Product 13 13
Competition-Based Competition-Based Pricing Pricing Setting Setting Prices Prices
Going-Rate Going-Rate
Company CompanySets SetsPrices PricesBased Basedon onWhat What Competitors CompetitorsAre AreCharging. Charging.
? ?
Sealed-Bid Sealed-Bid
Company CompanySets SetsPrices PricesBased Based on on What What They TheyThink ThinkCompetitors Competitors Will WillCharge. Charge. 14 14
New-Product New-Product Pricing Pricing Strategies Strategies Price Price -- Quality Quality Strategies Strategies
Price Higher
Lower
Premium Strategy
Good-Value Good-Value Strategy Strategy
Overcharging Overcharging Strategy Strategy
Economy Economy Strategy Strategy
Quality
Higher
Lower
15 15
Setting Setting Initial Initial Product Product Prices Prices
Market Market Skimming Skimming
Market Market Penetration Penetration
> Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market.
> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
> Results in Fewer, More Profitable Sales.
> Results in a Larger Market Share. > Wal-mart
> Intel’s $1,000 Chip
16 16
Product Product Mix Mix Pricing Pricing Strategies Strategies Product Product Line Line Pricing Pricing
Setting SettingPrice PriceSteps Steps Between Between Product ProductLine LineItems Items i.e. i.e. Lawnmowers Lawnmowersat at $299 $299&& $399 $399
Optional-Product Optional-Product Pricing Pricing
Product Product Mix Mix Pricing Pricing Strategies Strategies
Pricing Pricing Optional Optionalor orAccessory AccessoryProducts Products Sold Sold With WithThe TheMain MainProduct Product i.e. i.e.Car CarOptions Optionssuch suchas asaaCD CD player player
Captive-Product Captive-Product Pricing Pricing
Pricing Pricing Products ProductsThat That Must Must Be Be Used UsedAlong Along With With The TheMain MainProduct Product i.e. i.e.Razor RazorBlades, Blades,Film, Film,Software Software
By-Product By-Product Pricing Pricing
Pricing Pricing Low-Value Low-ValueBy-Products By-ProductsTo To Get Get Rid Ridof ofThem Them i.e. i.e. From FromChemicals, Chemicals,Lumber LumberMills, Mills,Zoos Zoos
Product-Bundle Product-Bundle Pricing Pricing
Bundles BundlesOf OfProducts ProductsSold Sold Together Togetherat ataaReduced Reduced Price Price i.e. i.e.Season Season Tickets, Tickets,Computer ComputerMakers Makers 17 17
Price-Adjustment Price-Adjustment Strategies Strategies Price Price Adjustment Adjustment Strategies Strategies Discount Discount & & Allowance Allowance
Reducing ReducingPrices Pricesto to Reward Reward Customer CustomerResponses Responses such suchas as Paying PayingEarly Earlyor or Promoting Promoting the theProduct. Product.
Segmented Segmented
Adjusting AdjustingPrices Pricesto to Allow Allow for forDifferences Differencesin inCustomers, Customers, Products, Products,and and Locations. Locations.
Cash Cash Discount Discount
Customer Customer
Quantity QuantityDiscount Discount
Product-Form Product-Form
Functional FunctionalDiscount Discount
Location Location
Seasonal SeasonalDiscount Discount
Time Time
Trade-In Trade-In Allowance Allowance
Promotional Promotional Allowance Allowance 18 18
Price-Adjustment Price-Adjustment Strategies Strategies • Adjusting
Psychological Pricing
Prices for Psychological Effect. • Price Used as a Quality Indicator. • Reference Prices i.e. Clothing. • Temporarily
Promotional Pricing
Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, for Special-Events, Cash Rebates
19 19
Price-Adjustment Price-Adjustment Strategies Strategies • Adjusting
Geographical Pricing
International Pricing
Prices to Account
for the Geographical Location of Customers. • i.e. FOB-Origin, UniformDelivered, Zone Pricing, etc. • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
20 20
Initiating Initiating and and Responding Responding to to Price Price Changes Changes Competitor Reactions to Price Changes
Initiating Price Cuts
Price Changes Buyer Reactions to Price Changes
Initiating Price Increases
21 21
Assessing Assessing & & Responding Responding to to Competitor Competitor Price Price Changes Changes Has HasCompetitor CompetitorCut Cut Price? Price?
No
Hold HoldCurrent CurrentPrice; Price; Continue Continueto toMonitor Monitor Competitor’s Competitor’sPrice. Price.
Yes
Will WillLower LowerPrice Price Negatively NegativelyAffect AffectOur Our Market MarketShare Share&& Profits? Profits?
No
Reduce ReducePrice Price
Yes
Can/ Can/Should Should Effective Effective Action Action be beTaken? Taken?
No
Raise RaisePerceived Perceived Quality Quality
Yes
Improve ImproveQuality Quality && Increase IncreasePrice Price Launch LaunchLow-Price Low-Price “Fighting “FightingBrand” Brand”22 22
Public Public Policy Policy and and Pricing Pricing Public Policy on Pricing Centers on Three Potentially Damaging Pricing Practices. Price Price Fixing Fixing
Price Price Discrimination Discrimination
Deceptive Deceptive Pricing Pricing 23 23
Factors Factors to to Consider Consider When When Setting Setting Prices Prices Price is the Amount of Money Charged for a Product or Service.
Internal Internal Factors Factors
Pricing Pricing Decisions Decisions
External External Factors Factors 22
Internal Internal Factors Factors Affecting Affecting Pricing Pricing Decisions Decisions Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations 33
Marketing Marketing Objectives Objectives that that Affect Affect Pricing Pricing Decisions Decisions Survival Survival Low LowPrices Pricesto toCover CoverVariable VariableCosts Costsand and Some Fixed Costs to Stay in Business. Some Fixed Costs to Stay in Business.
Current CurrentProfit ProfitMaximization Maximization
Marketing Marketing Objectives Objectives
Choose Choosethe thePrice Pricethat thatProduces Producesthe the Maximum MaximumCurrent CurrentProfit, Profit,Cash CashFlow Flowor orROI. ROI.
Market MarketShare ShareLeadership Leadership Low Lowas asPossible PossiblePrices Pricesto toBecome Become the Market Share Leader. the Market Share Leader.
Product ProductQuality QualityLeadership Leadership High HighPrices Pricesto toCover CoverHigher Higher Performance Quality and Performance Quality andRR&&D. D. 44
Marketing Marketing Mix Mix Variables Variables that that Affect Affect Pricing Pricing Decisions Decisions Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be Coordinated With: Product ProductDesign Design
Non-Price Non-Price Factors Factors
Marketing-Mix Strategy
Distribution Distribution
Promotion Promotion 55
Types Types of of Cost Cost Factors Factors that that Affect Affect Pricing Pricing Decisions Decisions Fixed Costs (Overhead)
Variable Costs
Costs that don’t vary with sales or production levels.
Costs that do vary directly with the level of production.
Executive Salaries Rent
Raw materials
Total Total Costs Costs
Sum Sumof ofthe theFixed Fixedand andVariable VariableCosts Costsfor foraaGiven Given Level Levelof ofProduction Production 66
External External Factors Factors Affecting Affecting Pricing Pricing Decisions Decisions Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns
77
Market Market and and Demand Demand Factors Factors that that Affect Pricing Decisions Affect Pricing Decisions Monopolistic Competition Pure Competition Pure Pure Competition Competition
Many ManyBuyers Buyersand andSellers SellersWho Who Have HaveLittle LittleEffect Effecton onthe thePrice. Price.
Monopolistic Competition
Many ManyBuyers Buyersand and Sellers SellersWho Who Trade TradeOver OveraaRange Rangeof of Prices. Prices.
Pricing Pricing in in Different Different Types Types of of Markets Markets
Oligopolistic Oligopolistic Competition Competition
Few FewSellers SellersWho WhoAre AreSensitive Sensitiveto toEach Each Other’s Other’sPricing/ Pricing/Marketing MarketingStrategies Strategies
Pure Pure Monopoly Monopoly Single SingleSeller Seller
88
Price Price Elasticity Elasticity of of Demand Demand Price
A. Inelastic Demand Demand Hardly Changes With a Small Change in Price. P2 P1
Price
Q2 Q1 Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price. P’2 P’1
Q2 Q1 Quantity Demanded per Period 99
Major Major Considerations Considerations in in Setting Setting Prices Prices No Possible Profit at This Price
Low Factory Price
Product Costs
Existing Products
Consumer Perceptions of Value
Selling and Promoting
No Possible Demand at This Price
Profits through Volume
High Price
Competitors’ Price and Other External & Internal Factors
10 10
What What is is Cost-Plus Cost-Plus Pricing Pricing and and Why Why is is itit Popular? Popular? Adding a Standard Markup to the Cost of the Product.
Sellers SellersAre AreMore More Certain Certain About About Costs CostsThan Than Demand Demand
Minimizes Minimizes Price Price Competition Competition
Perceived Perceived Fairness Fairnessto to Both BothBuyers Buyers and and Sellers Sellers 11 11
Breakeven Breakeven Analysis Analysis or or Target Profit Pricing to Determine TargetTries Profit Pricingthe Price at Which a Firm Will Cost in Dollars (millions)
Break Even or Make a Target Profit
Total Revenue Target Profit ($2 million)
12 10 8 6 4 2 0
Total Cost Fixed Cost
200
400
600
800
1,000
Sales Volume in Units (thousands)
12 12
Cost-Based Cost-Based Vs. Vs. Value-Based Value-Based Pricing Pricing Cost-Based Pricing
Value-Based Pricing
Product Product
Customer Customer
Cost Cost
Value Value
Price Price
Price Price
Value Value
Cost Cost
Customers Customers
Product Product 13 13
Competition-Based Competition-Based Pricing Pricing Setting Setting Prices Prices
Going-Rate Going-Rate
Company CompanySets SetsPrices PricesBased Basedon onWhat What Competitors CompetitorsAre AreCharging. Charging.
? ?
Sealed-Bid Sealed-Bid
Company CompanySets SetsPrices PricesBased Based on on What What They TheyThink ThinkCompetitors Competitors Will WillCharge. Charge. 14 14
New-Product New-Product Pricing Pricing Strategies Strategies Price Price -- Quality Quality Strategies Strategies
Price Higher
Lower
Premium Strategy
Good-Value Good-Value Strategy Strategy
Overcharging Overcharging Strategy Strategy
Economy Economy Strategy Strategy
Quality
Higher
Lower
15 15
Setting Setting Initial Initial Product Product Prices Prices
Market Market Skimming Skimming
Market Market Penetration Penetration
> Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market.
> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
> Results in Fewer, More Profitable Sales.
> Results in a Larger Market Share. > Wal-mart
> Intel’s $1,000 Chip
16 16
Product Product Mix Mix Pricing Pricing Strategies Strategies Product Product Line Line Pricing Pricing
Setting SettingPrice PriceSteps Steps Between Between Product ProductLine LineItems Items i.e. i.e. Lawnmowers Lawnmowersat at $299 $299&& $399 $399
Optional-Product Optional-Product Pricing Pricing
Product Product Mix Mix Pricing Pricing Strategies Strategies
Pricing Pricing Optional Optionalor orAccessory AccessoryProducts Products Sold Sold With WithThe TheMain MainProduct Product i.e. i.e.Car CarOptions Optionssuch suchas asaaCD CD player player
Captive-Product Captive-Product Pricing Pricing
Pricing Pricing Products ProductsThat That Must Must Be Be Used UsedAlong Along With With The TheMain MainProduct Product i.e. i.e.Razor RazorBlades, Blades,Film, Film,Software Software
By-Product By-Product Pricing Pricing
Pricing Pricing Low-Value Low-ValueBy-Products By-ProductsTo To Get Get Rid Ridof ofThem Them i.e. i.e. From FromChemicals, Chemicals,Lumber LumberMills, Mills,Zoos Zoos
Product-Bundle Product-Bundle Pricing Pricing
Bundles BundlesOf OfProducts ProductsSold Sold Together Togetherat ataaReduced Reduced Price Price i.e. i.e.Season Season Tickets, Tickets,Computer ComputerMakers Makers 17 17
Price-Adjustment Price-Adjustment Strategies Strategies Price Price Adjustment Adjustment Strategies Strategies Discount Discount & & Allowance Allowance
Reducing ReducingPrices Pricesto to Reward Reward Customer CustomerResponses Responses such suchas as Paying PayingEarly Earlyor or Promoting Promoting the theProduct. Product.
Segmented Segmented
Adjusting AdjustingPrices Pricesto to Allow Allow for forDifferences Differencesin inCustomers, Customers, Products, Products,and and Locations. Locations.
Cash Cash Discount Discount
Customer Customer
Quantity QuantityDiscount Discount
Product-Form Product-Form
Functional FunctionalDiscount Discount
Location Location
Seasonal SeasonalDiscount Discount
Time Time
Trade-In Trade-In Allowance Allowance
Promotional Promotional Allowance Allowance 18 18
Price-Adjustment Price-Adjustment Strategies Strategies • Adjusting
Psychological Pricing
Prices for Psychological Effect. • Price Used as a Quality Indicator. • Reference Prices i.e. Clothing. • Temporarily
Promotional Pricing
Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, for Special-Events, Cash Rebates
19 19
Price-Adjustment Price-Adjustment Strategies Strategies • Adjusting
Geographical Pricing
International Pricing
Prices to Account
for the Geographical Location of Customers. • i.e. FOB-Origin, UniformDelivered, Zone Pricing, etc. • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
20 20
Initiating Initiating and and Responding Responding to to Price Price Changes Changes Competitor Reactions to Price Changes
Initiating Price Cuts
Price Changes Buyer Reactions to Price Changes
Initiating Price Increases
21 21
Assessing Assessing & & Responding Responding to to Competitor Competitor Price Price Changes Changes Has HasCompetitor CompetitorCut Cut Price? Price?
No
Hold HoldCurrent CurrentPrice; Price; Continue Continueto toMonitor Monitor Competitor’s Competitor’sPrice. Price.
Yes
Will WillLower LowerPrice Price Negatively NegativelyAffect AffectOur Our Market MarketShare Share&& Profits? Profits?
No
Reduce ReducePrice Price
Yes
Can/ Can/Should Should Effective Effective Action Action be beTaken? Taken?
No
Raise RaisePerceived Perceived Quality Quality
Yes
Improve ImproveQuality Quality && Increase IncreasePrice Price Launch LaunchLow-Price Low-Price “Fighting “FightingBrand” Brand”22 22
Public Public Policy Policy and and Pricing Pricing Public Policy on Pricing Centers on Three Potentially Damaging Pricing Practices. Price Price Fixing Fixing
Price Price Discrimination Discrimination
Deceptive Deceptive Pricing Pricing 23 23
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