Pricing Strategies

Lecture 6 Pricing Strategy

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Price 

Price is the only element in the marketing mix that produces revenues; all others represent costs.

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Pricing Objectives 

Profit Oriented:  

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Sales Oriented:  

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To achieve a target return To maximize profit To increase sales volume To maintain or increase market share

Status Quo Oriented:  

To stabilize prices To meet competition 3

(1) Profit Oriented Goals •

Achieve a target return: a firm may price its product to achieve a target return – a specified percentage return on its sales or on its investment. They add an amount to the cost of the product, called a markup, to cover anticipated operating cost and provide a desired profit.

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Maximize profit: the goal of the firm is profit maximization. 4

(2) Sales Oriented •

Increase sales volume: this pricing goal is to achieve rapid growth in the industry or to discourage other firms from entering a market.

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Increase market share: companies for large market share in order to drive down production cost, reach economies of scale, or to project a dominance appearance to consumers. They accept small profit margins and reduce their costs so that they could lower their selling prices.

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(3) Status Quo Goals •

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Stabilize prices and meeting competition: a firm maintains its current standing in the market, and therefore, seeks to avoid competition. Price stabilization often is the goal in industries where (a) the product is highly standardized (e.g steel) and (b) one large firm, acts as a leader in setting prices for smaller firms. A price cut by any one firm is likely to be matched by all other firms in order to remain competitive. These firms are not competing on the basis of prices, but other marketing mix elements.

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Factors Affecting Price Decisions External External Factors Factors

Internal Internal Factors Factors Marketing MarketingObjectives Objectives Marketing MarketingMix MixStrategy Strategy Costs Costs Organizational Organizational considerations considerations

Pricing Pricing Decisions Decisions

Nature Natureof ofthe themarket market and anddemand demand Competition Competition Other Otherenvironmental environmental factors factors(economy, (economy, resellers, resellers,government) government)

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Internal Factors Affecting Pricing Decisions:

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1. Marketing Objectives

Marketing Objectives

Survival Low Prices to Cover Variable Costs and SomeProfit Fixed Costs to Stay in Current Maximization Choose theBusiness. Price that Produces the Maximum Current Profit, Etc.

Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D. 9

Marketing Objectives (contd) o

Other specific objectives include: 



o

Set prices low to prevent competition from entering the market, Prices might be reduced temporarily to create excitement or draw more customers.

Nonprofit and public organization may have other pricing objectives such as:   

University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of seats. 10

2. Marketing Mix Product Design

Nonprice Positions

Price

Distribution

Promotion 11

Marketing Mix Elements 

A product’s base price is influenced considerably by other ingredients in the marketing mix: 

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Product: changes over the life cycle of the product, brand image, extra-ordinary features. Distribution: channels and types of middlemen selected will influence the pricing. The firm selling both through wholesalers and directly to retailers often set a different factory price for these two classes of customers. Promotion: the extent to which a product is promoted by the producer/middleman and the methods used are added considerations in pricing.

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3. Types of Cost Factors that Affect Pricing 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 Sum of of the the Fixed Fixed and and Variable Variable Costs Costs for for aa Given Given Level Level of of Production Production 13

Types of Cost Factors that Affect Pricing Decisions 

As a firm gains experience in production, it learns how to do it better.

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The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience. 14

External Factors Affecting Pricing Decisions:

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1. Market and Demand Factors Affecting Pricing Decisions Pricing in Different Types of Markets Pure Pure Competition Competition

Many ManyBuyers Buyersand andSellers Sellers Who WhoHave HaveLittle Little Effect Effecton onthe thePrice Price

Monopolistic Monopolistic Competition Competition

Pure Pure Monopoly Monopoly Single SingleSeller Seller

Oligopolistic Oligopolistic Competition Competition

Many FewSellers SellersWho WhoAre Are ManyBuyers Buyersand andSellers Sellers Few Sensitive to Each Other’s Who WhoTrade TradeOver Overaa Sensitive to Each Other’s Pricing/ Pricing/Marketing Marketing Range Rangeof ofPrices Prices Strategies Strategies

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2. Demand Curves and Price Elasticity of Demand A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged. Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.

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Price

Price Elasticity of Demand 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

Quantity Demanded per

Q1

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Estimated Demand 

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Inverse demand – the higher the price the greater the unit sales. If the price is much lower than what the market expects, sales may be lost. Shoppers would be suspicious about product quality, or their selfconcept might not let them buy such low-prices products. A sharp drop in revenue occurring when the price is raised above the prevailing market level indicates that the seller faces a ‘Kinked Demand’ 19

3. Cost-Based Pricing

Cost-Plus Ethical Pricing is an Approach That Adds a Standard Markup to the Attitudes Costofof the Others Product.

Simples t Pricing Method

Ignores Current Demand & Competitio n 20

p x e n U td c S a itu l n o

to c a F rs

4. Breakeven Analysis

Cost in Dollars (millions)

Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit. Total Revenue

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Target Profit ($2 million)

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Total Cost Fixed Cost

6 4 2

200

400

600

800

1,000

Sales Volume in Units (thousands) 21

New Product Pricing Strategies Market Skimming Skimming Market  Setting Setting aa High High Price Price for for  New Product Product to to aa New “Skim” Maximum Maximum “Skim” Revenues from from the the Revenues Target Market. Market. Target  Results in Fewer, But  Results in Fewer, But More Profitable Profitable Sales. Sales. More

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Use Under These Conditions: 

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Product’s Quality and Image Must Support Its Higher Price. Costs Can’t be so High that They Cancel the Advantage of Charging More. Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price. 22

New Product Pricing Strategies 

Use Under These Conditions: 



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Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. Production/ Distribution Costs Must Fall as Sales Volume Increases. Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

Market Penetration Penetration Market  Setting Setting aa Low Low Price Price for for  New Product Product in in Order Order aa New to “Penetrate” “Penetrate” the the to Market Quickly Quickly and and Market Deeply. Deeply.  Attract Attract aa Large Large Number Number  of Buyers Buyers and and Win Win aa of Larger Market Market Share. Share. Larger

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Product Mix- Pricing Strategies 

Optional-Product 

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Pricing optional or accessory products sold with the main product. i.e camera bag.

Captive-Product 

Pricing products that must be used with the main product. i.e. film.

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Product Mix- Pricing Strategies 

By-Product 

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Pricing low-value by-products to get rid of them and make the main product’s price more competitive. i.e. sawdust, Zoo Doo

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Product-Bundling 

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Combining several products and offering the bundle at a reduced price. i.e. theater season tickets.

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Discount and Allowance Pricing A

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Discounts and Allowances (a) Quantity Discount: 

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Deductions from the sellers’ list price intended to encourage customers to buy in large amounts. To buy most of what they need from the seller offering the deduction. Discounts are based on the size of the purchase, either in dollars or in units. A non-cumulative discount is based on the size of an individual order of one or more products. A cumulative discount is based on the total volume purchased over a specified period. 27

(b) Trade Discount: 

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Reductions from the list price offered to buyers in payment for marketing functions the buyer will perform Storing, promoting, and selling the product are examples of these functions.

(c) Cash Discount: 

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Deduction granted to buyers for paying their bills within a specified time. It includes the percentage discount and the period is specified. 28

(d) Seasonal Discounts: 

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Discount given to a customer who places an order during the slack period. Off-season orders enables manufacturers to better use their production facilities, which helps to avoid inventory/carrying costs.

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This Sprint ad offers f reelong distance on Fridays.

WhycanSprint affordt ooffer this promotion on Fridays rat her than onanother day (like Monday)?

Promotional Pricing Loss Loss Leaders Leaders Special-Event Special-Event Pricing Pricing Cash Cash Rebates Rebates Low-Interest Low-Interest Financing Financing

Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through:

Longer Longer Warranties Warranties Free Free Merchandise Merchandise Discounts Discounts

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Initiating Price Changes

Why?

Why?

Excess Capacity

Cost Inflation

Falling Market Share

Overdemand: Company Can’t Supply All Customer’s Needs

Dominate Market Through Lower Costs

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Reactions to Price Changes Price Cuts Are Seen by BuyersCompetitors Reactions When: As: Number of Firms is Number of Firms is Being Replaced by Being Replaced by Small Small Newer Models Newer Models Current Current Models Models Are Are Not Not Selling Selling Well Well

Product Product is is Uniform Uniform

Company Company is is in in Financial Financial Trouble Trouble

Buyers Buyers are are Well Well Informed Informed

Quality Quality Has Has Been Been Reduced Reduced Price Price Comes Comes Down Down Further Further 32

Assessing/Responding to Competitor’s Price Changes

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