You are on page 1of 23

1.

Pricing objectives
Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

1-1

Setting Pricing Policy


1. Selecting the pricing objective

2. Determining demand

3. Estimating costs 4. Analyzing competitors costs, prices, and offers

5. Selecting a pricing method


6. Selecting final price
1-2

1-3

The Three Cs Model for Price Setting

Low Price No possible profit at this price

Costs

Competitors prices and prices of substitutes

Customers assessment of unique product features

High Price No possible demand at this price

1-4

Price Elasticity of Demand


% Change in quantity demanded

Price Elasticity of Demand =


% Change in price

Elastic Demand Inelastic Demand

1-5

1-6

Costs, Volume, and Profits


Fixed Costs (FC) Variable Costs (VC) Total Costs (TC)
TC = (VC X Q) + FC

Marginal Cost (MC) Marginal Revenue (MR) Total Revenue (TR)


Total Revenue = Price X Quantity

Profits = TR - TC
1-7

Price Determination Methods


Markup Pricing
Price = Unit Cost + Markup or Price = Unit Cost/(1-k)*
*k = desired % markup

1-8

Price Determination Methods


Break-Even Analysis
$
Total Revenue Profit

Total Cost

Loss

Fixed Cost

BEP Quantity (units)


1-9

Price Determination Methods


Target-Return Pricing

(Desired return X Invested capital)


Price = Unit Cost + Expected Unit Sales

1-10

Price Determination Methods


Target-Cost Pricing
1. Define market segments for new product. 2. Product is designed based on competitive advantages and disadvantages. 3. Position product in context of overall company strategy. 4. Fine-tune product based on customers preferences, perceived value and willingness to pay. 5. Estimate various price-responsiveness with simulations. 6. Estimate target costs between optimal price and

1-11

Price Determination Methods


Income-Based Pricing Real Estate Marketable Securities Businesses

1-12

Prices and Customer Value

1-13

Pricing Strategies
Differential Pricing Second-market discounting Periodic discounting Product Line Pricing Bundling Premium pricing Partitional pricing Psychological Pricing Odd-even pricing Customary pricing One-sided claims

Competitive Pricing Penetration pricing Price signaling Going-rate pricing

1-14

B2B Pricing Strategies


New Product Pricing
Price Skimming Penetration Pricing Experience Curve Pricing

Price Line Pricing


Complementary Product Pricing Price Bundling Customer Value Pricing

Competitive Pricing
Leader Pricing Parity Pricing Low-Price Supplier

Cost-based Pricing
Cost-plus Pricing

1-15

Adapting Prices: Decreases and Increases


Price Reduction Traps:
1. Low-quality trap 2. Fragile market share trap 3. Shallow pockets trap

Acceptable Price Range:


Prices the buyer is willing to pay.

1-16

Adapting Prices: Reacting to Competitive Price Changes


Temporary retail price reductions substantially increase store traffic and sales. Large-market-share brands are hurt less by price changes from smaller competitors. Frequent price dealing lowers consumers reference prices, which may hurt brand equity.

Price changes for high-quality brands affect weaker brands and private-label brands disproportionately.
1-17

Adapting Prices: Price Discounts and Allowances


Cash Discounts
Trade Sales Promotion Allowances Quantity Discounts

1-18

Adapting Prices: Geographical Pricing


FOB Origin Pricing
Uniform Delivered Price

Zone Pricing Freight Absorption Pricing


1-19

Competitive Bidding and Negotiated Pricing

Sealed-bid Pricing Reverse Auctions

1-20

Pricing Services
Price is influenced by the nature of the service involved. The larger the market share, the higher the price that can be charged. Managing off-peak demand makes pricing services difficult. Bundling services into a single package and price is a common strategy.
1-21

FTC Pricing Guidelines


Comparisons with former prices. Comparisons with other retailer prices.

Comparisons with prices suggested by manufacturers or other non-retail distributors.

1-22

Deceptive Pricing Practices


Bait and Switch Predatory Pricing Unit Pricing

1-23