17 pricing
TRANSCRIPT
-
8/7/2019 17 Pricing
1/22
Pricing Strategy
critical marketing mix variable
actually produces revenue
shortest term marketing mix variable
relates directly to microeconomics
supply versus demand analysis
breakeven analysis
price elasticity
-
8/7/2019 17 Pricing
2/22
Pricing Strategy
How to improve profit performance?
$
Q
Increase price
$
Q
Cut Variable Cost
rev
var.
cost
fixed
cost
-
8/7/2019 17 Pricing
3/22
Pricing Strategy
$
Q
$
Q
Cut Fixed Cost
profit performance.
Increase Volume
-
8/7/2019 17 Pricing
4/22
Pricing Strategy
Supply versus Demand
D
S
P
Q
D
Q
inelastic
Q
elastic
D
-
8/7/2019 17 Pricing
5/22
Pricing Strategy
Shift in Supply Curve
change in cost
change in expectations of costchange in price of other goods sold
-
8/7/2019 17 Pricing
6/22
Price Strategy
Shift in Demand Curve
change in income
change in price of related goodschange in price expectations
change in taste
Increase in demand versus increase in quantity demanded
-
8/7/2019 17 Pricing
7/22
Pricing Strategy
Set Pricing Objective
Estimate Demand
Estimate CostsAnalyze Competitors Prices
Select Pricing Policy/Method
Set Final Price
-
8/7/2019 17 Pricing
8/22
Pricing Strategy
Pricing Objectives
survivalcover fixed cost and some variable cost
very short-run.(avoid extinction)
profit maximization
requires accurate knowledge of demand, cost functions
-
8/7/2019 17 Pricing
9/22
Pricing Strategy
Pricing Objectives (cont.)
revenue maximizationcosts hard to determine
assume increase in revenue leads to decrease in unit costs (old BCG
model)
both production and distribution costs fall
works if market is price sensitive
low price may discourage competition
market penetration strategy
-
8/7/2019 17 Pricing
10/22
Pricing Strategy
Pricing Objectives (cont.)
market skimminghighest price that market will bear
benefits are barely worthwhile for some customers to buy
then work down the demand curve
works if no cost benefit of increasing volume
image is importantmay or may not discourage competition
-
8/7/2019 17 Pricing
11/22
Pricing Strategy
Estimate Demand (curve)
unique value
awareness of substitutesdifficult to compare alternatives
price relative to income
inventory effect
Can customer hold inventory?
-
8/7/2019 17 Pricing
12/22
Pricing Strategy
Estimate Costs (supply curve)
cost structure at different levels of productionold long run average cost curves
experience curves from BCG model
profit is a function of market share.
penetration versus skimming
How is supply curve affected?
-
8/7/2019 17 Pricing
13/22
Pricing Strategy
Analyze Competitors Prices
What is the structure of the market?
oligopoly versus pure competition
Select Pricing Policy/Method
single or multiple prices
administered pricing
ceiling and floor prices versus the level of competition
-
8/7/2019 17 Pricing
14/22
Pricing Strategy
Cost Based Pricing
cost plus, markup pricingeasy, costs known, minimizes price competition
ignores demand elasticity, not profit maximizing
target return of investment
use breakeven analysis to find a price to yield a target ROIuse sales volume to derive price?
-
8/7/2019 17 Pricing
15/22
Pricing Strategy
Demand Based Pricing
perceived valuerequires detailed knowledge of buyer behavior and demand elasticity
only true profit maximizing strategy
ignores costs and competitors
-
8/7/2019 17 Pricing
16/22
Pricing Strategy
Demand Based Pricing (cont.)
demand differential
price discriminationyield maximization pricing
sell at multiple prices to multiple segments
not based on marginal costs of dealing with each
daily, weekly, or seasonal pricing
geographic, physical, or electronic barriers
-
8/7/2019 17 Pricing
17/22
Pricing Strategy
Competition Based Pricing
going rate pricingused when costs difficult to measure
competitors lack differential advantage
sealed bid
forces competitors to lowest price
-
8/7/2019 17 Pricing
18/22
Pricing Strategies
Select Final Price
psychological pricing, prestige pricingknow demand elasticity
start high, work toward costs
discounts
cash, trade, quantity, or seasonal
promotional pricing
loss leaders
-
8/7/2019 17 Pricing
19/22
Pricing Strategy
Select Final Price (cont.)
price lining
odd pricing
perception
-
8/7/2019 17 Pricing
20/22
Pricing Strategy
Price cuts
excess capacity leads to margin squeezes (aka price wars)
build market share not brand loyalty
low cost producer will always win
-
8/7/2019 17 Pricing
21/22
Pricing Strategy
Price Increases Before After
Price 10.00 10.10 +1%
Quantity x 100 x 100 Revenue 1,000 1,010
Total Cost 970 970
Profit 30 40 +33%
-
8/7/2019 17 Pricing
22/22
Pricing Strategy
Intense pressure to inflate prices
reduce discounts
decrease amount of product
substitute cheaper materials
reduce product features