pricing strategies
TRANSCRIPT
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Pricing Strategies
The price and quantity of goods available in a market
are determined by the demand for the good and the
supply of a good available at any given time.
The price and quantity of goods available in a market
are determined by the demand for the good and the
supply of a good available at any given time.
What is 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.
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Introduction We need to set price when we have:
a new product, or when we enter a new market with an existing product.
How? Need to decide what position you want your product to be in Static Analysis - assumes that competitors will not react to how a
firm prices its products Dynamic Analysis - assumes that competitors will react to changes in
prices of a firm’s products Static is very unrealistic. The Internet had influenced dynamic pricing in two ways:
Decreased menu costs - cost to change the price Interactivity - ease of Internet interaction
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Key Principles Consumers are heterogeneous in their willingness to pay
Charge according to consumer price sensitivity. Make sure that people with inelastic demand pay more and people with elastic demand pay less.
Make sure that prices directed at one segment cannot be taken advantage of by the other.
How should you achieve this? Identify a “bad” for the high willingness to pay segment and bundle it with
the product to create a product for the low segment This is where product design and pricing comes together.
The Seven Deadly Sins of Pricing
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Price-Quality Strategies
Philip Kotler identified 9 price-quality strategies
Premium HighValue
SuperValue
OverCharging
MidValue
GoodValue
Rip-offFalse
EconomyEconomy
High QualityHigh Quality
Low QualityLow Quality
High PriceHigh Price Low PriceLow Price
The Pricing Pentagon
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Pricing Process
Set Pricing Objectives
Analyze demand - Differentiate value relative to substitute products
Draw conclusions from competitive intelligence -Strategically select target customers segments
Select pricing strategy appropriate to the political, social, legal and economical environment - Predict strategic pricing/competitive reaction
Determine specific prices - Select a pricing structure and price point.
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Possible Pricing Objectives
Profit objectives Targeted profit return
Volume objectives Dollar or unit sales growth Market share growth
Other objectives Match competitors’ price Non-price competition
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Demand Analysis Measure the impact of price change on total
revenue Predicts unit sales volume and total revenue
for various price levels Different customers have different price
sensitivities and needs
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Impact of Cost on Pricing Strategy
Fixed and variable costs Full-Cost Pricing
Markup pricing, break-even pricing and rate-of-return pricing
Variable-cost pricing 3 types of relationships
Ratio of fixed costs to variable costs Economies of scales Cost structure
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Prices serve three broad functions:1. Prices raise revenue for the firm.
2. Prices act as a rationing device.
3. Prices indicate changes in the wants of consumers and induce suppliers to alter product accordingly.
Price determination and managerial objectives
• Pricing is key to managerial decision making
• Firms with market power can raise prices without losing all customers.
• A firm has market power when it faces a downward sloping demand curve.
• Firms wish to capture as much consumer surplus as possible.
• Firms achieve a target rate of return, target market share, stabilize output and match the competition.
Factors Affecting Pricing Decisions
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Customer Value Perceptions
Effective, customer-oriented Effective, customer-oriented pricing involves understanding pricing involves understanding
how much value consumers how much value consumers place on the benefits they place on the benefits they
receive from the product and receive from the product and setting a price that captures setting a price that captures
that value.that value.
Value-Based Pricing Vs. Cost-Based Pricing
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Good-Value Pricing: Offering just the right combination of quality and good service
at a fair price.
Value-Added Pricing: Attaching value-added features and services to differentiate a
marketing and offer and support higher prices, rather than cutting prices to match competitors.
Good-Value Pricing and Value-Added PricingGood-Value Pricing and Value-Added Pricing
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Discussion: Impact of Ethics on Pricing
How should you price if your product is a life-saving drug?
What are the ethical considerations? Customers have no choice Need to pay for the research When cheaper options doesn’t work Competition decides
Segmented demand, heterogeneous goods
Not a “demand curve” for a homogeneous commodity, but segmented markets for related but very different products
Product made & priced for one target income group/taste pattern; very hard to shift demand.
Can’t do it just by reducing price…
Quantity
Pri
ce Luxury
Sports
Midrange
Standard
Economy
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Product differentiation limits sales because…
• Cannot reduce costs with an increase in production or without having to face increased marketing expenses.
• Main constraint on sales is not “conditions of supply” but “conditions of demand”
• Unlimited wants and Scarce resources.
• Not “waste” but “opportunity”
• In growing economy, new factory must have much more capacity than needed now.
• In uncertain world, excess capacity needed to react to opportunities
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Choose a Price StrategyChoose a Price Strategy
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Status Quo Pricing Status Quo Pricing
Price SkimmingPrice Skimming
Penetration PricingPenetration Pricing
Price SkimmingPrice Skimming
SituationsSituationsWhenWhenPrice Price
SkimmingSkimmingIs SuccessfulIs Successful
SituationsSituationsWhenWhenPrice Price
SkimmingSkimmingIs SuccessfulIs Successful
Superior Product
Legal Protection of Product
Limited Production
Technological Breakthrough
Inelastic Demand
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New-Product Pricing Strategies
Market-skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market
Product quality and image must support the price
Buyers must want the product at the price
Costs of producing the product in small volume should not cancel the advantage of higher prices
Competitors should not be able to enter the market easily
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Penetration PricingPenetration Pricing
SituationsSituationsWhenWhen
PenetrationPenetrationPricingPricing
Is SuccessfulIs Successful
SituationsSituationsWhenWhen
PenetrationPenetrationPricingPricing
Is SuccessfulIs SuccessfulElastic Demand
Price-sensitive market
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New-Product Pricing Strategies
Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share
Price sensitive market
Inverse relationship of production and distribution cost to sales growth
Low prices must keep competition out of the market
When to use:
•Elastic demand
•Economies of scale
•Threat of strong competition
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Status Quo PricingStatus Quo Pricing
SituationsSituationsWhenWhen
Status QuoStatus QuoPricingPricing
Is SuccessfulIs Successful
SituationsSituationsWhenWhen
Status QuoStatus QuoPricingPricing
Is SuccessfulIs Successful Price Leader
Small firm
Product Mix Pricing Strategies
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Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices
Optional-product pricing takes into account optional or accessory products along with the main product
Captive-product pricing involves products that must be used along with the main product
Two-part pricing involves breaking the price into: Fixed feeVariable usage fee
By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.
Product bundle pricing combines several products at a reduced price
Product Mix Pricing Strategies
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Price-Adjustment Strategies
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Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product – Discounts, Allowances
Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost
To be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Watching the market cannot exceed the extra revenue obtained from the price difference
• Must be legal
Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics
Reference prices are prices that buyers carry in their minds and refer to when looking at a given product
•Noting current prices
•Remembering past prices
•Assessing the buying situations
Price-Adjustment
Strategies
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Promotional pricing is when prices are temporarily priced below list price or cost to increase demand
•Loss leaders•Special event pricing•Cash rebates•Low-interest financing•Longer warrantees•Free maintenance
Price-Adjustment Strategies
Risks of promotional pricing:
• Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price
• Creates price wars
Geographical pricing is used for customers in different parts of the country -world
•FOB-origin pricing
•Uniformed-delivered pricing
•Zone pricing
•Basing-point pricing
•Freight-absorption pricing 23
FOB-origin (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer.Uniformed-delivered pricing means the company charges the same price plus freight to all customers, regardless of location.
Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total priceBasing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations
Price-Adjustment Strategies
International pricing is when prices are set in a specific country based on country-specific factors:
•Economic conditions & Competitive conditions
•Laws and regulations & Infrastructure
•Company marketing objective
Geographical pricing
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Price Changes
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Price Changes
Initiating Pricing Changes Price cuts is a reduction in selling price.
Excess capacity Increase market share
Price increases is an increase in selling price Cost inflation Increased demand and lack of supply
Buyers’ Interpretation to Price Changes Price cuts
New models will be available Models are not selling well Quality issues
Price increases Product is “hot” Company greed
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Price Changes
Responding to Price Changes Questions
Why did the competitor change the price? Is the price cut permanent or temporary? What is the effect on market share and profits? Will competitors respond?
Solutions Reduce price to match competition Maintain price but raise the perceived value through
communications Improve quality and increase price Launch a lower-price “fighting brand”
Competitor Price Cuts
Financial Trouble
Decreasing prices may be a desperate attempt to raise cash, or signal to competitors an interest in being acquired
Financial Trouble
Decreasing prices may be a desperate attempt to raise cash, or signal to competitors an interest in being acquired
Attempting to Become an Industry Leader
Decreasing prices is sometimes a show of strength to indicate that a firm is doing well enough to withstand the lower prices
Attempting to Become an Industry Leader
Decreasing prices is sometimes a show of strength to indicate that a firm is doing well enough to withstand the lower prices
Signaling Displeasure Over a Competitor’s Strategy
A firm can use a price cut to punish a competitor for a change in its strategy
Signaling Displeasure Over a Competitor’s Strategy
A firm can use a price cut to punish a competitor for a change in its strategy
Typical motives forprice cutting:
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Price Changes
Estimate Competitor Response
Select potential prices
Game out competitors reactions
Estimate revised price
• Pick at least three potential prices
• Must be prices that the firm could actually charge
• Do industry research to brief managers before game
• Construct a scenario-planning exercise
• Use a multiperiod game for best results
• Use game results to estimate both the firm’s final price as well as competitors’ price points
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
Legality and Ethics of Price StrategyLegality and Ethics of Price Strategy
Price Discrimination Charge different prices to different customers Transaction must occur in interstate commerce Seller must make two/ more sales w/in short time period Commodities of like grade and quality Must be significant competitive injury Sellers can argue price variations
Different Costs Different Market Conditions Competition
Price fixing: Sellers must set prices without talking to competitors
Predatory Pricing
Legality and Ethics of Price Strategy
• Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business
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Price Discrimination
With price discriminationprice discrimination, a firm sets two or more distinct prices for a product. Higher prices are for inelastic segments and lower prices for elastic ones.
Customer-based price discriminationCustomer-based price discrimination——Prices differ by customer category for the same good or service.
Product-based price discriminationProduct-based price discrimination——A firm markets a number of features, styles, qualities, brands, or sizes of a product and sets a different price for each product version.
Time-based price discriminationTime-based price discrimination——A firm varies prices by day versus evening, time of day, or season.
Place-based price discriminationPlace-based price discrimination——Prices differ by seat location, floor location, or geographic location.
When a firm engages in price discrimination, it should use yield yield management pricingmanagement pricing——whereby it determines the mix of price-quantity combinations that generates the highest revenues for a given time.
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Price Discrimination
First Degree — Charge consumers exactly what they are willing to pay for product
(e.g., 1–1 price haggling)
First Degree — Charge consumers exactly what they are willing to pay for product
(e.g., 1–1 price haggling)
Second Degree — Charge consumers exactly what they
are willing to pay for first unit of good as well as additional units
(e.g., volume pricing)
Second Degree — Charge consumers exactly what they
are willing to pay for first unit of good as well as additional units
(e.g., volume pricing)
Third Degree — Divide consumers into distinct
segments, charging different prices to different segments (e.g., movie-theater pricing)
Third Degree — Divide consumers into distinct
segments, charging different prices to different segments (e.g., movie-theater pricing)
PricePriceDiscriminationDiscrimination
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
Promotional AllowancesPromotional Allowances
RebatesRebates
Fine Tuning the Base PriceFine Tuning the Base Price
Special Pricing TacticsSpecial Pricing Tactics
Single-Price Tactic All goods at the same price
Flexible Pricing Different customers pay different price
Price Lining Several line items at specific price points
Loss Leader Pricing Sell product at near or below cost
Bait Pricing Lure customers through false or misleading price advertising
Odd-Even Pricing Odd-number prices imply bargainEven-number prices imply quality
Price Bundling Combining two or more products in a single package
Two-Part Pricing Two separate charges to consume a single good
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Information Needed for Price Change
Customers’ ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product.
Need to know everything about the competitors How would competitors react to our price change?
(see following slide) In obtaining competitors’ information, remember the
value of the information
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New-Product Pricing Strategies
1.1. Skimming pricingSkimming pricing Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products
in the ASPAC region
2.2. Penetration pricingPenetration pricing Charging a low price when entering the market to capture
market share Used when competitors are closing in with similar or better
products
3.3. Intermediate pricingIntermediate pricing Pricing somewhere in between the skimming strategy and the
penetration strategy
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Pricing Strategies for Established ProductsPricing Strategies for Established Products
Three strategic alternatives:
1. Maintain the price if you are the leader
2. Reduce the price e.g.
3. Increase the price
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Price-Flexibility StrategyPrice-Flexibility Strategy
One-price policy—setting one fixed price for all markets
Flexible-price policy—setting different prices in different markets based on: Geographic Location, Time of delivery, or The complexity of the product
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How much flexibility in price?
Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations
Example: Life-saving drugs
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Product-Line Pricing When pricing products in different lines, must
take cross-elasticities of demand across the set of products into consideration
The idea is to maximize the profits of the entire organization rather than that of a single product or a single line
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Leasing Strategy
Leasing is more common for industrial goods e.g. Singapore Airlines sold many of their
aircraft and lease them back for their operations
There is a growing trend toward leasing consumer goods as well e.g. Leasing of office equipment
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Reactions to Price Change
Customers are more sensitive to price changes if the products cost a lot and/or are bought frequently
Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitor’s likely reaction
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Responding to Competitors’ Price Change
If competitors lower price for homogenous products Try augmenting the product If it doesn’t work or if it is not likely to work, then meet the
price cut head-on If competitors raise price
In a homogeneous market, follow if you think the whole market is likely to follow
In a non-homogeneous market, evaluate The reason for the competitor price change If the price increase is temporary The effect on your market share & profit The likely responses from the other competitors
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When a Market Leader is Being Attacked on Price
Options available:
Maintain price
Raise perceived quality
Match competitors’ price
Increase price and improve quality
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Impact of Discounting on Brand Equity
Why discount?
Problems emerging with discounts
The value equation (V=Q/P)
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Price War
Price wars are frequent in industries where Cost differentiation opportunities exists Capital is intensive and products are
homogeneous
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Yield Management
What is it? Yield management goals Industries that benefited from yield management Common variables
Will the Internet Commoditize Prices?
The Internet Will Lead to Price Commoditization
The Internet Will Not Commoditize Prices
The Internet makes vast amounts of information available to consumers. As a result, markets will become more efficient, and differences in products and pricing will decrease
Consumers on the Internet are not restricted by geography when making their purchases, so they are free to choose among a wider range of providers and may switch more frequently
On the Internet, providers have difficulty differentiating their products; they find it hard to compete on anything but price
Even if all else is equal, brand will still command a premium
Providers are able to differentiate their offerings by bundling products and services; consumers will place a premium on attractive "bundles"
The Internet makes it possible for consumers to create their own products and bundles
The Internet offers consumers a new convenient purchasing experience that they are willing to pay for
Point-Counterpoint
Click-through promotions
Web-referral promotions Specialty negotiated
promotions (e.g., hotels) Bricks-and-clicks
promotions Web price discounts Bundle Frenzy pricing Prestige Price as a sign of quality Hi-Lo Dynamic pricing EDLP
Targeted Promotions Future price
promotions Justify prices Loyalty programs
Tiered loyalty programs
Wide variety ofpricing plans
Become affiliates Profit-enhancing
programs Volume-discount
promotions Targeted promotions Future price
promotions Fairness Two-part pricing EDLP
Discontinue pricing promotions
Reconfigure loyalty programs
Decrease profit programs
Levers & the Stages of Customer Relationships
AwarenessAwareness Exploration/Expansion
Exploration/Expansion CommitmentCommitment DissolutionDissolution