Pricing

Pricing Strategy

…critical marketing mix variable

actually produces revenue

shortest term marketing mix variable

relates directly to microeconomicssupply versus demand analysisbreakeven analysisprice elasticity

Pricing Strategy

How to improve profit performance?

$

Q

Increase price

$

Q

Cut Variable Cost

rev

var.costfixedcost

Pricing Strategy

$

Q

$

Q

Cut Fixed Cost

…profit performance.

Increase Volume

Pricing Strategy

Supply versus Demand

D

S

P

Q

D

Q

inelastic

Q

elastic

D

Pricing Strategy

Shift in Supply Curvechange in costchange in expectations of costchange in price of other goods sold

Price Strategy

Shift in Demand Curvechange in incomechange in price of related goodschange in price expectationschange in taste

Increase in demand versus increase in quantity demanded

Pricing Strategy

Set Pricing ObjectiveEstimate DemandEstimate CostsAnalyze Competitors’ PricesSelect Pricing Policy/MethodSet Final Price

Pricing Strategy

Pricing Objectives

survivalcover fixed cost and some variable costvery short-run….(avoid extinction)

profit maximizationrequires accurate knowledge of demand, cost functions

Pricing Strategy

Pricing Objectives (cont.)

revenue maximizationcosts hard to determineassume 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

Pricing Strategy

Pricing Objectives (cont.)

market skimminghighest price that market will bearbenefits are barely worthwhile for some customers to buy

…then work down the demand curve

works if no cost benefit of increasing volumeimage is importantmay or may not discourage competition

Pricing Strategy

Estimate Demand (…curve)unique valueawareness of substitutesdifficult to compare alternativesprice relative to incomeinventory effect

Can customer hold inventory?

Pricing Strategy

Estimate Costs (supply curve)

cost structure at different levels of production…old 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?

Pricing Strategy

Analyze Competitors’ PricesWhat is the structure of the market?

oligopoly versus pure competition

Select Pricing Policy/Methodsingle or multiple pricesadministered pricing

ceiling and floor prices versus the level of competition

Pricing Strategy

Cost Based Pricing

cost plus, markup pricingeasy, costs known, minimizes price competitionignores demand elasticity, not profit maximizing

target return of investmentuse breakeven analysis to find a price to yield a target

ROI…use sales volume to derive price…?

Pricing Strategy

Demand Based Pricing

perceived valuerequires detailed knowledge of buyer behavior and

demand elasticityonly true profit maximizing strategyignores costs and competitors

Pricing Strategy

Demand Based Pricing (cont.)

demand differentialprice discriminationyield maximization pricing

sell at multiple prices to multiple segmentsnot based on marginal costs of dealing with eachdaily, weekly, or seasonal pricinggeographic, physical, or electronic barriers

Pricing Strategy

Competition Based Pricing

going rate pricingused when costs difficult to measurecompetitors lack differential advantage

sealed bidforces competitors to lowest price

Pricing Strategies

Select Final Price

psychological pricing, prestige pricingknow demand elasticitystart high, work toward costs

discountscash, trade, quantity, or seasonal

promotional pricingloss leaders

Pricing Strategy

Select Final Price (cont.)

price lining

odd pricingperception

Pricing Strategy

Price cutsexcess capacity leads to margin squeezes (aka price

wars)build market share not brand loyaltylow cost producer will always win

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%

Pricing Strategy

Intense pressure to “inflate” prices reduce discountsdecrease amount of productsubstitute cheaper materialsreduce product features