Pricing Strategy and Management Professor Chip Besio Marketing 3340.

Pricing Strategy and Management

Professor Chip Besio

Marketing 3340

Pricing ConsiderationsObjectives:

Enhance brand image Provide customer value Obtain an adequate ROI Maximize profits Maintain price stability in an industry or

market

Factors Affecting Pricing Internal Factors

CostsProduct, Strategy

Internal FactorsCosts

Product, Strategy

PricingDecisionsPricing

Decisions

External FactorsCompetitorsCustomers

External FactorsCompetitorsCustomers

Pricing ConsiderationsFactors Effecting Pricing:

Demand sets price ceiling Cost sets price floor Consumer value perceptions Consumer price sensitivity Government regulations

Pricing ConsiderationsFactors Effecting Pricing:

Product/Service differentiation Organization’s financial goals Stage of Product Life Cycle Marketing Channel margin impact Prices of other products in mix

Pricing ConsiderationsPrice as Indicator of Value

Value = Perceived Benefits/Price Value may be linked to meeting

expectations of consumer Price may shape the consumer’s

perceptions of value Price may affect consumer’s perception of

prestige

Customer ConsiderationsPRICE SENSITIVITYProduct categories are not uniformly

responsive to prices -- some are more sensitive to price levels than others

Customers also may respond differently than one another to price levels

Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

Pricing ConsiderationsPRICE SENSITIVITY

Pri

ce

Quantity Demanded per Period

A. Inelastic Demand - Demand hardly changes with a small change in price

P2

P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P2P1

Q1Q2

B. Elastic Demand - Demand changes greatly with a small change in price

Product-Based Pricing Approaches

Product Line PricingProduct Line PricingSetting price steps between product line items

i.e. $299, $399

Product Line PricingProduct Line PricingSetting price steps between product line items

i.e. $299, $399

Optional-Product PricingOptional-Product PricingPricing optional or accessory products sold with

the main product *** i.e. car options

Optional-Product PricingOptional-Product PricingPricing optional or accessory products sold with

the main product *** i.e. car options

Captive-Product PricingCaptive-Product PricingPricing products that must be used with the main

Product***i.e. Razor Blades, Film, Software

Captive-Product PricingCaptive-Product PricingPricing products that must be used with the main

Product***i.e. Razor Blades, Film, Software

By-Product PricingBy-Product PricingPricing low-value by-products to get rid of them

***i.e. Lumber Mills, Zoos

By-Product PricingBy-Product PricingPricing low-value by-products to get rid of them

***i.e. Lumber Mills, Zoos

Product-Bundle PricingProduct-Bundle PricingPricing bundles Of products sold together

***i.e. season tickets, computer makers

Product-Bundle PricingProduct-Bundle PricingPricing bundles Of products sold together

***i.e. season tickets, computer makers Source: Prentice Hall

Cost Considerations

Recall that costs may depend on the production level

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Cost BasedPricing StrategiesFull Cost StrategiesVariable Cost StrategiesNew-Offering StrategiesCompetitive Bidding

Full Cost Strategies Markup Pricing Break-even Pricing ROR Pricing

Cost BasedPricing Strategies

Variable Cost Strategies Stimulate Demand Shift Demand


Cost-Based Pricing Approaches

Cost-Plus PricingCost-Plus Pricing - Adds a standard mark up to the cost of the product Useful when there are a great many products or

demand is hard to forecast Simple to implement

Breakeven or Target Profit PricingBreakeven or Target Profit Pricing - Price is set to meet a specific profit target Also takes consumer demand into account

Cost-Based PricingCOST-PLUS

Minimizesprice

competition

Minimizesprice

competition

Perceivedfairness forboth buyersand sellers

Perceivedfairness forboth buyersand sellers

Sellers are morecertain aboutcosts than

demand

Sellers are morecertain aboutcosts than

demand

Pricing StrategiesCompetitive Bidding

Demand is Known & Constant Marketing Mix Variables Uncontrollable Sophisticated Mathematical Models

Calculate Profit Levels Calculate Probability of Winning at Different

Price Levels

New-Offering Strategies Skimming Penetration Intermediate


New Product Intro Strategies

Capture “cream” – less price sensitive buyers

High Profit Margin – sacrifice volume

Invite Competitors, Short-term Profits

Sell Whole Market – no “elite” market

High Volume –sacrifice profit margin

Keep Competition Out – E.O.S.

INTENT

FOCUS

RESULT

SKIMMING PENETRATION

Skimming Strategy Price High Initially

Reduce Over Time

Inelastic Demand - Buyers Price Range

Unique Offering


Skimming Strategy Production or Marketing Costs

Unknown

Limited Capacity to Deliver

Realistic Perceived Value


Penetration Strategy Price Low Initially

Elastic Demand

Offering Not Unique

Competition Entering Quickly


Penetration Strategy No Distinct Price Segments

Volume Increases Dramatically Impact Costs

Objective - Large Market Share


Intermediate Strategy More Prevalent Less Dramatic


Customer ConsiderationsPRICE AWARENESS Mindless Shopping:

Average time between arriving and departing from product category is 12 seconds

In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size

21% could not offer a price estimate when asked Only 50% were able to state correct price 93% did know relative price (i.e., higher, lower or

the same as other brands in category)

Source: Dickson and Sawyer (1990)

Customer ConsiderationsREFERENCE PRICES

Consumers do not evaluate price absolutely, but rather relative to a convenient quantity for comparison

Context Matters!

Two kinds of reference prices External reference priceExternal reference price Internal reference priceInternal reference price


External Reference Prices

List prices/sale prices

Other products on the shelf or convenient for comparison


Internal Reference Prices One that is recorded in consumer’s memory Memory of price may not be accurate If brand is frequently promoted, consumers

tend to lower their internal reference point consumers have a notion of “fair price”

acquisition utility - economic benefit of the product

transaction utility - getting a good deal Asymmetric response to price changes

Customer ConsiderationsPRICE AS A SIGNAL

Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality

When is price used as a signal? When there is little information about

product quality available Primarily for experience or credence goods

Customer ConsiderationsVALUE PRICING

ProductProduct

CostCost

PricePrice

ValueValue

CustomersCustomers

CustomerCustomer

ValueValue

PricePrice

CostCost

ProductProduct

Cost-Based Pricing Value-Based Pricing

Source: Prentice Hall

General Price Adjustment Strategies

• Adjusting Prices for Psychological Effect.•Price Used as a Signal

• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.

• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing

Source: Prentice Hall

Pricing Strategy and Management Professor Chip Besio Marketing 3340.

Documents

pricing strategies slide

pricing strategy

price slide

target profit pricing

pricing considerations

costbased pricing costplus

demand slide

price stability