Pricing Strategy …critical marketing mix variable actually produces revenue shortest term marketing mix variable relates directly to microeconomics supply.

Pricing Strategy

…critical marketing mix variable

actually produces revenue

shortest term marketing mix variable

relates directly to microeconomicssupply versus demand analysis

breakeven analysis

price 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 cost

change in expectations of cost

change in price of other goods sold

Price Strategy

Shift in Demand Curvechange in income

change in price of related goods

change in price expectations

change in taste

Increase in demand versus increase in quantity demanded

Pricing Strategy

Set Pricing Objective

Estimate Demand

Estimate Costs

Analyze Competitors’ Prices

Select Pricing Policy/Method

Set Final Price

Pricing Strategy

Pricing Objectives

survivalcover fixed cost and some variable cost

very short-run….(avoid extinction)

profit maximizationrequires accurate knowledge of demand, cost functions

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

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 important

may or may not discourage competition

Pricing Strategy

Estimate Demand (…curve)unique value

awareness of substitutes

difficult to compare alternatives

price relative to income

inventory effectCan 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 prices

administered pricingceiling and floor prices versus the level of competition

Pricing Strategy

Cost Based Pricing

cost plus, markup pricingeasy, costs known, minimizes price competition

ignores 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 elasticity

only true profit maximizing strategy

ignores costs and competitors

Pricing Strategy

Demand Based Pricing (cont.)

demand differential

price discrimination

yield maximization pricingsell 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

Pricing Strategy

Competition Based Pricing

going rate pricingused when costs difficult to measure

competitors lack differential advantage

sealed bidforces competitors to lowest price

Pricing Strategies

Select Final Price

psychological pricing, prestige pricingknow demand elasticity

start 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 loyalty

low 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 discounts

decrease amount of product

substitute cheaper materials

reduce product features