1 / 32

Competitor Based Pricing

Competitor Based Pricing. Cost. Customer. Competitor. The Goal. Setting a Price that is Competitive That is to say Choosing a Selling Price that is based on the prices chosen by the competition in our industry seeking to serve our market. Three Approaches to Pricing. Cost Based

amber
Télécharger la présentation

Competitor Based Pricing

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Competitor Based Pricing Cost Customer Competitor

  2. The Goal • Setting a Price that is CompetitiveThat is to say • Choosing a Selling Price that is based on the prices chosen by the competition in our industry seeking to serve our market

  3. Three Approaches to Pricing • Cost Based • Competitive Based • Customer Based

  4. Classic Competitive Topics • Relative to Competitor’s Prices • Relative to Relative Product Quality • Bidding Models

  5. Relative to Competitor’s Pricesaka Going-rate pricing • Relative Price Ratio

  6. Relative Price Ratioaka Going-rate pricing • Your price per unit as a percentage of • the average industry price • the closest competitor’s price • Your price = $85 • Average industry price = $90 • Relative Price Ratio = $85/$90 = 94%

  7. Relative Price Ratio • Classic Application is Using the Relative Price Ratio in a Pricing Policy for Price Setting • Our Policy is to have a Price that is always 5% less than the industry’s average price • If our $85 Price is currently at 94% of average • We must raise our price to a new level • New price = 95%($90) = $85.50

  8. Classic Competitive Topics • Relative to Competitor’s Prices • Relative to Relative Product Quality • Bidding Models

  9. Value-Pricing Policy • “Value-pricing is not simply a matter of setting lower prices than the competitor... it is a commitment to having one’s operations designed to be the cost leader.”

  10. Relative Product Quality • Measuring Product Quality • Horse power, Speed, Reliability, etc. • Government, Industrial and Consumer Testing (performance index or 5 star rating system) • Product Version # (our simulation) • Average Product Quality is the sum of the individual ratings divided by the number of competitors • Relative product quality is your quality rating divided by the average quality rating

  11. Basic Price/Quality Theorem • The maximum price you can set is the point where your relative price, Pr, is equal to your product’s relative quality, Ur. • Pr = Ur • P/Pa = U/Ua where P = your price, Pa = average price, your quality = U, Ua = average product quality

  12. Basic Theorem Implies • 1) If you have a product with average quality, then the most you can charge is the average price. • 2) If you have a product that is 10% higher than the average quality, then you can charge up to 10% more than the average price.

  13. P/Pa = U/Ua • P = your price, Pa = average PriceU = your product quality, Ua = average quality Pr = P/Pa = relative price, Ur = U/Ua = relative quality • In a perfectly equal world Relative Price = Relative Quality P/Pa = U/Ua • To set the Upper Limit or Maximum Price • P = (U/Ua) x Pa

  14. Example • In the simulation your product has achieved version 2 quality and the average product version is 1.8 quality and the average price is $80. No new product versions will be reached next period. What is the maximum price you can charge? • Relative Quality = U/Ua = 2/1.8 =111% • Maximum Price to set = P* =(U/Ua)Pa • P* = 111%($80) = $88.89

  15. Upper and Lower Limits • Calculating your price on a cost plus basis to cover cost and achieve a target Return on Sales (Profit) for the lower limit. • Calculating your Pricing to Relative Product Quality is a popular benchmark for the upper limit on the price selection

  16. Setting a Specific Price • Using relative quality to set a specific price • Start with the definition that your selected price, P, equals your price relative to the average price,Pr, x the average price, Pa. • P = Pr x Pa • Remember the concept that in an ideal world the relative price = the relative quality • Pr = Ur

  17. To set a Specific Price In the normal world the relationship between Pr ≠ Ur and needs an adjustment for conversion efficiency, E. Pr = Ur x E This equation is estimated from current operations or forecasted for future products, etc. e.g., E = Pr/Ur

  18. To set a Specific Price Substitute the relationship Pr = Ur x E Into the price definition that P = Pr x Pa To get pricing formula P = Ur x E x Pa P = the specific price you want to set Ur = relative quality E = efficiency of marketing to convert relative quality into relative price Pa = average industry price

  19. For example • The traditional efficiency of your marketing department at converting your relative product quality into the highest relative price the customer will pay is E =105%Relative Quality is Ur = 90%Average Price is Pa = $80What Price, P, can you set? • P = Ur x E x x Pa • P = 0.9 x 1.05 x $80 = $75.6

  20. Other Classic Topics in Competitive Pricing • Bidding Models (American actions,Dutch auctions, etc.) • Sorry not enough time in this course for bidding! • See pages 271-272 for more on bidding • Game Theory • Measuring impact of relative price changes

  21. Any Questions?

  22. Game Theory Pricing Policy • Prediction of Competitor’s reaction to Your Price Changes • Building Pricing Policies ...How You Should React to Changes in Your competitor’s Policy

  23. Relative to Competitor’s Prices • Impact Analysis of Change in Price

  24. Analysis of Impact Due to Change • Change in Revenue Due to Change in Price and Change in Quantity • Change in Quantity Due to Change in Market Share and Change in Market Size • Change in Price Due to Change in Relative Price and Change in Average Competitive Price

  25. Revenue = Price x Quantity Quantity = Share x Market Size

  26. Revenue = Price x Quantity Quantity = Share x Market Size Price = Relative Price x Average Industry Price

  27. Relative Price Ratio Old price =$85 94.4% $90 Average Industry Price

  28. New price =$85.50 Relative Price Ratio Old price =$85 97.16% 94.4% $88 $90 Average Industry Price

  29. New price =$85.50 Impact on Price Change due to Relative Price Change Relative Price Ratio Old price =$85 97.16% 94.4% Impact on our price due to change in Industry Price $88 $90 Average Industry Price

  30. New price =$85.50 SLOW REACTION! YOUR FAULT? Relative Price Ratio Old price =$85 97.16% 94.4% NOT YOUR FAULT $88 $90 Average Industry Price

  31. Revenue = Price x Quantity Quantity = Share x Market Size Price = Relative Price x Average Industry Price Revenue = (Relative Price) x (Average Industry Price) x (Market Share) x (Market Size)

  32. Change in Revenue = (Change due to Relative Price + Change due to Average Industry Price + Change due to Market Share + Change due to Market Size) ∆R = ∆Pr +∆Pa +∆S + ∆M

More Related