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PRICING STRATEGY

PRICING STRATEGY. Presented by: Yuju Lee Chinpei Hung Tom Tobin Georgeanne Talarico. Components of Price. Four main objectives to focus on when developing price strategy Cost of producing product Cost of services required by product Expected profit Intended image of the product.

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PRICING STRATEGY

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  1. PRICING STRATEGY • Presented by: • Yuju Lee • Chinpei Hung • Tom Tobin • Georgeanne Talarico

  2. Components of Price • Four main objectives to focus on when developing price strategy • Cost of producing product • Cost of services required by product • Expected profit • Intended image of the product

  3. Constructing the appropriate image • Perceived quality of product • Competition comparison • Branding strategy

  4. Importance of pricing • Creates revenue • Defines: • Customers • Competition • Expectations

  5. Purpose of developing Strategy • Profit Maximization • Sales growth • Survival • Image • Targeted return • Remaining competitive • Depending on a company’s specific goals, a pricing strategy is developed

  6. Pricing Strategy • 4 Policies: • Price Flexibility Policies • Price Level Policies • Discount Policies and Allowances • Geographic Terms

  7. Price Flexibility Policies • One-price policy • Offering the same price to all customers • Used by a majority of U.S. firms • Convenience, maintain goodwill

  8. Price Flexibility Policies • Flexible-price • Offering the same product and quantity to different customers at different prices • Common in the channels, directsales, etc. • Higher competitiveness

  9. Price Level Policies:Over the product life cycle • Skimming Price • Sell to the top of a market at a high price before aiming at more price-sensitive customers • Penetration pricing • Sell to the whole market at one low price • Value pricing • Set a fair price level for a marketing mix that really gives customers what they need

  10. Discount Policies • Cumulative quantity discounts • Encourage repeat buying • Build customer loyalty • Non-cumulative quantity discounts • Encourage larger orders • Sometimes disturb regular market price

  11. Discount Policies • Seasonal discounts • Encourage buyers to buy earlier than present demand requires • Trade (functional) discount • A price reduction given to channel members

  12. Discount Policies • Sale price • A temporary discount from the list price • Everyday low pricing • Setting a regularly low list price • Grocery stores use more

  13. Allowances • Advertising allowances • Price reductions given to firms in the channel • Stocking allowances (Slotting allowances) • Given to a middleman to getshelf space for a product • Push money (or prize money) allowances • Given to retailers by manufacturers or wholesalers

  14. Allowances • Trade-in allowance • Given for used products when similar new products are bought • Rebates • Refunds paid to consumers after a purchase

  15. Geographic Terms • FOB (free on board) pricing • Free on board some vehicle at some place • Zone pricing • Making an average freight charge to all buyers within specific geographic areas • Uniform delivered pricing • Making an average freight charge to all buyers

  16. Steps in Setting Right Price • Establishing pricing goals • Estimate demand, costs, and profits • Choosing a price strategy • Fine-tuning the best price

  17. Setting the Right Price • Pricing Objectives • Profit oriented • Sales oriented • Status quo • Estimate demand, costs, and profits • Estimate total revenue • Determine corresponding costs • Estimate profits and market share

  18. Pricing Strategy • A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle. • Price skimming • Penetration pricing • Status quo pricing

  19. Price skimming • Situation when price skimming is successful • Inelastic demand • Superior product • Legal protection of product • Technological breakthrough • Limited production

  20. Advantages Discourages or blocks from competition from market entry Disadvantages Requires gear up for mass production Selling large volumes for low prices Strategy from gaining market share may fall Penetration pricing

  21. Advantages Simplicity Safest route to long-term survival for small firms Disadvantages Strategy may ignore demands or costs Status quo pricing

  22. The Legality and Ethics ofPrice Strategy • Issues that limit price decisions • Unfair trade practices • Price fixing • Price discrimination • Predatory pricing

  23. Price Discrimination The Robinson-Patman Act of 1936: • Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition

  24. Tactics for Fine-Tuning the Base Price • Discounts • Quantity; Cash; Functional; Seasonal; Promotional allowances; Rebates; Value-based pricing • Geographic pricing • Special pricing tactics

  25. Special pricing tactics

  26. The Future of Pricing Technology and Pricing

  27. Product Development • Product Development Cycles • Shorter cycles increase need for precise predictions of future revenue and profits streams • Many products are often obsolete before they even hit the market

  28. Traditional Process • Pricing decision relegated to after product is designed and ready for positioning in the marketplace. • Product configuration is then set and cannot be changed • Rarely is product set to achieve a profit-optimized price.

  29. New Process • Pricing research done much earlier in the process at the same time as R & D • R & D needs to realize the market value of possible features to determine which to include or place developmental emphasis upon • More accurate forecasting while product is still in development • Improved resource allocation among all R & D projects

  30. QRS Corporation • Based in Richmond, CA • Global sourcing and supply chain management • Tradeweave Retail Price Analyzer (TRPA)

  31. Competitor Price Info • Competitor price info is supplied on a weekly basis • Focus on Top 500 Products • Differentiates regular prices from promotional prices • Timely info and reports available based on retailer requirements • Timely data allows retailer to maintain margins while exhibiting aggressive promotional pricing

  32. DemandTec • 3 year old firm based in San Francisco, CA • Price and promotion optimization technologies for large drugstore and retail chains

  33. Price Optimization Services • Dangerous to Base prices on gross margins alone • Other Factors: Transportation and storage costs Stocking fees and rental rates for store and item • All activity-based costs are factored into a formula -Shows retailers which items are profitable and which are not profitable

  34. Promotion Optimization Services • Questions: What to promote What type of promotions How long to run promotions When to run them • Uses statistical modeling and consumer behavior from the previous year

  35. DemandTec Analysis • Two models: Demand Model and Activity Based Costing (ABC) Model • Demand Model-Customer Price Sensitivity • ABC Model-Net Profit for Every Item in Store • Models revised throughout the year to evaluate effect of new products • Point of sale data analyzed to see which promotions customers prefer. Purchases are scanned at the register and fed into database

  36. Meta Analysis • Gerard J. Tellis • Objective: To summarize the findings of a number of different studies • Focus: Price Elasticity, % change in sales or share for a 1% change in price • Findings: Sales and Market share are very responsive to changes in price • Consumer seems to derive more value from price cuts as opposed to increased advertising

  37. What does it all mean? • Technology-Technology-Technology • Firms are trying to take advantage of the fast pace of business by using the internet and other technologies to maximize profitability • Pricing can no longer be determined at the end of the production life cycle

  38. Questions Thank you!!!!

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