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Pricing Strategy and Management

Pricing Strategy and Management. Professor Chip Besio Marketing 3340. Pricing Considerations. Objectives: Enhance brand image Provide customer value Obtain an adequate ROI Maximize profits Maintain price stability in an industry or market. Internal Factors Costs Product, Strategy.

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Pricing Strategy and Management

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  1. Pricing Strategy and Management Professor Chip Besio Marketing 3340

  2. Pricing Considerations • Objectives: • Enhance brand image • Provide customer value • Obtain an adequate ROI • Maximize profits • Maintain price stability in an industry or market

  3. Internal Factors Costs Product, Strategy Factors Affecting Pricing Pricing Decisions External Factors Competitors Customers

  4. Pricing Considerations • Factors Effecting Pricing: • Demand sets price ceiling • Cost sets price floor • Consumer value perceptions • Consumer price sensitivity • Government regulations

  5. Pricing Considerations • Factors Effecting Pricing: • Product/Service differentiation • Organization’s financial goals • Stage of Product Life Cycle • Marketing Channel margin impact • Prices of other products in mix

  6. Pricing Considerations • Price 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

  7. Customer ConsiderationsPRICE SENSITIVITY • Product 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

  8. A. Inelastic Demand - Demand hardly changes with a small change in price P2 Price P1 Q2 Q1 Quantity Demanded per Period B. Elastic Demand - Demand changes greatly with a small change in price P2 Price P1 Q2 Q1 Quantity Demanded per Period Pricing ConsiderationsPRICE SENSITIVITY

  9. Product Line Pricing Setting price steps between product line items i.e. $299, $399 Product-Based Pricing Approaches Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Source: Prentice Hall

  10. Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Cost Considerations • Recall that costs may depend on the production level • Total Costs • Sum of the Fixed and Variable Costs for a Given • Level of Production

  11. Cost BasedPricing Strategies • Full Cost Strategies • Variable Cost Strategies • New-Offering Strategies • Competitive Bidding

  12. Cost BasedPricing Strategies • Full Cost Strategies • Markup Pricing • Break-even Pricing • ROR Pricing

  13. Cost BasedPricing Strategies • Variable Cost Strategies • Stimulate Demand • Shift Demand

  14. Cost-Based Pricing Approaches • Cost-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 Pricing - Price is set to meet a specific profit target • Also takes consumer demand into account

  15. Cost-Based PricingCOST-PLUS Sellers are more certain about costs than demand Minimizes price competition Perceived fairness for both buyers and sellers

  16. Pricing Strategies • Competitive Bidding • Demand is Known & Constant • Marketing Mix Variables Uncontrollable • Sophisticated Mathematical Models • Calculate Profit Levels • Calculate Probability of Winning at Different Price Levels

  17. Cost BasedPricing Strategies • New-Offering Strategies • Skimming • Penetration • Intermediate

  18. 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. New Product Intro Strategies SKIMMING PENETRATION INTENT FOCUS RESULT

  19. New Product Intro Strategies • Skimming Strategy • Price High Initially • Reduce Over Time • Inelastic Demand - Buyers Price Range • Unique Offering

  20. New Product Intro Strategies • Skimming Strategy • Production or Marketing Costs Unknown • Limited Capacity to Deliver • Realistic Perceived Value

  21. New Product Intro Strategies • Penetration Strategy • Price Low Initially • Elastic Demand • Offering Not Unique • Competition Entering Quickly

  22. New Product Intro Strategies • Penetration Strategy • No Distinct Price Segments • Volume Increases Dramatically Impact Costs • Objective - Large Market Share

  23. New Product Intro Strategies • Intermediate Strategy • More Prevalent • Less Dramatic

  24. 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)

  25. 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 price • Internal reference price

  26. Customer ConsiderationsREFERENCE PRICES • External Reference Prices • List prices/sale prices • Other products on the shelf or convenient for comparison

  27. Customer ConsiderationsREFERENCE PRICES • 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

  28. 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

  29. Product Customer Cost Value Price Price Cost Value Product Customers Customer ConsiderationsVALUE PRICING Value-Based Pricing Cost-Based Pricing Source: Prentice Hall

  30. General Price Adjustment Strategies Psychological Pricing Promotional Pricing • Adjusting Prices for Psychological • Effect. • Price Used as a Signal Geographical Pricing • Temporarily Reducing Prices to • Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events International Pricing • 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. Source: Prentice Hall

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