Download - Pricing
Pricing Strategy
…critical marketing mix variable
actually produces revenue
shortest term marketing mix variable
relates directly to microeconomicssupply versus demand analysisbreakeven analysisprice elasticity
Pricing Strategy
How to improve profit performance?
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Q
Increase price
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Cut Variable Cost
rev
var.costfixedcost
Pricing Strategy
$
Q
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Cut Fixed Cost
…profit performance.
Increase Volume
Pricing Strategy
Supply versus Demand
D
S
P
Q
D
Q
inelastic
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elastic
D
Pricing Strategy
Shift in Supply Curvechange in costchange in expectations of costchange in price of other goods sold
Price Strategy
Shift in Demand Curvechange in incomechange in price of related goodschange in price expectationschange in taste
Increase in demand versus increase in quantity demanded
Pricing Strategy
Set Pricing ObjectiveEstimate DemandEstimate CostsAnalyze Competitors’ PricesSelect Pricing Policy/MethodSet Final Price
Pricing Strategy
Pricing Objectives
survivalcover fixed cost and some variable costvery short-run….(avoid extinction)
profit maximizationrequires accurate knowledge of demand, cost functions
Pricing Strategy
Pricing Objectives (cont.)
revenue maximizationcosts hard to determineassume 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 bearbenefits are barely worthwhile for some customers to buy
…then work down the demand curve
works if no cost benefit of increasing volumeimage is importantmay or may not discourage competition
Pricing Strategy
Estimate Demand (…curve)unique valueawareness of substitutesdifficult to compare alternativesprice relative to incomeinventory effect
Can 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 pricesadministered pricing
ceiling and floor prices versus the level of competition
Pricing Strategy
Cost Based Pricing
cost plus, markup pricingeasy, costs known, minimizes price competitionignores 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 elasticityonly true profit maximizing strategyignores costs and competitors
Pricing Strategy
Demand Based Pricing (cont.)
demand differentialprice discriminationyield maximization pricing
sell at multiple prices to multiple segmentsnot based on marginal costs of dealing with eachdaily, weekly, or seasonal pricinggeographic, physical, or electronic barriers
Pricing Strategy
Competition Based Pricing
going rate pricingused when costs difficult to measurecompetitors lack differential advantage
sealed bidforces competitors to lowest price
Pricing Strategies
Select Final Price
psychological pricing, prestige pricingknow demand elasticitystart 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 loyaltylow 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 discountsdecrease amount of productsubstitute cheaper materialsreduce product features