Prof. Bauer-Ramazani

MARKETINGMARKETING

Pricing StrategiesPricing Strategies

OverviewOverview

Definition of price Prices in BU113 companies Factors that influence the pricing decision Pricing objectives Three major pricing strategies and their

advantages and disadvantages Pricing strategies over the product life cycle Pricing tactics

Price -- Definition• the amount of money charged for a product or

service• the sum of all the values that consumers

exchange for the benefits of having or using the product or service

• Examples of “price?”– Tuition, rent, fare, retainer, toll, salary/wage, dues

Prices -- BU113 Companies

• What objectives did the managers have in mind when they set their prices?

Factors in Setting PriceFactors in Setting Price

Pricing ObjectivesPricing Objectives

Meet Business

Objectives

Volum

e

Sales

Max

imiza

tion

Marke

t Sha

reProfitability

Profit-Maximization

Target Return Goals

Other Pricing Objectives Status Quo Image Social & Ethical Considerations

Price Strategies for New ProductsPrice Strategies for New ProductsPRICE

PRICE

PRICE

Skimming Penetration

Penetration Pricing

Skimming Pricing

Low price establish product in the market

High price/Prestige pricing appeal to early adopters; recover high R&D costs

Lower price over time

Move inventory, stimulate D, extend product life

Marketing Strategy Over the Product Life Cycle INTRODUCTION GROWTH MATURITY DECLINE

Marketing strategy Market development Increase market Defend market Maintain efficiency inemphasis share share exploiting product

Promotion Mount sales Appeal to Emphasize Reinforce loyal Strategy promotion for mass market brand differences, customers; reduce

product awareness benefits & loyalty promotion costs

Place strategy Distribute through Build intensive Enlarge Be selective in selective outlets network of distribution distribution, trim

outlets network unprofitable outlets

Pricing High price/unique Lower price Price at or below Set price to strategy product / cover over time competition remain profitable

production costs or reduce to

Low price/gain liquidatemarket share

Price-SettingToolsCos

t-Orie

nted

-

Varia

ble/Fi

xed

Economic—Supply/Demand

Break-even Analysis

Determining PricesDetermining Prices

Elasticity of DemandElasticity of Demandmeasure of the sensitivity of demand to changes in prices

not price sensitive - no real change in demand price sensitive - changes in demand

Inelastic Demand

Q2 Q1 Quantity

PP11

PP22

ElectricityPric

e

Elastic Demand

QQ22 Quantity

PP11

PP22

Fast food

Q1

Pric

e

Market-based PricingMarket-based Pricing

Pricing Existing Products/Services - 3 options Pricing below market prices price wars

EX: airlines, store brand vs. manufacturer’s brand

Dumping

Pricing above prevailing market prices for similar products

EX: Sony higher price = higher quality?

Pricing at or near market prices

Pricing TacticsPricing Tactics

Price Lining • Price points: Setting a limited number of prices for

certain categories of products Psychological Pricing

• Odd-even

Discounting • Quantity discounts• Cash discounts (2/10 net 30)

Web programs: free!

Cost-based Pricing (Cost-Plus)Cost-based Pricing (Cost-Plus)1. Cover costs costs

Material Labor Capital resources Marketing

2.2. Mark-upMark-up Targeted return for shareholders

CostsCosts + mark-up mark-up = = Sales priceSales price

$1.00$1.00 + + $0.50 $0.50 = $1.50 = $1.50 (50% markup)(50% markup)

variable costs

fixed costs

Mark-up Calculation – ExerciseMark-up Calculation – Exercise

1. Price per product2. Less the cost per product (what you paid

the supplier, e.g. total cost paid / # of items purchased)

Price SalesUpMarkDollar UPMARK %

Breakeven AnalysisBreakeven Analysis

TC = TR

Breakeven Point FormulaBreakeven Point Formula

(Contribution Margin)

cost/unit Variable– Price/unitCosts Fixed QUANTITY BREAKEVEN

Review

• 5 Factors that influence prices• Pricing objectives• Pricing strategies at different stages of the

Product Life Cycle (advantages/disadvantages)• Methods of Determining Prices

– Elasticity of demand– Mark-up– Breakeven Analysis