pricing strategies
TRANSCRIPT
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Chapter 7 Pricing Strategies
You don’t sell through price. You sell the price.
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The Learning Objectives
Setting Pricing Policy Price-adjustment Strategies Price changes
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1.Pricing objectives
Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership
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Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’costs, prices, and offers
5. Selecting a pricingmethod
6. Selecting final price
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Types of Costs
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive SalariesRent
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive SalariesRent
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
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The Three C’s Modelfor Price Setting
Costs Competitors’prices andprices ofsubstitutes
Customers’assessmentof uniqueproductfeatures
Low Price
No possibleprofit at
this price
High Price
No possibledemand atthis price
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Some important pricing definitions
Utility: The attribute that makes it capable of want satisfaction
Value: The worth in terms of other products
Price: The monetary medium of exchange.
Value Example: CaterpillarTractor is $100,000 vs.
Market $90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits -
$10,000 discount!
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Examples: new-product pricing
Market-skimming pricing Market-penetration pricing
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Market-skimming pricing
Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales.
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The conditions:
1. A sufficient number of buyers have a high current demand;
2. The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;
3. The high initial price does not attract more competitors to market;
4. The high price communicates the image of a superior product.
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Market-penetration pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share.
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The conditions:
1. The market is highly price sensitive,and a low price stimulates market growth;
2. Production and distribution costs fall with accumulated production experience;
3. A low price discourages actual and potential competition.
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Price sensitivity
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Examples: product mix pricing
Product line pricing Optional-product pricing Captive-product pricing By-product pricing Cash rebates Low-interest,longer warranties,free
maintenance
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2.pricing-adjustment strategies
Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing
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Discount and allowance pricing
Cash discount Quantity discount Functional discount Seasonal discount allowance
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Discriminatory Pricing
Time
Product-form
Customer Segment
Location
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Psychological Pricing
Most Attractive?
Better Value?
Psychological reason to price this way?
A32 oz.
$2.19
B26 oz.
$1.99
Assume Equal Quality
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Geographical pricing
FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing
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Promotional Pricing
Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties & service contracts Psychological discounting
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3. Pricing changing
Initiating price cuts Initiating price increases
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Discussion
Please explain the reasons for price cuts. Please explain the reasons for price increases. Please describe the advantage and
disadvantage of price cuts and increases.
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The reasons for price cuts
Excess capacity Price competition
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The reasons for price increases
Cost inflation overdemand
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Reactions to price changes
Customers’ reactions Competitor’s reactions
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Responding to competitors’ price changes
Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line
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Price-Reaction Program for Meeting a Competitor’s Price Cut
Has competitorcut his price?
NoNoHold our price
at present level;continue to watch
competitor’sprice
Is the pricelikely to
significantlyhurt our sales?
YesYes
Is it likely to bea permanent
price cut?YesYes
By more than 4%Drop price tocompetitor’s
price
By 2-4%Drop price by
half of thecompetitor’s
price cut
How much hashis price been
cut?YesYes
NoNo NoNo
By less than 2%Include a
cents-off couponfor the nextpurchase
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Assignment:
Read page P411---P415 Question 2, interactive marketing
applications ,P423