Factors Influencing Pricing Decisions

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Factors Influencing Pricing Decisions

• Economic Factors
• Total Income Discretionary Income Budgeted
  Income
• Buyer Spending Power (Financing, Type of product
  -- e.g., Value Meal, Target Market Selection)
• Channel Factors
• Markups Margins
• Price Increases Price Cuts
• Psychological Factors

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Setting Pricing Policy
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Selecting the Price Objective
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Determining Demand

• Demand curve - illustrates relation between
  alternate prices and current demand
• Price sensitivity
• Price elasticity of demand

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Price Elasticity

• Price Elasticity, or the elasticity of demand
  with respect to price, relates price to quantity
  sold and hence to revenues
• If the percentage change in demand is greater
  than the percentage change in price, the demand
  is said to be elastic
• If the percentage change in demand is less than
  the percentage change in price, the demand is
  said to be inelastic
• When demand is Elastic, Price Revenue are
  inversely related
• When demand is inealstic, Price Revenue are
  directly related

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Price Elasticity

• Price Elasticity is defined as the ratio of the
  percentage change in quantity demanded for a
  given percentage change in price.
• Elasticity can be calculated using the formula
• Num Q2 - Q1/Q1
• Den -P2 - P1/P1
• Elasticity E Num/Den

• If Egt 1, then the demand is said to be elastic.
  If Elt1, it is inelastic

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Points to Note Regarding Elasticity

• Ceteris is never paribus
• Other factors do not remain constant as assumed
• Long-run elasticity may differ from measured
  value
• Demand curve arent smooth in real life
• Indifference Zone
• Breakthrough price -- below which the market just
  takes off (Video Movies)
• Price Ceiling -- above which the demand just
  dies (Del Monte Green Beans VS Kroger green beans)

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• P.E. in the upward direction may not be the same
  as the P.E. in the downward direction --
  particularly for low-end products with poor
  equity
• Asymmetry in Price Effects -- do not provoke the
  market leader into a price war
• Indifference zones are wider for costlier items
• Elasticity may vary across time (seasons)
• Brand Elasticity need not be the same as
  product-level elasticity
• Cross-Price Elasticity

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Estimating Costs

• Define each of the following
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Accumulated production
• Differentiated marketing offers
• Target costing

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Selecting a Pricing Method
The Three Cs Pricing Model
Costs
Competitors prices and prices of substitutes
Customers assessment of unique product features
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Selecting a Pricing Method

• markup pricing and target-return pricing
• perceived-value pricing
• value pricing (including EDLP)
• Going rate pricing
• Sealed-Bid pricing?

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Selecting the Final Price

• Psychological pricing
• Sometimes price is equated to quality
• Influencing of other marketing-mix elements
• The brands quality and advertising relative to
  competition must be considered
• Company pricing policies
• Must be consistent with company goals
• Impact of price on other parties such as dealers
  and distributors

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Factors Influencing Pricing Decisions

• Psychological Factors
• Winning a Good Deal
• Reference Price (price establishes value)
• Limited attention and information retention
• Image Expectation (pricing hamburger in
  different settings)
• Price as a cue to quality
• Throw-ins vs Price-cuts
• Buying Situation (for self, gift, on vacation)

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Consumers fall prey to behavioral heuristics and
biases
Source Bias
Price when the Coke comes from grocery store
Price when the Coke comes from luxury resort hotel
lt
Decreasing Sensitivity Bias
Likely to walk 10 min to save 10 on a 725
dollar item
Likely to walk 10 min to save 10 on a 25 dollar
item
lt
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Heuristics and biases change the willingness to
pay
Willingness To Pay
Economic Willingness To Pay
Psychological Utility Of Transaction


Value to consumer minus value of best alternative
Reference price Relative value Motivation of
seller Perceived fairness Mental Accounting
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Pricing Issues Strategies

• Setting Price Levels Demand Cost Competition
• New Product Pricing
• Product Line Pricing Price Points
• Reference Price Price Ceiling Floor Price
• Optional - Feature Pricing
• Base Product Accessories
• Captive - Product pricing
• 2-Part Pricing
• By-Product Pricing
• Pricing a Product Bundle
• Incremental/Discriminatory Pricing

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Conditions Favorable for Incremental Pricing

• Excess capacity
• Heavy fixed costs
• Price-sensitive segment
• Ability to isolate from core market

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Alternatives to Price Promotions

• Change Size and/or Content
• Change Price Product Features Simultaneously
• Automobile Yearly Model Change
• Change Payment Terms Financing Terms
• Increase/Decrease availability of Economy
  Models
• Toyota Tercel EZ
• Move Excess Inventory through alternate channels