Pricing Strategy

1
APPLIED MARKETING MANAGEMENT
8
Pricing
2
Overview

• Price Defined
• Marketing Strategy Considerations
• Seller Issues
• Buyer Perceptions
• Price Setting Process
• Auctions

3
Price Defined

• What one party is asked to give up to complete an
  exchange.

4
General Pricing Considerations

• Pricing decisions should both
• reflect the value customers want relative to
  competitors offerings, and
• achieve the firms strategic objectives.

5
Marketing Strategy Considerations

• The Sellers Perspective on Pricing
• Four key issues
• (1) Costs
• (2) Demand
• (3) Customer value
• (4) Competitors prices
• The Buyers Perspective on Pricing
• Two key issues
• (1) Perceived value
• (2) Price sensitivity

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Marketing Strategy Considerations

• Market strength considerations
• Buyers market
• Large number of sellers in the market
• Many substitutes for the product
• Economy is weak
• Sellers market
• Products are in short supply
• High demand
• Economy is strong
• The Relationship among Price, Revenue Profit
• Price ? Revenue ? Profit
• What is the nature of these relationships?

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Price-Setting Decision Process
Set strategic pricing objective

• Influences and constraints
• SBU and marketing strategies
• Company strengths and weaknesses
• Product characteristics
• Target market characteristics
• Competitor characteristics
• Industry structure
• Environmental influences
• Economic trends
• Legal restrictions

Estimate demand and price elasticity of demand
Determine costs and their relationship to volume
Examine competitors prices and costs
Select a method for calculating price
Set a price level
Adapt price structure to meet variations in
demand and cost across geo.territories, mkt.
seg., sales channels
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Influences Constraints

• Objectives of SBU and marketing strategies
• Company strengths and weaknesses
• The Firms Cost Structure, Role of Other Mix
  Elements
• Product characteristics Uniqueness, PLC Stage
• Target market characteristics Demand, AIC Stage
• Competitor characteristics Supply, sizes,
  capabilities
• Industry Structure Pure Competition, Oligopoly,
  Monopoly
• Environmental influences
• Economic trends
• Legal restrictions Price Discrimination/ Fixing,
  Predatory Pricing

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Pricing Strategy Over theProduct Life Cycle
Exhibit 8.2
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Strategic Pricing Objectives (1 of 2)

• Base Pricing Strategies
• Price Skimming
• Penetration Pricing
• Prestige Pricing
• Value-Based Pricing (EDLP)
• Competitive Matching
• Non-Price Strategies
• Adjusting Prices in Consumer Markets
• Promotional Discounting
• Reference Pricing
• Odd-Even Pricing
• Price Bundling

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Strategic Pricing Objectives (2 of 2)

• Adjusting Prices in Business Markets
• Pricing techniques unique to business markets
• Trade discounts
• Discounts and allowances
• Geographic pricing
• Transfer pricing
• Barter and countertrade
• Price discrimination

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Marketing in Action

• Chryslers price skimming strategy for the
  Pacifica model has not been successful in
  attracting customers. What do you think Chrysler
  should do in rethinking its pricing strategy for
  this model?

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Price Bundling
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Price Elasticity of Demand (1 of 2)

• Formula for calculating price elasticity
• Situations That Increase Price Sensitivity
• Availability of product substitutes
• Higher total expenditure
• Crossing the Just Noticeable Difference threshold
• Easy price comparison

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Price Elasticity of Demand
Exhibit 8.3
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Price Elasticity of Demand (2 of 2)

• Situations That Decrease Price Sensitivity
• Real or perceived necessities
• Lack of product substitutes
• Complementary products
• Product differentiation
• Perceived product benefits
• Situational influences
• Price Elasticity and Yield Management
• Allows simultaneous control of capacity and
  demand
• Control capacity by limiting available capacity
  at certain price points
• Control demand through price changes and
  overbooking capacity

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Yield Management fora Hypothetical Model
Exhibit 8.4
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Discussion Question

• Discuss the variety of situational factors that
  could come into play and impact elasticity in the
  purchase of each of the following products
• Sporting event or concert tickets,
• Staple goods such as milk or bread and,
• Eye surgery to improve vision.

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Break-Even and Target Return Volumes for
Alternative Selling Prices
Selling price 18 20 24 26 28 30
Fixed costs [phone] 500 500
500 500
Per-unit average variable cost 10 10 10
10 10 10
Target return [phone] 200 200
200 200
Break-even volume (units) 62,500 50,000 35,714 31
,250 27,778 25,000
Target return volume (units) 87,500 70,000 50,000
43,750 38,889 35,000
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Break-Even Chart Showing Break-Even and Target
Return Volume
1,500 1,250 1,000 750 500 250 0
Total revenue Total costs
Target return
Dollars (000)
10 20 30 40 50
(31,250) Break-even volume
(43,750) Target return volume
Sales volume in units (000)
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Assessing Competitors Costs

• This can be done by reviewing financial
  statements and by gathering intelligence from
  suppliers (buyers) and customers (sales force).
• It is critical to know how low a price
  competitors can charge for a competing item.

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Pricing Methods

• Cost-Plus The floor price
• Marginal (direct) cost is the least a product
  should be sold for in the short term.
• Full cost is the least a product can be sold for
  in the long term.
• Competitive Parity Price is equalized with those
  charged by competitors.
• Perceived value-in-use The most a customer will
  pay for a productthe ceiling price.

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Review Pricing Objectives, Set Price
Exhibit 8.1
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Discussion Question

• If you were trying to sell your car through the
  newspaper, what factors would determine how you
  might set your opening position, your aspiration
  price, and your limit during the negotiation
  process?

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Major Online Auction Strategies
Exhibit 8.5