IV PRICING STRATEGY

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IVPRICING STRATEGY

• Pricing Objectives
• Price/Quality Strategies
• Demand and Costs
• Pricing Methods
• Other Factors in Pricing

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Pricing Strategy

• Most neglected variable in marketing mix
• Least understood in real world terms
• Critically important in many cases
• Easiest for competitors to copy (short run)

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Pricing Objectives

• Maximize profits
• Maximize revenue and/or market share
• Achieve target return on investment
• Attain and maintain product quality leadership
• Undermine or destroy competition (predatory
  pricing)

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Setting Pricing Policy
1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors costs, prices, and
offers
5. Selecting a pricing method
6. Selecting final price
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Price Elasticity of Demand

• Measure of Price Sensitivity

change in quantity change in price
E
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Inelastic and Elastic Demand
15
15
Price
10
10
105
100
150
50
Quantity demanded per period A. Inelastic demand
Quantity demanded per period B. Elastic demand
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Factors Affecting Price Sensitivity

• Distinctiveness effect
• Substitution effect
• Comparison difficulty effect
• Income effect
• Shared cost effect
• Quality effect

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Price as an Indicator of Value

• Perceived Benefits
• Price

Value
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How Downward Price Pressure is Determined
Consumers shop more carefully
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Nine Price Quality Strategies
Price
High
Medium
Low
1. Premium strategy
2. High- value strategy
3. Super- value strategy
High
4. Over- charging strategy
5. Medium- value strategy
6. Good- value strategy
Product Quality
Medium
8. False economy strategy
7. Rip-off strategy
9.Economy strategy
Low
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Cost-Based Pricing Strategies

• Full cost pricing
• Variable cost pricing

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Full-Cost Pricing

• Markup pricing
• Break-even pricing
• Rate-of-return pricing

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Markup Pricing

• R C M

Where
R selling price C cost M markup
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Break-even Pricing
total dollar fixed costs
BE
unit selling price -- unit variable costs
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Break-even Chart forDetermining Target Return
Price and Break-even Volume
Total revenue
1200
Target profit
Total cost
1000
Break-even point
800
Dollars (in thousands)
600
400
Fixed cost
200
0
10
20
30
40
50
Sales volume in units (thousands)
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Rate-of-Return Pricing
(ROI) x I CQ
P
Q
Where
ROI desired return on investment I investment
level C total cost per unit Q forecasted
quantity demanded
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Variable Cost Pricing

• Emphasis on marginal revenue when marginal cost
  of additional unit is low
• Works best when fixed costs are high
• Stimulate demand via low variable price

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We lose 50 on each room but well make it up in
volume.Silly or possible?Answer possible
Variable Cost Pricing Model
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• As long as excess capacity exists and price
  charged is above variable unit costs
• Regular price of hotel room 180
• Occupancy rate 60
• Average Fixed Cost 100
• Average Variable Cost 40
• Average Total Cost 140.
• Hotel offers half price on rooms 90
• Less AVC 40
• Contribution to FC 50

Internet is a near perfect source for this type
of information
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Market Based Pricing Strategies

• Basic Types
• Above the market pricing
• Below the market pricing
• At the market pricing

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The Three Cs Modelfor Price Setting
Low Price No possible profit at this price
High Price No possible demand at this price
Costs
Competitors prices and prices of substitutes
Customers assessment of unique product features
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New Product Pricing

• Skim the cream pricing
• Penetration pricing

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Skim-the Cream PricingFactors to Consider

• inelastic demand
• highly differentiated product
• identifiable high-price market segment
• low economies of scale

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Penetration PricingFactors to Consider

• elastic demand
• less differentiated product
• no high-price market segment
• economies of scale present
• quick competitive reaction expected

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Price-Reaction Program for Meeting a Competitors
Price Cut
Hold our price at present level continue to
watch competitors price
Has competitor cut his price?
No
No
No
Yes
Is the price likely to significantly hurt our
sales?
Is it likely to be a permanent price cut?
How much has his price been cut?
Yes
Yes
By less than 2 Include a cents-off coupon for
the next purchase
By more than 4 Drop price to competitors price
By 2-4 Drop price by half of the competitors pr
ice cut
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Specialized Pricing Strategies

• Price lining
• Leader pricing
• Psychological pricing
• Price point pricing
• One price vs. variable price
• Private brand pricing
• Prestige pricing
• Discounts and allowances
• Geographical pricing
• Price discrimination