Pricing Strategy

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Pricing Strategy

• 03/21/05

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Objectives

• Marketers versus consumers view of price
• How is price determined?
• Demand curve
• Price elasticity of demand
• Break even point analysis

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Price

• Different forms, names
• Rent
• Fares
• Interest
• Fees
• Tolls
• Wages, salary, commission
• Income tax
• Tuition

Price is the money or other considerations
(including goods and services) exchanged for the
ownership or use of a good or service
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Price Characteristics

• The marketing mix element that generates revenue
• Very flexible
• Price critical aspect of competition

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Price flexibility
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Marketers versus Consumers

• Marketers
• price represents a revenue stream
• contribution to profits

• Consumers
• price represents something of value given up
• buyers make choices about what to buy based on
  value and value is determined by price

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Pricing Strategy

• From a marketers perspective two factors
  influence price
• Demand
• Demand is sensitive to price
• It is also influenced by competition, marketing
  efforts and other external variables (e.g.
  economic conditions)
• Costs
• Usually, price is not set below cost
• Important to note that price in the market is
  ultimately determined by the consumer- the
  amount that they are willing and able to pay

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Steps in setting price
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Step 1 Pricing constraints

• Demand for the Product Class, Product, and Brand
• Newness of the Product Stage in the Product
  Life Cycle
• Single Product versus a Product Line
• Cost of Changing Prices and Time Period They
  Apply
• Types of Competitive Markets
• Competitors prices
• Cost of Producing and Marketing the Product

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Step 2 Pricing objectives

• Profit
• Sales
• Market share
• Volume
• Survival
• Social responsibility

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Step 2 Estimate demand and revenue

• Demand curve
• It is not smooth and downward sloping, but is
  kinked
• A kinked demand curve exists because of peoples
  psychology in processing price information
• While demand remains fairly flat within a certain
  price range (e.g., 1.00 to 1.49), it falls
  steeply for small increases out of the range
  (e.g., 1.49 to 1.50)

Price
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10.99
Quantity demanded
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Step 2 Demand curve

• Shift of the curve vs. movement along the curve
• Price elasticity of demand
• Percentage change in quantity demanded/Percentage
  change in price
• Factors impacting elasticity
• number of substitutes
• type of product
• total expenditure
• price-quality relationship
• sunk cost

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Step 2 Estimate revenue

• Total revenue
• Average revenue
• Marginal revenue

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Step 3 Determine cost, volume and profit

• Costs can be broadly classified into
• Fixed costs
• These are constant across different levels of
  production and sales
• Examples include salaries, plant and equipment
  costs and rent
• Variable costs
• These are costs that are incurred on a per unit
  of production/sale basis
• These are over and above fixed costs
• Examples include raw materials, sales commission

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Cost

• Marginal costs change in total costs due to
  producing and marketing one additional unit
• Fixed and variable costs are used to calculate
  break-even point
• Assume your fixed costs are FC, variable cost per
  unit is UVC, Quantity sold is Q, and selling
  price is P. Then,
• Q FC/ (P-UVC)
• (P-V) is generally referred to as contribution.

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Break even analysis
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Break even analysis
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Setting the final price
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Demand oriented approaches

• Skimming Pricing
• Penetration Pricing
• Prestige Pricing
• Price Lining
• Odd-Even Pricing
• Target Pricing
• Bundle Pricing
• Yield Management Pricing
• Optional feature pricing
• Two part pricing
• Captive product pricing

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Cost oriented approaches

• Standard Markup Pricing
• Cost-Plus Pricing
• Experience Curve Pricing

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Profit oriented approaches

• Target Profit Pricing
• Target Return-on-Sales Pricing
• Target Return-on-Investment Pricing

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Competition oriented approach

• Customary Pricing
• Above- At- or Below- Market Pricing
• Loss-Leader Pricing

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Consumer price awareness

• Mindless Shopping
• Average time between arriving and departing from
  product category is 12 seconds
• In 85 of purchases only the chosen brand was
  handled, and 90 of shoppers inspected only one
  size
• 21 could not offer a price estimate when asked
• Only 50 were able to state correct price
• 93 did know relative price (i.e., higher, lower
  or the same as other brands in category)

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Reference prices

• Consumers do not evaluate price absolutely, but
  rather relative to a convenient quantity for
  comparison
• Context Matters!
• Two kinds of reference prices
• External reference price
• Internal reference price

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Reference prices

• External Reference Prices
• List prices/sale prices
• Other products on the shelf or convenient for
  comparison

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Reference prices

• Internal Reference Prices
• One that is recorded in consumers memory
• Memory of price may not be accurate
• If brand is frequently promoted, consumers tend
  to lower their internal reference point
• consumers have a notion of fair price
• acquisition utility - economic benefit of the
  product
• transaction utility - getting a good deal

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Price discounts

• Quantity discounts
• Seasonal discounts
• Cash discounts
• Price wars

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Legal Issues Price Discrimination

• Price is a useful discriminatory tool
• Customer segment pricing (Students, seniors)
• Time pricing (Airlines, movies)
• Conditions for discrimination
• Existence of different segments with different
  sensitivities
• No re-selling within segments
• No underselling by competition
• Should not be illegal
• Should not generate resentment

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Price discrimination

• Different Acts prohibit price discrimination that
  substantially reduces competition or creates a
  monopoly
• Exceptions
• Cost justification defense
• Competition defense
• Changing market conditions

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Legal Issues Deceptive pricing

• Bait and switch
• Conditional bargains
• Comparable value comparisons
• Comparisons with suggested prices
• Former price comparisons

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Legal issues Predatory pricing

• Setting very low prices to reduce competition
• Example

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Conclusions

• Price is determined by cost (fixed and variable)
  and demand (elasticity, awareness, reference
  prices) factors
• Always choose a price that is consistent with the
  rest of the marketing strategy
• Legal price discrimination is practiced widely