Pricing Considerations

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Pricing Considerations

• David Forlani
• University of Colorado at Denver and Health
  Sciences Center

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Overview

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

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Price Defined

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

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General Pricing Considerations

• Pricing decisions should both
• reflect the value customers want relative to
  competitors offerings, and
• achieve the firms strategic objectives.
• Be clear on the Relationship among Price, Revenue
  Profit
• Price ? Revenue ? Profit
• Lower price will likely increase revenues (pq),
  but what impact will this have on profits
  (revenues less costs)?

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Marketing Strategy Considerations 1 of 2

• Factors from the Sellers Perspective
• (1) Costs
• (2) Demand
• (3) Customer value
• (4) Competitors prices
• Factors from the Buyers Perspective
• (1) Perceived value
• (2) Price sensitivity

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Marketing Strategy Considerations 2 of 2

• 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

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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
  revenues and profits
• Company strengths and weaknesses cost structure,
  market position
• Product characteristics uniqueness, PLC stage
• Target market characteristics demand, AIC stage
• Competitor characteristics sizes, capabilities
• Industry structure pure competition, oligopoly,
  monopoly
• Environmental influences (economic/legal)

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Pricing Strategy Over theProduct Life Cycle
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Strategic Pricing Objectives 1 of 2

• Base Pricing Strategies
• Price Skimming (Harvest the demand curve)
• Penetration Pricing (Make it tough for
  competitors)
• Prestige Pricing (High Road MB)
• Value-Based Pricing (EDLP)
• Competitive Matching (Reactive)
• Adjusting Prices in Consumer Markets
• Promotional Discounting (Sales)
• Reference Pricing (Compare at)
• Odd-Even Pricing (9.89 versus 10.00)
• Price Bundling (Drill, Saw and Light for only)

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Strategic Pricing Objectives 2 of 2

• Adjusting Prices in Business Markets
• Pricing techniques unique to business markets
• Trade discounts (1.50 off per case in December)
• Discounts and allowances (2/10 net 30)
• Geographic pricing (freight)
• Transfer pricing (intra-organization pricing)
• Barter and counter-trade (products versus cash)

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Application

• 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 Elasticity of Demand 1 of 2

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

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Price Elasticity of Demand
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Price Elasticity of Demand 2 of 2

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

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Yield Management fora Hypothetical Hotel
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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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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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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 Prices are equalized to those
  charged by competitors
• Perceived value / Economic value-in-use The most
  a customer will pay for a productthe ceiling
  price

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Set Price

• Review Pricing Objectives
• Ensure that the Marketing and Financial
  Objectives will be met
• Recheck competitors prices
• Application 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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Legal Ethical Issues

• Price Discrimination Selling different customers
  at different prices without justification
  (Robinson-Patman and Clayton Acts)
• Price Fixing Plotting with competitors (Sherman
  Antitrust Act)
• Predatory Pricing Eliminating competitors,
  cannot sell below average variable cost (Above
  Acts).
• Deceptive Pricing Fake salesfurniture stores,
  clothing discounters (FTC Wheeler-Lea Acts)

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Major Online Auction Strategies