Pricing Strategy

The demand curve Price P1 P2 Q1 Q2 Quantity 7 7 7 7 7

Pricing methods Cost Pricing methods Competition Marketing

Cost-oriented Pricing Full Cost Pricing Direct (Marginal) Cost Pricing

Determining the break even point Total revenue Units of Production Money (£) Total cost Break even point Profits Total variable costs Fixed costs Losses 10 10 10 10 10

Full cost pricing Advantages Gives an indication of minimum price needed to make a profit. Can be used with other methods – acts as a constraint. Criticisms Takes no account of customers’ willingness to pay. If followed strictly, leads to an increase in price when demand falls. Is illogical because a sales estimate is made before a price is set. May be problems in allocating overheads.

Direct cost pricing Advantages Criticisms Avoids problem of allocating overheads. Avoids ‘price up as demand down’ problem. Indicates lowest price at which it is sensible to take business. Criticisms When business is buoyant, gives no indication of optimum price. Cannot be used in the long-term.

Competitor-oriented Pricing Going-rate Pricing: With no product differentiation, producers are forced to accept the going rate. In reality there is almost no situation in which no differentiation occurs. Competitive bidding: The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered. Statistical modelling has resulted in the following basis for calculating expected profits. Expected profit = Profit X Probability of winning

Competitive bidding using the expected profit criterion Bid price (£) Profit Probability Expected Profit 2000 0.99 2100 100 0.90 90 2200 200 0.80 160* 2300 300 0.40 120 2400 400 0.20 80 2500 500 0.10 50

Marketing-orientated pricing Marketing strategy Value to customer Effect on distributors/ retailers Negotiating margins Costs Political factors Product line pricing Competition Price-quality relationships Explicability Marketing-oriented pricing

Adoption of innovations by segments: calculators S1 Engineer/scientists S2 Commercial S3 General public S4 Schoolchildren Time Sales

New product launch strategy Promotion High Low Slow skimming Rapid skimming High Price Low Rapid penetration Slow penetration

Travelodge compares the price of its rooms with that of Comfort Inn.

Characteristics of high price market segments Product provides high value Customers have high ability to pay Consumer and bill payer are different Lack of competition Excess demand High pressure to buy

Conditions for charging low prices Only feasible alternative Market presence or domination Experience curve effect/low costs Make money later Make money elsewhere Barrier to entry Predation

Cutting costs means that consumers can be offered lower prices. Virgin Trains Cutting costs means that consumers can be offered lower prices.

Pricing existing products Strategic Objectives Build objective Hold objective Harvest objective Reposition objective

Methods of estimating value Trade-off analysis Experimentation Economic value to the customer analysis

Pricing using EVC analysis 50 000 30 000 120 000 100 000 20 000 80 000 EVC = 90 000 Life-cycle cost Purchase price Start-up costs Post-purchase costs 200 000 40 000 Added value Reference product New product X New product Y

Secondary competitors Immediate competitors Layers of competition Tertiary competitors Different products solving or eliminating the problem in a different way Different products solving the same problem in a similar way Secondary competitors Immediate competitors Technically similar products

Initiating price changes

Reacting to competitors’ price changes

Ethical issues in pricing Price fixing Predatory pricing Deceptive pricing Price discrimination Penetration pricing and obesity Product dumping

Core Reading Core reading to support this topic can be found in Chapter 12 of your recommended text