Pricing Strategy

Pricing Strategy Is a key factor in producing revenue for the firm Is the easiest of all marketing variables to change Is an important consideration in competitive intelligence Is considered to be the only real means of differentiation in highly commoditized markets

Key Issues in Pricing Strategy The Firm’s Cost Structure Perceived Value The Price/Revenue Relationship Pricing Objectives Price Elasticity

The Firm’s Cost Structure Breakeven in Units Total Fixed Costs Unit Price - Unit Variable Costs Selling Price Average Unit Cost 1 - Markup Percent (decimal)

Perceived Value Value is a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. Benefits – everything the customer obtains from the offering Costs – everything the customer must give up Value is intricately tied to every element in the marketing program.

The Price/Revenue Relationship Myth #1 – When business is good, a price cut will capture greater market share. Myth #2 – When business is bad, a price cut will stimulate sales. Price cutting is generally not in the best interests of the firm unless sales volume will increase. A better strategy is to build value into the product offering at the same (or even a higher) price.

Common Pricing Objectives (Exhibit 6.4)

Price Elasticity Refers to customers’ sensitivity to changes in price The relative impact on the demand for a product, given specific increases or decreases in the price charged for that product Perhaps the most important overall consideration in setting effective prices.

Situations That Increase Price Sensitivity Availability of Substitute Products Customers are more sensitive to price changes when they can choose among a number of substitute products. Higher Total Expenditure The higher the total expense, the more elastic the demand. Noticeable Price Differences Products having heavily promoted prices tend to experience more elastic demand. Easy Price Comparisons Customers are more price sensitive if they can shop around for a better price.

Situations That Decrease Price Sensitivity Lack of Substitutes Customers are less price sensitive when they have fewer options. Real or Perceived Necessities These products have very inelastic demand because customers have to have them. Complementary Products If the price of one product falls, customers will be less sensitive to the price of complementary products.

Situations That Decrease Price Sensitivity (continued) Perceived Product Benefits Sometimes, products are “just worth it” to consumers. Situational Influences Customers are less price sensitive in certain situations (time pressure, emergencies, gift giving, etc.) Product Differentiation Differentiation reduces the number of perceived substitutes. The goal is to differentiate the product so well that customers perceive that no competing product can take its place.

Pricing Service Products Service pricing is critical because price may be the only cue to quality in advance of purchase. Service pricing becomes more important and difficult when: Service quality is hard to detect prior to purchase Costs are difficult to determine Customers are unfamiliar with the service process Brand names are not well established Customers can perform the service themselves Advertising within the service category is limited The total price of the service is difficult to state beforehand

Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services? How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?

Service Pricing and Yield Management Service pricing becomes a key issue in balancing supply and demand during peak and off-peak demand times. Yield management allows the firm to simultaneously control capacity and demand. Control capacity by limiting available capacity at certain price points Control demand through price changes and overbooking capacity Yield management also allows service firms to segment markets based on price elasticity.

Yield Management for a Hypothetical Hotel (Exhibit 6.5)

Base Pricing Strategies Price Skimming Price Penetration Prestige Pricing Value-Based Pricing (EDLP) Competitive Matching Non-Price Strategies

Adjusting the Base Price Discounting Reference Pricing Price Lining Odd Pricing Price Bundling

Pricing Strategies in Business Markets Adjusting Prices in Business Markets Trade discounts Discounts and allowances Geographic pricing Transfer pricing Barter and countertrade Price discrimination