Copyright © 2007 Pearson Education Canada10-1 Chapter Ten Pricing Considerations and Strategies with Duane Weaver

Copyright © 2007 Pearson Education Canada10-2 OUTLINE Price defined Best Practices Decision Factors Pricing in different markets Demand and Elasticity Pricing approaches/strategies and price setting Initiating and responding to price changes Ethics in pricing

Copyright © 2007 Pearson Education Canada10-3 What is a Price? Narrow definition. –Price is the amount of money charged for a product or service. Broad definition. –Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic pricing. –Charging different prices depending on individual customers and situations.

Copyright © 2007 Pearson Education Canada10-4 Pricing Best Practices Develop a one percent pricing mentality. Consistently deliver more value. Price strategically, not opportunistically. Know your competition. Make pricing a process.

Copyright © 2007 Pearson Education Canada10-5 Pricing Decision Factors External Factors Nature of the market. Demand. Competitor. Economic state. Reseller needs. Government actions. Social concerns. Internal Factors Marketing objectives. Marketing mix. Costs –Fixed –Variable Organization style. Target market. Positioning objectives.

Copyright © 2007 Pearson Education Canada10-6 Pricing in Different Markets Pure competition. –Many buyers and sellers where each has little effect on the going market price. Monopolistic competition. –Many buyers and sellers who trade over a range of prices. Oligopolistic competition. –Few sellers and sensitive to each other’s pricing/marketing strategies. Pure monopoly. –Market consists of a single seller.

Copyright © 2007 Pearson Education Canada10-7 Demand and Elasticity Demand. –The relationship between price changes and the number of units sold. Elasticity. –A way of measuring how sensitive the market is to price changes. Inelastic – minimal change in demand as price increases. Elastic – significant drop in demand as price increases. See Figure 10.2 on page 383

Copyright © 2007 Pearson Education Canada10-8 Price Setting Considerations Product costs. –Price floor – no profits below this price. Competitors’ prices and other internal and external factors. Consumer perceptions of value. –Price ceiling – no demand above this price.

Copyright © 2007 Pearson Education Canada10-9 General Pricing Approaches Cost-based approach. –Cost-plus pricing. –Break-even analysis. –Target profit pricing. Value-based approach. –Consumer perceptions of value. Competition-based approach. –What competitors are charging (going rate vs. sealed bid).

Copyright © 2007 Pearson Education Canada10-10 Pricing New Products Skimming pricing. –High price to reap maximum profit from early adopter segments. –Can encourage competition. –Products must be unique and hard to copy. Penetration pricing. –Low price to gain maximum market share. –May discourage competition. –Used when the product is easily copied.

Copyright © 2007 Pearson Education Canada10-11 Product Mix Pricing Strategies Product line – pricing levels to deliver value to different segments. Optional products – separate options available for the main product. Captive products – needed to make main product usable. By-products – created from the manufacture of the main product. Product bundles – combinations.

Copyright © 2007 Pearson Education Canada10-12 Product Line Pricing Involves setting price steps between various products in a product line based on: –Cost differences between products. –Customer evaluations of different features. –Competitors’ prices.

Copyright © 2007 Pearson Education Canada10-13 Optional/Captive Product Pricing Optional-product. –Pricing optional or accessory products sold with the main product (e.g. ice maker with the refrigerator). Product bundle pricing (packaging or bundling) –Combining several products and offering the bundle at a reduced price (e.g. computer with software and Internet access).

Copyright © 2007 Pearson Education Canada10-14 Price-Adjustment Strategies Discount and allowance pricing –give away profit Segmented pricing –movie theatre Psychological pricing –quality judgment Promotional pricing –create interest…loss leader… Geographical pricing –FOB origin, uniform (averaged freight), zone (zone averaging), basing-point (freight from base), freight-absorption (seller takes hit) International pricing –Economics, competition, laws, infrastructure (wholesale/retail), costs, internet

Copyright © 2007 Pearson Education Canada10-15 Initiating Price Changes Price Cuts –Excess capacity. –Falling market share. –Dominate market through lower costs. Price Increases –Cost inflation. –Over-demand. Cannot supply all customers’ needs.

Copyright © 2007 Pearson Education Canada10-16 Responding to Competitor Price Changes What can you do when a competitor lowers prices? How can you respond? –Please get together in your groups, think of a local business you know and come up with three ideas of what you could do if you were the Product Manager for the business and your main competitor dropped their prices on one of your main products? 1.Name the business 2.Define the main product 3.Identify the three options available to you and explain why you think they would work and why they might not?

Copyright © 2007 Pearson Education Canada10-17 Responding to Competitor Price Changes What can you do when a competitor lowers prices? How can you respond? –Reduce price to match the competitors’ price. –Maintain price but increase the perceived value of the offer. –Improve quality and raise price. –Hold price and introduce a new brand at a higher price. –Hold price and introduce a new brand at a lower price (fighting brand).

Copyright © 2007 Pearson Education Canada10-18 Pricing Ethics - Regulation Competitors –Price-fixing (collusion) –Predatory pricing (sell at loss-eliminate competition) Manufacturer and retailer. –Retail price maintenance (same price to same level of trade) –Discriminatory pricing (allowed if prove costs different) Manufacturer/retailer and consumer. –Deceptive pricing (bait and switch up – stock out)

Copyright © 2007 Pearson Education Canada10-19 Thanks Go forth and price for success! Beat the waves of competition to the shore!