Price Strategy & Management Chapter 10 & 11

Price “The exchange value of a good or service in the marketplace.” Value derived from tangible and intangible benefits

Importance of Price Organization must establish fair and competitive prices while generating adequate revenues and profit. Low prices (perceived value) attracts customers High prices (perceived value) attracts customers

Factors Influencing Price Consumers Nature of Market Price Profit Objectives Channel Members Costs

Nature of Market The market and the degree of competition in the market influences pricing strategy. Monopoly Oligopoly Monopolistic Competition Pure Competition

Consumer Demand and Price Principle: 1. Consumers purchase greater quantity at lower prices. 2. The effect of a price change on demand must be factored into pricing strategy. Price Elasticity of Demand: Measures the effect of a change in price on the quantity purchased.

Elasticity of Demand Elastic Inelastic Small change in price; large change in volume Inelastic Change in price does not have significant impact on volume

Costs Influence Price Controlling costs delay or minimize the need for price increases. Some alternatives for protecting margins include: Improving operational efficiency Less expensive materials Shrinkage Relocation of manufacturing

Break-Even Analysis A break-even analysis shows how many units must be sold to exactly break even, given fixed and variable costs, and a price.

(Selling Price – Variable Costs) Break-Even Fixed Costs . (Selling Price – Variable Costs) = $800,000 . ($1.00 – $0.40)

Channel Members Influence Price Mfg’r Wholesaler Retailer Consumer Organizations want distributors to charge prices that agree with their marketing strategy. 1. Adequate Margin 2. Fair Treatment 3. Special Deals 4. Impact of Increases

Pricing Methods Demand-Based Pricing Competition-Based Cost-Based Total costs plus profit determines price Position relative to competition determines price What consumers will pay determines price

Psychological Pricing Tactics Appeals to tendencies in consumer behaviour. 1. Prestige Pricing 2. Odd-Even Pricing 3. Price Lining 4. Customary Pricing 5. Unit Pricing 6. EDLP

Promotional Pricing Tactics “Strategies to reduce prices temporarily.” Loss Leaders Multiple-Unit Prices

New Product Pricing STRATEGY: Price Skimming “High” entry price to maximize revenue. Appropriate if: 1. Product is an innovation 2. Competition is limited 3. Patent protection applies

New Product Pricing STRATEGY: Price Penetration “Low” entry price to gain acceptance quickly. Appropriate if: 1. Demand is elastic 2. Production costs are kept in check 3. Market is segmented on price

Managing Price-The Trade Side Providing incentives to buy more is the name of the game. 1. Quantity Discount 2. Slotting Allowance 3. Performance Allowance 5. Seasonal Discount