Pricing Making Profitable Decisions Third Edition Kent B. Monroe University of Illinois at Urbana Champaign Champaign, Illinois, U.S.A.

Effective Pricing Management Chapter 1 Effective Pricing Management

Russian Proverb There are two fools in any market: One does not charge enough. The other charges too much.

The Role of Price Prices determine what products and services should be produced and in what amounts. Prices determine how these products and services should be produced. Prices determine for whom the products and services should be produced.

The Definition of Price quantity of money or goods and services received by the seller quantity of goods and services paid by the buyer Price =

Pricing Terms Rate Fees Premiums Rent Tuition Fares Tolls Admission User fees Minimum required balances Interest charges Tariffs Duties

Ways to Change Price Change the quantity of money or goods and services to be paid by the buyer Change the quantity of goods and services to be provided by the seller Change the quality of goods and services provided

More Ways to Change Price Change the premiums or discounts to be applied for quantity reasons. Change the time and place of transfer of ownership. Change the place and time of payment. Change the acceptable form of payment.

Faster Technological Progress Has… Reduced the gap between invention and innovation Reduced the average age of products Intensified competition from alternative uses of income

Proliferation of New Products “Population explosion” of new products Product lines have widened Blurred market segments Small price differentials may produce relatively large shifts in demand

Increased Demand for Services Increase in demand for services has led to an increase in prices, which have led to public concern and governmental activity There is also an increase in demand for services built into products

Increased Global Competition Increased foreign trade around the world has increased the amount of price competition faced by domestic producers

The Changing Legal Environment Deregulation and privatization of companies have resulted in more complex, more difficult, and more important pricing decisions

Economic Uncertainty Slowed or stopped inflation rates in other countries’ economies has led to the need for new approaches to developing pricing strategies

Five Factors to Consider Demand Costs Competitive factors Corporate profit and market objectives Regulatory constraints

Demand Implications Market versus product elasticity Derived demand for buyer’s output Likelihood of competitive entry Demand consequences of a product line

Cost Implications Cost-plus pricing Maximizing margins Pricing with scarce resources

Marketing and Distribution Strategy Implications The product life cycle Sales force management

How To Become a Proactive Pricer 1. Understand how pricing works 2. Understand how customers perceive prices and price changes

The Three Levels of Pricing Management 1. Understanding the economic and competitive environment Factors that influence supply and demand 2. Developing product and market pricing strategy Benefits, costs, and prices 3. Administering the pricing process Tactical pricing decisions

Level One 1. Traditional Economic How will current and future supply and demand dynamics affect overall market price levels? Economic/market environment Changes in competition, supply, capacity Shifts in demand New product developments

Level Two 2. Product and Market Strategy Within each market segment, what is the correct list or target price for each product? Customers’ perceptions of price and value Price research Profitability analysis Pricing strategy

Concept Of Benefits A product or service must promise to: Perform identified functions, Solve identified problems, or Provide specified pleasure. Thus, a product or service is bought for what it does, not what it is made of.

Customer’s Perceptions Are Important! The relative benefits customers perceive the product or service provides; The relative total costs of acquiring, installing, and using the product or service over its lifetime; The tradeoff that customers perceive between receiving the perceived benefits compared to the total costs - perceived value

Model Of Price-value Relationship

Level Three 3. Price Structure Management How to determine the actual price to receive from each transaction? Organizing for price administration Transaction management: setting discounts, allowances, rebates… Establishing pricing tactics Maintaining feedback and control Legal and ethical issues

Tactical Pricing Decisions Tactical pricing decisions concern day-to-day management of the pricing function, including: Timing of price changes Amount of price changes Direction of price changes Administering price changes Communicating price changes to sales force customers

Topics Covered in Following Sections! Section 1: Economic and competitive issues Section 2-3: Techniques to acquire and analyze relevant information Section 4: How to develop prices for product life cycles and multiple products/services Section 5: How to increase pricing flexibility Section 6: Techniques for pricing in a competitive bidding situation Section 7: Guidelines for developing and implementing a proactive approach to pricing