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Introduction to Pricing Decisions
4/17/2017 Introduction to Pricing Decisions Copyright 2005 Brainy Betty, Inc.
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4/17/2017 Preview Importance of understanding customer value perceptions and company costs when setting prices Important internal and external factors affecting a firm’s pricing decisions The major strategies for pricing imitative and new products How companies find a set of prices that maximizes the profits from the total product mix How companies adjust their prices to account for different types of customers and situations Issues related to initiating and responding to price changes Copyright 2005 Brainy Betty, Inc.
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4/17/2017 What Is a Price? Narrowly, price is amount of money charged for a product or service Broadly, price is sum of all the values that consumers exchange for benefits of having or using a product or service Copyright 2005 Brainy Betty, Inc.
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Major Considerations in Setting Price
4/17/2017 Major Considerations in Setting Price Customer perceptions of value Other internal and external considerations Marketing strategy, objectives, mix Nature of the market and demand Competitors’ strategies and prices Product costs Copyright 2005 Brainy Betty, Inc.
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Customer Value Perceptions
4/17/2017 Customer Value Perceptions Customer-oriented pricing Involves understanding how much value consumers place on benefits they receive from a product and setting a price that captures that value Value-based pricing Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing Good value pricing Value-added pricing Copyright 2005 Brainy Betty, Inc.
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Internal Factors Affecting Pricing Decisions
4/17/2017 Internal Factors Affecting Pricing Decisions Company and Product Costs Fixed Costs Costs that do not vary with production or sales level Variable Costs Costs that vary directly with level of production Copyright 2005 Brainy Betty, Inc.
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Cost-Based Pricing Cost-plus pricing Break-even pricing
4/17/2017 Cost-Based Pricing Cost-plus pricing Adding standard markup to product’s cost Break-even pricing Target-profit pricing Copyright 2005 Brainy Betty, Inc.
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Internal Factors Affecting Pricing Decisions
4/17/2017 Internal Factors Affecting Pricing Decisions Marketing Objectives Company must decide on its product strategy General pricing objectives Survival Current profit maximization Market share leadership Product quality leadership Copyright 2005 Brainy Betty, Inc.
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Internal Factors Affecting Pricing Decisions
4/17/2017 Internal Factors Affecting Pricing Decisions Marketing Mix Strategy Price decisions Must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program Target costing Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met Copyright 2005 Brainy Betty, Inc.
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External Factors Affecting Pricing Decisions
4/17/2017 External Factors Affecting Pricing Decisions The Market and Demand Costs set the lower limit of prices; the market and demand set the upper limit of prices Pricing in different types of markets Pure competition Monopolistic competition Oligopolistic competition Pure (non)regulated monopoly Price elasticity of demand Copyright 2005 Brainy Betty, Inc.
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External Factors Affecting Pricing Decisions
4/17/2017 External Factors Affecting Pricing Decisions Competitors’ Strategies and Prices How does the market offering compare? How strong is competition and what is their pricing strategy? How does competition influence price sensitivity? Other External Factors Economic conditions, government regulation, social environment Copyright 2005 Brainy Betty, Inc.
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New-Product Pricing Strategies
4/17/2017 New-Product Pricing Strategies Market Skimming Set high price for new product to “skim” revenues layer by layer from the market Company makes fewer, but more profitable sales When to Use Product’s quality and image must support its higher price Costs of low volume cannot be so high they cancel the advantage of charging more Competitors should not be able to enter market easily and undercut the price Copyright 2005 Brainy Betty, Inc.
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New-Product Pricing Strategies
4/17/2017 New-Product Pricing Strategies Market Penetration Set low initial price to “penetrate” the market quickly and deeply Can attract large number of buyers quickly and win large market share When to Use Market is highly price sensitive so a low price produces more growth Costs must fall as sales volume increases Need to keep competition out or effects are only temporary Copyright 2005 Brainy Betty, Inc.
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Product Mix Pricing Strategies
4/17/2017 Product Mix Pricing Strategies Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing Copyright 2005 Brainy Betty, Inc.
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4/17/2017 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 2005 Brainy Betty, Inc.
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Optional- and Captive-Product Pricing
4/17/2017 Optional- and Captive-Product Pricing Optional-Product Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator) Captive-Product Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors) Copyright 2005 Brainy Betty, Inc.
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By-Product and Product Bundle Pricing Strategies
4/17/2017 By-Product and Product Bundle Pricing Strategies By-Product Pricing Pricing low-value by-products to get rid of them (e.g., animal manure from zoo) Product Bundle Pricing Pricing bundles of products sold together (software, monitor, PC, and printer) Copyright 2005 Brainy Betty, Inc.
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Price Adjustment Strategies
4/17/2017 Price Adjustment Strategies Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Dynamic pricing Copyright 2005 Brainy Betty, Inc.
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Discounts and Allowances
4/17/2017 Discounts and Allowances Discounts Cash Quantity Seasonal Allowances Trade-in Promotional (for retailer) Copyright 2005 Brainy Betty, Inc.
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4/17/2017 Segmented Pricing Selling product or service at two or more prices, where price difference not based on cost difference Called yield-management in hospitality industry Types Customer-segment Product-form Location pricing Time pricing Copyright 2005 Brainy Betty, Inc.
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Psychological Pricing
4/17/2017 Psychological Pricing Considers psychology of prices and not simply economics Consumers usually perceive higher-priced products as having higher quality Consumers use price less when they can judge product quality by examining it or recalling experiences Copyright 2005 Brainy Betty, Inc.
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Promotional Pricing Low-Interest Financing Longer Warranties
4/17/2017 Promotional Pricing Low-Interest Financing Longer Warranties Free Maintenance Cash Rebates Special-Event Pricing Loss Leaders Copyright 2005 Brainy Betty, Inc.
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4/17/2017 Dynamic Pricing Adjusting prices continually to meet characteristics and needs of individual customers and situations Copyright 2005 Brainy Betty, Inc.
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Initiating Price Changes
4/17/2017 Initiating Price Changes Price Cuts Excess capacity Falling market share Dominate market through lower costs Price Increases Cost inflation Over-demand Copyright 2005 Brainy Betty, Inc.
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Responses to Price Changes
4/17/2017 Responses to Price Changes Buyer reactions to price changes Competitor reactions to price changes Firm responses to price changes Reduce price to match competition Raise perceived quality of its offer Improve quality and increase price Launch a low-price “fighting brand” Copyright 2005 Brainy Betty, Inc.
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Public Policy and Pricing
4/17/2017 Public Policy and Pricing Price fixing Predatory pricing Price discrimination Retail price maintenance Deceptive pricing Promotion price reductions Scanner fraud Price confusion Copyright 2005 Brainy Betty, Inc.
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Recap—What was Covered?
4/17/2017 Recap—What was Covered? Importance of understanding customer value perceptions and company costs when setting prices Important internal and external factors affecting a firm’s pricing decisions The major strategies for pricing imitative and new products How companies find a set of prices that maximizes the profits from the total product mix How companies adjust their prices to account for different types of customers and situations Issues related to initiating and responding to price changes Copyright 2005 Brainy Betty, Inc.
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