1. Chapter 8 Pricing Strategy and Management

2. Conceptual Orientation to Pricing
Demand factors (Value to buyers)
(price ceiling)
Competitive factors
Final pricing Initial
discretion pricing
Corporate objectives discretion
and regulatory
constraints
Direct variable costs
(price floor)

3. Price as an Indicator of Value
Perceived benefits
Price
for a given price, value decreases as perceived benefits decrease and vice versa
price also affects consumer perceptions of prestige; as price increases, demand may also increase

4. Price Elasticity of Demand
Percentage change in quantity demanded
Percentage change in price
where E is the coefficient of elasticity
if the % change in quantity demanded is greater than the % change in price, demand is said to be elastic – E is greater than 1.
if the % change in quantity demanded is less than the % change in price, demand is said to be inelastic – E is less than 1.

5. Factors that Influence Price Elasticity of Demand
the more substitutes a product or service has, the greater its price elasticity
the more uses a product or service has, the greater its price elasticity
the higher the ratio of the price of the product or service to the income of the buyer, the greater the price elasticity

6. Product-Line Pricing Product-Line Pricing involves determining:
the lowest-priced product and price
the highest-priced product and price, and
price differentials for all other products in the line

7. Pricing Strategies
full-cost price strategies – consider both variable and fixed costs
variable-cost price strategies – consider only variable costs, not total costs

8. Full-Cost Pricing
markup pricing : fixed amount added to the total cost of the product
break-even pricing : per-unit fixed costs + per-unit variable costs
rate-of-return pricing : set to obtain a desired ROI

9. Variable-Cost Pricing
Variable-cost pricing is demand-oriented pricing.
Two purposes:
stimulate demand
shift demand
Assumption is that variable-cost pricing will stimulate demand and increase revenues.

10. New-Offering Pricing Strategies
skimming pricing strategy
penetration pricing strategy
intermediate pricing strategy

11. Use Skimming Pricing Strategy when:
demand likely to be price inelastic
different price-market segments, appealing to buyers with a higher acceptable price
offering is unique enough to be protected from competition
production or marketing costs are unknown
capacity constraint exists
organization wants to generate funds quickly
realistic perceived value of the product exists

12. Use Penetration Pricing Strategy when:
demand likely to be price elastic
offering is not unique enough to be protected from competition
competitors expected to enter market quickly
no distinct price-market segments
possibility of cost savings with large volume of sales
organization’s major objective is to obtain a large market share

13. Intermediate Pricing Strategy
falls between skimming and penetration
most prevalent in practice
more likely to be used in majority of pricing decisions

14. Pricing and Competitive Interaction
the action and reaction of rival companies in setting and changing prices for their offerings
managers should focus more on long-term – “look forward and reason backwards”
Competitors’ goals and objectives ?
Assumptions competitor made about itself ?
Strengths and weaknesses of competitor ?

15. Industry Characteristics and Risk of Price Wars
High Risk
Low Risk
Product/Service Type
undifferentiated
differentiated
Market Growth Rate
stable/decreasing
increasing
Price Visibility to Competitors
high
low
Consumer Price Sensitivity
high
low
Overall Industry Cost Trend
declining
stable
Industry Capacity Utilization
low
high
Number of Competitors
many
few