MM:Chapter 16

1. MM:Chapter 16 Designing Pricing Strategies and Programs

2. Setting the Price 5.Selecting a pricing method 4.Analyzing competitors’ costs, prices and offers 3. Estimating costs 6. Selecting the final price 2. Determining demand 1. Selecting the pricing objective

3. 1. Selecting the pricing objective • The firm must determine position of its market • offer. • There are 5 main objectives of pricing: • Survival: covering all FC and VC • Maximum current profit: taking dd & cost into acct • Maximum market share: mkt penetration pricing • Maximum market skimming: skimming pricing • Product-quality leadership: high price, high-quality • Partial cost recovery: for nonprofit org

4. 2. Determining demand • Demand varies across the level of price. • The lower the price, the more the units • products can be sold. • Degree of price sensitivity depends on • several factors.

5. Factors affecting degree of price sensitivity Unique-value effect Substitute- awareness effect Difficult- comparison effect Total income- expenditure effect Total cost- expenditure effect Share-cost effect Sunk- investment effect Price-quality effect Inventory effect

6. 2.1 Estimating demand curve • Analyzing past data • Longitudinal (overtime e.g., BKK in last 10 yrs) • Cross-sectional(diff locations at the same time e.g., BKK, Phuket, Chiengmai, etc. in the yr 2002) • Using price experiment(e.g., several prices in a store) • Interviewing customers(e.g., how many units custs would buy at diff proposed prices)

7. 2.2 Elasticity of demand • Demand is likely to be more inelastic when : • There are no or few substitutes. • Buyers do not notice higher price. • Buyers are slow to change habit. • Price increase is justified.

8. 3. Estimating costs 3 main types of costs are: 1) Fixed costs, 2) Variable costs, 3) Average costs: cost per unit at that level of production Accumulated Production: Learning curve will aid price reduction. Differentiated Marketing Offers: ABC accting identifying real costs associated with serving each cust Target costing: 1) Determine price, 2) Determine desired profit margin; then we have the target cost that must be achieved.

9. 4. Analyzing competitors’ costs, prices and offers

10. 5. Selecting the pricing method • Pricing can be based on: • Customers' demand schedule • Cost function • Competitors' prices

11. 7 Different Pricing Methods 1. Markup pricing 2. Target-return pricing 3. Perceived-value pricing 4. Value pricing 5. Going-rate pricing 6. Auction-Type pricing 7. Group pricing

12. 1. Mark-up Pricing Unit Cost = VC + __FC__ Unit Sales MU Price = Unit Cost________ ( 1 – desired return on sales)

13. 2. Target-Return Pricing • Target-return price = unit cost + desired return * invested capital unit sales • Break-even volume= __fixed cost__ (Price – VC)

14. 3. Perceived-value Pricing • Under perceived-value pricing, a company use ads and sales force to communicate and enhance perceived value in buyers’ minds.

15. 4. Value Pricing • Charging relatively low price for a high-quality product/service e.g., Lotus supercenter. • Everyday low pricing (EDLP) VS High-Low pricing

16. 5. Going-Rate pricing • Basing price mainly on competitors’ prices rather basing on the dd and cost of the company • Mainly used in oligopolistic industries that sell commodity, and where costs are difficult to measure

17. The last two Pricing methods 6. Auction-Type Pricing 7. Group or Pool Pricing • Consumers and business buyers can join groups to buy at lower price

18. 6. Selecting the final price Apart from those calculations, a firm must consider these 5 factors: 1. Psychological pricing 2. Gain-and-risk-Sharing Pricing 3. Influence of other mkting mix 4. Corporate pricing policies 5. Impact of price on other parties

19. Adapting the price • Geographical pricing • Price discount and allowance • Promotional pricing • Discriminatory pricing • Product-mix pricing

20. GeographicalPricing • Barter: direct exchange of goods • Compensation deal: some in cash, the rest in pdts • Buyback arrangement: some in cash, the rest in pdts made by the supplied equipment • Offset: all in cash but the large amount of the money will be invested in the buyer’s country

21. Price Discount and Allowance • Cash discount • Quantity discount • (cumulative, non-cumulative) • Functional discount (trade discount) • Seasonal discount • Allowance: trade-in , and promotional • allowances

22. Promotional pricing • Loss-leader pricing: cutting price on well-known brands • Special-event pricing: e.g., Central’s summer sale • Cash rebates • Low-interest financing: e.g., water heaters at o% • Longer payment terms • Warranties and service contracts • Psychological discounting: e.g., Was Bt 999, now Bt 499

23. Discriminatory pricing • Customer-segment pricing: e.g., BTS • Product-form pricing: e.g., Text with hard cover and paperback • Image pricing • Channel pricing: e.g., Coke in a pub, a restaurant • Location pricing • Time pricing

24. Product-mix pricing • Product-line pricing: e.g., Microsoft’s operating systems • Optional-feature pricing: e.g., small talks, GPRS • Captive-product pricing: e.g., razors and razor blades • Two-part pricing: fixed fee plus a variable usage fee • By-product pricing: pricing pdt on its value • Product-bundling pricing