Pricing Strategy
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Pricing Strategy. 8. C H A P T E R. Pricing. Is a key factor in producing revenue for the firm Is the easiest of all marketing variables to change Is an important consideration in competitive intelligence

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Pricing strategy

Pricing Strategy

8

C H A P T E R


Pricing

Pricing

  • Is a key factor in producing revenue for the firm

  • Is the easiest of all marketing variables to change

  • Is an important consideration in competitive intelligence

  • Is considered to be the only means of differentiation in highly commoditized markets

  • Is among the most complex decisions in the marketing plan


Discussion question

Discussion Question

  • One of the key themes of today’s economy is the challenge of marketing goods and services in mature markets that are plagued by commoditization. In what ways is pricing strategy related to commoditization? How can a firm offer good value in a mature market where price is the only visible means of differentiation? Are most firms too concerned about their costs to really deliver value in other ways? Explain.


The role of pricing in marketing strategy 1 of 2

The Seller’s Perspective on Pricing

Four key issues:

Costs

Demand

Customer value

Competitors’ prices

The Buyer’s Perspective on Pricing

Two key issues:

Perceived value

Price sensitivity

The Role of Pricing inMarketing Strategy (1 of 2)


The role of pricing in marketing strategy 2 of 2

A Shift in the Balance of Power

A buyer’s market occurs when:

Large number of sellers in the market

Many substitutes for the product

Economy is weak

A seller’s market occurs when:

Products are in short supply

Products are in high demand

Economy is strong

The Role of Pricing inMarketing Strategy (2 of 2)


The relationship between price and revenue

Myth #1 – When business is good, a price cut will increase market share.

Myth #2 – When business is bad, a price cut will stimulate sales.

Price cutting is generally not in the best interests of the firm unless sales volume will increase.

A better strategy is to build value into the product offering at the same (or even a higher) price.

The Relationship BetweenPrice and Revenue


Key issues in pricing strategy

Pricing Objectives

Supply and Demand

The Firm’s Cost Structure

Competition and Industry Structure

Pure Competition

Monopolistic Competition

Oligopoly

Monopoly

Stage of the Product Life Cycle

Key Issues in Pricing Strategy


Common pricing objectives

Common Pricing Objectives

Exhibit 8.1


Pricing strategy over the product life cycle

Pricing Strategy Overthe Product Life Cycle

Exhibit 8.2


Pricing strategy in services

Pricing Strategy in Services

  • Is critical because price may be the only cue to quality

  • Becomes more important and difficult when:

    • Service quality is hard to detect prior to purchase

    • Costs are difficult to determine

    • Customers are unfamiliar with the process

    • Brand names are not well established

    • Customers can perform the service themselves

    • Service has poorly defined units of consumption

    • Advertising within the service category is limited

    • The total price of the service is difficult to state beforehand


Discussion question1

Discussion Question

  • Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services? How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?


Price elasticity and yield management

Allows simultaneous control of capacity and demand

Control capacity by limiting available capacity at certain price points

Control demand through price changes and overbooking capacity

Price Elasticity and Yield Management


Yield management for a hypothetical hotel

Yield Management for a Hypothetical Hotel

Exhibit 8.3


Price elasticity of demand 1 of 2

Price Elasticity of Demand (1 of 2)

Exhibit 8.4


Price elasticity of demand 2 of 2

Situations that increase price sensitivity:

Availability of product substitutes

Higher total expenditure

Noticeable differences

Easy price comparison

Situations that decrease price sensitivity:

Real or perceived necessities

Lack of product substitutes

Complementary products

Product differentiation

Perceived product benefits

Situational influences

Price Elasticity of Demand (2 of 2)


Discussion question2

Discussion Question

  • Price elasticity often varies for the same product based on the situation. What situational factors might affect the price elasticity of these products:

    • sporting event or concert tickets

    • staple goods such as milk, eggs, or bread

    • an electric razor

    • eye surgery to correct vision


Pricing strategies 1 of 2

Base Pricing Strategies

Market Introduction Pricing (skimming and penetration)

Prestige Pricing

Value-Based Pricing (EDLP)

Competitive Matching

Non-Price Strategies

Adjusting Prices in Consumer Markets

Promotional Discounting

Reference Pricing

Odd-Even Pricing

Price Bundling

Pricing Strategies (1 of 2)


Marketing strategy in action

Marketing Strategy in Action

  • Chrysler’s initial price skimming strategy for the Pacifica was not successful in attracting customers. Why would customers balk at a $40,000 price tag for the Pacifica? What are the issues affecting price sensitivity in this situation?


Pricing strategies 2 of 2

Adjusting Prices in Business Markets

Trade discounts

Discounts and allowances

Geographic pricing

Transfer pricing

Barter and countertrade

Price discrimination

Pricing Strategies (2 of 2)


Fixed vs dynamic pricing

Pricing levels in a negotiated pricing situation:

Opening position

Aspiration price

Limit

Guidelines for making concessions:

Avoid being the first side to make a concession

Start with modest concessions and make them smaller as you proceed

Avoid making concessions early in the negotiation

Do not give up anything without something in return

Fixed vs. Dynamic Pricing


Major online auction strategies

Major Online Auction Strategies

Exhibit 8.5


Legal and ethical issues in pricing

Price Discrimination

Price Fixing

Predatory Pricing

Deceptive Pricing

Legal and Ethical Issues in Pricing


Selling at a loss

Selling at a Loss

  • Sony is expected to lose money on each PlayStation 3 console due to the cost of the cell processor and the Blu-ray DVD drive. Sony plans to make up for the loss in games and accessories. Is this a sound pricing strategy? How can Sony minimize the loss on each console?

Beyond the Pages 8.2


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