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Pricing Marketing and pricing Customers’ rationality is bounded Prices are not always determined by pure market forces Marketing has different pricing strategies Skim the cream Odd-number pricing Penetrate the market Searching Web supports information and price searching

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marketing and pricing
Marketing and pricing
  • Customers’ rationality is bounded
  • Prices are not always determined by pure market forces
  • Marketing has different pricing strategies
    • Skim the cream
    • Odd-number pricing
    • Penetrate the market
searching
Searching
  • Web supports information and price searching
    • Intelligent agents
  • In the physical world, searching is costly and time-consuming
oversupply creates sophistication
Oversupply creates sophistication
  • Customers shop around and learn
  • Customers assertively seek value
  • Marketers innovate to avoid this confrontation
  • Competitors copy and oversupply continues
  • The Web accelerates this cycle
pareto principle
Pareto principle
  • A few customers create most of the value
  • A Mexican cellular phone company
    • 10% of customers account for 90% of sales
      • Recoup investment in months
    • 80% of customers account for 10%
      • Recoup investment in years
spectrum of exchange
Spectrum of exchange
  • Exchanges between actors varies from
    • Theft by force to trading floor
    • Marketing is effective between these extremes
customer value categories and exchange spectrum

Range of

marketing

effectiveness

Customer value categories and exchange spectrum

Theft

by force

Market

Theft by stealth

forces

High

Fraud

Seduction

A+

A

Customer's value

to the firm

Products and

B

services

C

Commodities

Trades on a stock

Low

Corporate

exchange

strategy

directions
Directions
  • Marketing
    • Moves customers up the pyramid
    • Moves products and services away from commoditization
  • Competition
    • Moves customers down the pyramid
    • Moves products and services towards commoditization
flattening and narrowing
Flattening and narrowing
  • Technology facilitates searching
  • Reducing transaction costs
  • Customers make prices
  • Customers control transactions
  • More one-to-one negotiation
  • Commoditization
customers make prices
Suppliers tend to make prices and customers take them

Auctions are an exception

Web is reversing

Auctions becoming more popular

Customers make prices
customers control transactions
Major manufacturers are inviting suppliers to bid on-line

Caterpillar and GE

Suppliers forced to compete on price

Less

differentiation

personal selling

added service

Customers control transactions
more one to one negotiation
As negotiation costs decrease, more negotiation should emerge

Intelligent agents negotiating on behalf of buyer and seller

Prices will be closer to real-market value

More one-to-one negotiation
commoditization
Commodities are the first to migrate to electronic markets

The Web is compelling for perishable products

Expect more switching between established brands

Commoditization
migrating up and effective marketing
Migrating up and effective marketing
  • Differentiated pricing all the time
  • Creating customer switching barriers
  • De-menuing pricing
  • Better differentiation
  • Customers may pay more
  • Consider total cost
  • Establish electronic exchanges
  • Maximize revenue not price
  • Reduce buyer’s risk
differentiated pricing all the time
Differentiated pricing all the time
  • The same product and service can have different values to different customers
    • Airlines
    • Drink vendors could charge more on a hot day
  • Mass customization enables mass price differentiation
creating customer switching barriers
Creating customer switching barriers
  • Collect details on customers to raise switching costs
  • Knowing preferences is necessary for better service
  • The Web site should learn about the customer’s preferences
de menuing pricing
De-menuing pricing
  • Without automation, changing prices is costly and time-consuming
    • It takes time to filter through the distribution network
  • Networks enable rapid dissemination of price changes
  • Change prices as needed
better differentiation
Better differentiation
  • Differentiate the buying experience as well as the product or service
  • Stage the customer experience
  • The Web as theater for a unique personal experience
customers may pay more
Customers may pay more
  • Marketers often assume customers underestimate the value of a product
    • This may not be true
  • Try letting customers set the price
    • London restaurant
consider total cost
Consider total cost
  • Purchase price is one element of total acquisition cost
  • If Web-based purchasing reduces the total acquisition cost customers may pay a price premium
    • Convenience
    • Opportunity cost
establish electronic exchanges
Establish electronic exchanges
  • Bartering may be more effective than selling when prices are low
  • Barter excess supplies
  • Mainly business-to-business
maximize revenue not price
Maximize revenue not price
  • Airlines use yield management software to maximize revenue
  • Use Web to sell perishable, last-minute capacity
risk and return trade off

Risk

Auction

On-line

Premium

Return

Risk and return trade-off
  • Buyers may pay a price premium for reduced risk
    • Manheim Auctions
conclusion
Conclusion
  • The Web is having a major impact on pricing strategy
  • Technology creates opportunities for both buyers and sellers
  • Smart firms will use the Web to move customers up the pyramid and the exchange spectrum
  • The Web creates an opportunity for pricing creativity