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Pricing Strategies

Pricing Strategies. What is a Price? Barter?. Price is the money or other consideration (including other goods and services) exchanged for the ownership or use of a good or service.

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Pricing Strategies

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  1. Pricing Strategies

  2. What is a Price? Barter? Price is the money or other consideration (including other goods and services) exchanged for the ownership or use of a good or service. Barter is the practice of exchanging goods and services for other goods and services rather than money.

  3. Value and Value Pricing • Value can be defined as the ratio of perceived benefits to price or: value = perceived benefits/price • Value-pricing is the practice of simultaneously increasing product and service benefits and maintaining or decreasing price.

  4. The Profit Equation Profit= Total revenue – Total cost Total revenue= Unit price  Quantity sold Total cost= Fixed cost + Variable cost

  5. Steps in Setting Price

  6. 1a. Pricing Constraints Identified Pricing constraints are factors that limit the latitude of prices a firm may set. • demand for the product class, product, and brand • newness of the product: stage in the product life cycle • cost of producing and marketing the product • competitor prices • type of competitive markets • pure monopoly • oligopoly • monopolistic competition • pure competition

  7. 1b. Pricing Objectives Expectations that specify the role of price in an organization’s marketing and strategic plans are pricing objectives: 1. Profit 4. Unit Volume 2. Sales 5. Survival 3. Market Share 6. Social Responsibility

  8. 2. Estimate Demand A demand curve shows a maximum number of products consumers will demand/buy at a given price. Economists stress three key factors in estimating demand: 1. Consumer tastes 2. Price and availability of other products 3. Consumer income

  9. 2b. Fundamental Revenue Concepts • Total revenue (TR) • Is the total money received from the sale of a product, or Unit Price  Quantity Sold • Average revenue (AR) • Is the average amount of money received for selling one unit of the product, or Total Revenue/Quantity = Unit Price • Marginal revenue (MR) • Is the change in total revenue obtained by selling one additional unit, or The Slope of the Total Revenue Curve

  10. Price Elasticity of Demand Defined Price Elasticity of Demand isthe percentage change in quantity demanded (QD) relative to a percentage change in price (P) and can be expressed as follows: E = % change in QD % change in P Elastic Demand = % change in QD >% change in P Inelastic Demand =% change in QD <% change in P Unitary Demand =% change in QD = % change in P

  11. 3. Fundamental cost concepts • Total cost (TC) • Is the total expense incurred by a firm in producing and marketing the product, and is the sum of the fixedcost and variable. • Fixed cost (FC) • Is the sum of the expenses of the firm that are stableand do not change with the quantity of product thatis produced and sold . • Variable cost (VC) • Is the sum of the expenses of the firm that varydirectly with the quantity of product that isproduced and sold. (continued)

  12. 3b.Calculating a Break-Even Point Total Total Unit Variable Fixed Total Quantity Price per Revenue (TR) Variable Cost (TVC) Cost Cost (TC) Profit Sold (Q) Bushel (P) (P x Q) Cost (UVC) (UVC x Q) (FC) (FC+VC) (TR-TC) 0 $2 $ 0 1 $ 0 $2,000 $2,000 -$2,000 1,000 2 2,000 1 1,000 2,000 3,000 -1,000 2,000 2 4,000 1 2,000 2,000 4,000 0 3,000 2 6,000 1 3,000 2,000 5,000 1,000 4,000 2 8,000 1 4,000 2,000 6,000 2,000 5,000 2 10,000 1 5,000 2,000 7,000 3,000 6,000 2 12,000 1 6,000 2,000 8,000 4,000

  13. 4. Select an approximate price level

  14. a) Demand-Oriented Pricing Approaches • Skimming pricing. • Penetration Pricing. • Prestige Pricing. • Price Lining. • Odd-Even Pricing. • Target Pricing. • Bundle Pricing. • Yield Management Pricing.

  15. b) Cost-Oriented Pricing Approaches • Standard markup pricing. • Cost-plus pricing. • Experience curve pricing.

  16. c) Profit-Oriented Pricing Approaches • target profit pricing • target return-on-sales pricing • target return-on-investment pricing

  17. d) Competition-Oriented Pricing Approaches • customary pricing. • above-, at-, or below- market pricing • loss leader pricing.

  18. 5. Set the List or Quoted Price • One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. • Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. (buying a house)

  19. 5. Set the List or Quoted Price • Company effects • Customer effects • Competitive effects

  20. 6. Special Adjustments to List or Quoted Price Special adjustments to list or quoted price Allowances Trade-in Promotional Geographical adjustments Discounts Quantity cumulative non cumulative Cash

  21. Legal and Regulatory aspects of Pricing Price Fixing Price Discrimination Deceptive Pricing Predatory Pricing Delivered Pricing

  22. Deceptive Pricing Bait and switch Bargains conditional on other purchases Comparable value comparisons Comparisons with suggested prices Former price comparisons

  23. “It is not the cost of the materials that determines the product value, but rather the customers perception of value”Greaves, 1995

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