Chapter 11 PRICING STRATEGIES
Chapter 11Pricing Strategies In this chapter, we focus on 3 parts: • 1 The process of price setting • 2 Pricing strategies • 3 Initiating and Responding to Price Change
Chapter 11Pricing Strategies Designing a new product Determining its cost Asking ‘can we sell it for this’ An ideal selling price based on customer considerations Targets costs that will ensure that the price is met 1 The process of setting price • Former process • Now
Chapter 11Pricing Strategies 1 The process of setting price Selecting the Pricing Objective Determining Demand Estimating Costs Analyzing Competitors’ Costs, prices, and Offers Selecting Pricing Method Selecting the Final Price
Chapter 11Pricing Strategies 1.1 Selecting the Pricing Objective • 1.1.1 The position of the product • 1.1.2 the Pricing Objective
Chapter 11Pricing Strategies 1.1.1 The position of the product • Under the circumstances, companies must firstly decide on target price for a product, then decide on its target cost and other marketing mix. • Before selecting the pricing objectives, the firm must decide where to position its product on quality and price.
Chapter 11Pricing Strategies Segment ( 市场细分) Example Ultimate ( 最高) Mercedes-Benz vs. Rolls Royce Luxury ( 豪华 ) Audi vs. Lexus Special Need ( 特别需要 ) Volvo Middle ( 中档 ) Buick vs. Toyota Convenience ( 便利 ) Escort Me too,but cheaper ( 类似品，但较便宜 ) Hyundai Price Alone ( 价格导向 ) Daihatsu 1.1.1 The position of the product • For example if GM decides to produce a new sports car to compete with European sports cars in the higher-income segment, suggests charging a high price.
Chapter 11Pricing Strategies 1.1.2 the Pricing Objective • Survival • Maximum Current Profit • Maximum Current Revenue • Maximum Sales Growth • Maximum Market Skimming • Market share leadership • Product-Quality Leadership • Competition Restraining • price stabilization • …
Chapter 11Pricing Strategies 1.2 Determining Demand ＄15 ＄15 价 格 价 格 ＄10 ＄10 100 105 50 150 每期的需求数量 每期的需求数量
Chapter 11Pricing Strategies 1.2.1 Demand curve ●a curve that shows the number of units the market will buy in a given time period at different prices that might be charged.
Chapter 11Pricing Strategies The balance point supplies price demands Quantity sold 1.2.2the price-demand relationship ● the demand usually increases when price falls. But the rule is probably broken in some circumstances.
Chapter 11Pricing Strategies 1.2.3 Factors Affecting Demand- Price Sensitivity • Unique-Value Effect • Substitute-Awareness Effect • Difficult-Comparison Effect • Total-Expenditure Effect • End-Benefit Effect • Shared-Cost Effect • Sunk-Investment Effect • Price-Quality Effect • Inventory Effect
Chapter 11Pricing Strategies 1.2.4 Price elasticity ●Price elasticity: a measure of the sensitivity of demand to changes in price. It is described as follows: Price elasticity of demand =(% change in quantity demand) / (% change in price) or as follows:
Chapter 11Pricing Strategies ∞ × （1，∞）（elastic） E = 1 × （0，1）（inelastic） 0 × 1.2.4 Price elasticity • Discussion of price elasticity: • For elastic: ↓P → Q↑↑ → PQ ↑ → profit ↑ • For inelastic: ↑↑ P → Q ↓ → PQ ↑ → profit↑
Chapter 11Pricing Strategies 1.3 Estimating Costs • 1.3.1 Type of costs • 1.3.2 Cost Behavior • 1.3.3 The Experience Curve • 1.3.4 Cost ,variety and quality • 1.3.5 Pricing according to Cost
Chapter 11Pricing Strategies 1.3.1 Type of costs ●variable costs: costs that vary directly with the level of production. ●fixed costs: costs that do not vary with production or sale level. ●total costs: the sum of the fixed and variable costs for any given level of production. ●marginal costs: increased cost produce a unit of product. ●average costs: total costs/quantity produced = variable costs+ fixed costs /quantity produced
Chapter 11Pricing Strategies 短期平均 成本曲线 单 位 成 本 1 短期平均成本曲线 2 单 位 成 本 3 4 长期平均成本曲线 1,000 2,000 3,000 4,000 1，000 每天生产的数量 Cost Behavior Over Different-Size Plants （不同规模工厂的成本特性） Cost Behavior in a Fixed-Size Plant （在固定规模工厂中的成本特性） 1.3.2 Cost Behavior
Chapter 11Pricing Strategies 1.3.3 The Experience Curve The Experience Curve(经验曲线) · ＄10 当前价格 · A B · ＄8 单位成本 C 经验成本曲线 ＄6 ＄4 ＄2 800,000 100,000 200,000 400,000 Accumulated Production 积累生产
Chapter 11Pricing Strategies C 总质量成本 C 质量预防 O n 质量故障 O Quality Level 1.3.4 Cost ,variety and quality ◆成本与品种 ◆成本与质量水平
Chapter 11Pricing Strategies 1.3.5 Pricing according to Cost • Discussion: How pricing according to costs? ●if price≥average cost, then profits≥0. ●if price＜average cost, then profits＜0. Under some specific circumstances, it can be allowed, but price can't be lower than variable cost, so variable cost is usually considered the floor price. ●if price＜marginal cost, doesn’t mean lack of profit for a company thought negative profit per unit of product, because price might be higher than average cost, unless sold quantity excess a limited quantity.
Chapter 11Pricing Strategies Demand Price, cost,＄ Marginal cost Average cost Min Cost Max Profit Quantity produced 1.3.5 Pricing according to Cost • Discussion: How pricing according to costs?
Chapter 11Pricing Strategies 1.4 Analyzing Competitors’ Costs, prices, and Offers • Competitors’ costs, prices, and offers ●The company’s pricing strategy may affect the nature of the competition it faces. For example, If Canon follows a high-price, high-margin strategy, it may attract competition. A low-price, low-margin strategy, however, may stop competitors or drive them out of the market.
Chapter 11Pricing Strategies 1.4 Analyzing Competitors’ Costs, prices, and Offers ●The company’s pricing strategy may affect the nature of the competition it faces. For example, If Canon follows a high-price, high-margin strategy, it may attract competition. A low-price, low-margin strategy, however, may stop competitors or drive them out of the market.
Chapter 11Pricing Strategies 1.4 Analyzing Competitors’ Costs, prices, and Offers • different types of markets: ●Pure competition: priced by market ●Monopolisticcompetition: mainly priced by market competition, a trade arrangement is probably reached by sellers, but its binding force is feeble. ●Oligopolies competition (寡头竞争): priced by sellers’ arrangement ●Puremonopoly（独占）: priced by a seller
Chapter 11Pricing Strategies 1.5 Selecting Pricing Method • Markup Pricing • Target-Return Pricing • Perceived-Value Pricing • Value Pricing • Going-Rate Pricing • Sealed-Bid Pricing
Chapter 11Pricing Strategies Product costs Competitors’ price other internal and external factors Consumer Perceptions of value Price floor No profits below this price Price ceiling No demand above this price Pricing theories and approaches
Chapter 11Pricing Strategies 1.5 Selecting Pricing Method ●1.5.1 Cost-based pricing ●1.5.2 Break-even analysis and target profit pricing ●1.5.3 Value-based pricing ●1.5.4 Competition-based pricing ●1.5.5 Advantages and disadvantages of each pricing approach
Chapter 11Pricing Strategies 1.5.1 Cost-based pricing ●(1) Definition: adding a standard markup to the cost of the product. ●(2) Formation: ■product price= unit cost+ markup price, ■unit cost= variable cost + fixed costs / sales volume, ■markup price= unit cost × added rate, or=unit cost /(1-desired return on sales)
Chapter 11Pricing Strategies 1.5.2 Break-even analysis and target profit pricing ●(1)Definition: setting price to break even on the costs of making and marketing a product; or setting price to make a target profit. ●(2) Formation: ■ product price=unit variable cost+ (target profit +fixed cost)/ sales volume
Chapter 11Pricing Strategies Total income Income/profit/price Total cost Fixed cost Break even price Sales volume break-even volume • (3) Relation among sales volume, costs and profits Formation: profit=(price－variable cost) × production/sale volume－total fixed cost break-even volume = fixed cost / (price – variable cost)
Chapter 11Pricing Strategies (3) Relation among sales volume, costs and profits R=（P－Cv）×Q－Co R 、Co分为统计期的利润、固定成本 Q为统计期的产销量 Cv为单位产品的可变成本 ●pricing based on target profits
Chapter 11Pricing Strategies 1.5.3 Value-based pricing ●(1) Definition: setting price based on buyers’ perceptions of value rather than on the seller’s cost. ●(2) Value pricing: offering just the right combination of quality and good service at a fair price.
Chapter 11Pricing Strategies 1.5.3 Value-based pricing ●(3) The proceeding of value-based pricing Max Pricing: P = Pk Max｛R1，R2，…，Rk，…，Rn｝
Chapter 11Pricing Strategies 1.5.3 Value-based pricing ●(3) The proceeding of value-based pricing • Cost-based pricing product cost price value customers • Value-based pricing Customers value price cost product
Chapter 11Pricing Strategies 1.5.4 Competition-based pricing (1) Definition: setting prices based on the prices that competitors charge for similar products. (2)Forms: ● going-rate pricing ● sealed-bid pricing
Chapter 11Pricing Strategies 1.5.5 Advantages and disadvantages of each pricing approach • (1) cost-based pricing ◆简便、实用，将本求利，一般不会诱发价格竞争 ◆定价过程脱离市场，“闭门造车”，所定价格要么高于市场可接受价格，面临滞销风险；要么低于市场可接受价格，面临市场抢购和营销机会损失 ◆企业缺乏主动控制和降低成本的动力和压力
Chapter 11Pricing Strategies 1.5.5 Advantages and disadvantages of each pricing approach • (2) value-based pricing on the contrary with cost-based pricing
Chapter 11Pricing Strategies 1.5.5 Advantages and disadvantages of each pricing approach • (3) Competition-based pricing: ◆综合了以上两种方法的部分优点，如简便、富有价格竞争力、价格决定成本等 ◆价格刚性较强，有时对手的价格调整会导致企业“措手不及” ◆可能长期没有利润
Chapter 11Pricing Strategies 1.6 Selecting the Final Price • Psychological Pricing • The Influence of Other marketing-Mix Elements on Price • Company Pricing Policies • Impact of Price on Other parties
Chapter 11Pricing Strategies 2 Pricing Strategies • 2.1 New-product Pricing Strategies • 2.2 Price-adjustment Strategies
Chapter 11Pricing Strategies 2.1 New-product Pricing Strategies • Pricing strategies usually change as the product passes through its life cycle. The introductory stage is especially challenging. Companies bringing out a new product face the challenge of setting prices for the first time. They can choose their strategies: ● market-skimming pricing ● market-penetration pricing
Chapter 11Pricing Strategies 2.1.1 market-skimming pricing ●Definition: setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price. ●Applied conditions of market skimming: firstly, the product’ quality and image must support its higher price, and there are enough buyers at the level of higher price. secondly, the costs of producing a smaller volume cannot be so high that they counteract the advantage of higher price. finally, competitors should not be able to enter the market easily and undercut the high price.
Chapter 11Pricing Strategies 2.1.2 Market-penetration pricing • ●Definition: setting a low price for a new product in order to attract a large number of buyers and a large market share. • ● Applied conditions of market-penetration: • firstly, the market must be highly price sensitive so that a low price results in more selling growth. • secondly, production and distribution costs must fall as sales volume increases. • finally, the low price must help keep out the competition, and penetration price must maintain its low-price position. Otherwise, the price advantage may be only temporary.
Chapter 11Pricing Strategies 2.2 Price-adaptation Strategies • A company’s pricing decisions are affected by both internal company factors and external environmental factors. • Besides cost and demand,other external factors,such as economic situations,policies, laws and regulations as well as social concerns also influence price a lot. In setting prices, a company’s short-term sales, market share, and profit goals may have to be tempered（调节）by broadly societal considerations.
Chapter 11Pricing Strategies 2.2 Price- adaptation Strategies • Companies usually adjust their basic prices to account for various customer differences and changing situations.
Chapter 11Pricing Strategies 2.2 Price- adaptation Strategies • 2.2.1 Geographical Pricing (地理定价) • 2.2.2 Price Discounts and Allowance(价格折扣和折让) • 2.2.3 Promotional Pricing(促销定价) • 2.2.4 Discriminatory Pricing(差别定价) • 2.2.5 Product-Mix Pricing(产品组合定价)
Chapter 11Pricing Strategies 2.2.1 Geographical pricing • Geographical pricing：Adjusting prices to account for the geographic location of customers. Its forms are as follows: ● FOB-origin pricing（free on board） ● uniform-delivered pricing (统一价) ● zone pricing ● basing-point pricing ● freight-absorption pricing（含运费）
Chapter 11Pricing Strategies 2.2.1 Geographical pricing • International pricing: Adjusting prices for international markets.The price that a company should charge in a specific country depends on many factors, including economic conditions, laws and regulations, and development of the wholesaling and retailing system. Consumer perceptions and preferences(感觉与偏好) also may vary from country to country, calling for different prices.
Chapter 11Pricing Strategies 2.2.2 Discount and allowance pricing • Discount and allowance pricing: Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases, and off-season buying. Its forms are as follow: ● cash discount ● quantity discount ● functional discount ● seasonal discount ● allowances
Chapter 11Pricing Strategies 2.2.3 Promotional Pricing • Promotional pricing: Temporarily reducing prices, sometimes even below cost, to increase short-run sales. Its forms are as follows: ● discounts ● special-event pricing ● cash rebates ● low-interest financing ● longer warranties ● free maintenance Attention: used too frequently and copied by competitors, price promotions can create “deal-prone” customers who wait until brands go on sale before buying them. Or, constantly reduced prices can erode(腐蚀) a brand’s value in the eyes of customers.