Pricing strategy
Chapter 11
Group 8
Julia Kosch, Katharina Sitter, Shi Yue, Lukas
Weghofer
1
Overview
1. Introduction
2. The economist´s approach to price
3.
4.
5.
6.
7.
8.
determination
Full cost and direct cost pricing
Competitor orientated pricing
Marketing-orientated pricing
Initiating price changes
Reacting to competitors’ price changes
Ethical issues in pricing
2
1) Introduction
ÆPrice
• one of the 4 P´s
• return for manufacturing and marketing the product
• other 3 P´s are costs
• has to cover costs otherwise losses
• undercharging (lost margin) and overcharging (lost
•
sales) can have dramatic effects on profitability
important part of positioning strategy Æ sends quality
cues to customers.
3
2)Economists´approach to pricing
ÆDemand curves:
• relationship between quantity
demanded & different price levels
Econweb, Introduction to macroeconomic
• elastic: fall in price Æ
large increase in
demand
• Inelastic: fall in price
Æ small increase in
demand
Sharp et all, economics of social issues, Mc-Graw Hill
4
ÆShapiro and Jackson identified 3 methods
used by managers to set prices
1. internal orientated pricing is based on
costs
2. competitor orientated pricing focuses on
competitor activities
3. marketing orientated pricing acts on
value customers place on a product
5
3) Full cost and direct cost pricing
ÆCost orientated pricing, the 2 forms are:
-full cost
-direct (marginal) cost pricing
3.1 Full cost pricing
• fixed and direct costs
• increase in price Æ sales fall
• sales estimation made before price is set
• internal costs rather than customers´ willingness
to pay
• indication of minimum price to make a profit
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3.2 Direct cost pricing
• costs that likely to rise as output rises
• doesn´t cover full costs
• useful for service marketing e.g seats in an
•
•
aircraft or rooms in hotels Æ can´t be stored
lowest price sensible to take business if
alternative is to let the machinery (seats, rooms)
unused
can´t be used in longterm Æ fixed costs must
be covered to make profits
7
4.) Competitor-orientated pricing
• Going-rate pricing
•
- when there is no differentiation between products
- for economists it is the principle of perfect competition
Competitive bidding
buyer selects the supplier that quotes the lowest price
Æ important to know competitor`s bids
statistic model:
expected profit= profit*probability of winning
disadvantages of the model:
difficult to express the probability to win
the model can only be used for long term calculations
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5.) Marketing-orientated pricing
5.1 Marketing strategy
Pricing new products:
- positionig strategy (choice of target market and
creating a differential advantage
- launch strategy
Promotion
high
low
high
rapid
skimming
slow
skimming
low
rapid
penetration
slow
penetration
Price
Jobber, Principles and Practice of Marketing
9
5.) Marketing-orientated pricing
Characteristics of high
price market segments:
-High value for customers
-High ability to pay
-Consumer and bill payer are
different
-Lack of competition
-High pressure to buy
Conditions for
charging low prices:
- only alternative
-Wish to gain market
presence
- cost reduction trough
experience curve
- make money later/elsewhere
- entry barrier
-predatory pricing
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5.) Marketing-orientated pricing
5.2 Value to customer
buy respond method: customers are asked if
they`d buy a product at varying prices
trade off analysis: measures the trade off
between price and other features
experimentation: to place a product on sale at
different locations with different prices
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5.) Marketing-orientated pricing
Economic Value to Customer (EVC):
-Used in industrial markets
-The higher the EVC, the higher
the price can be
-X could be cheaper than reference
product
-with an EVC 80 000 the life cycle
costs would be the same
-every price below 80 000
is an incentive to buy
Life-cycle
cost
200 000
200 000
Purchase
price
50 000
EVC=
80 000
Start up
costs
30 000
20 000
120 000
Post-purchase
costs
100 000
Reference
product
New product
X
Jobber, Principles and Practise of Marketing
12
5.) Marketing-orientated pricing
5.3 Price-quality relationship
People often use price as an indicator for quality
5.4 Product line pricing
the price needs to fit into the existing product line
5.5 Explicability
economic justification of prices
5.6 Competition
3 layers: direct, secondary and tertiary competition
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5.) Marketing-orientated pricing
5.7 Negotiating margins
allow prices to fall from list level but still
permit profitable transactions
5.8 Effect on distributor/retailer
They only include a product into their range if they
think it will sell well
5.9 Political factors
sometimes governments intervene
5.10Costs
can act as an restraint
14
6.) Initiating price changes
Circumstances
Tactics
Increases
Value greater than price
Rising costs
Excess demand
Harvest objective
Cuts
Value less than price
Excess supply
Build objective
Price war unlikely
Pre-empt competitive entry
Price jump
Staged price increases
Escalator clauses
Price unbundling
Lower discounts
Price fall
Staged price reductions
Fighter brand
Price bundling
Higher discounts
Estimating competitor
reaction
Stratregic objectives
Self-interest
Competitive situation
Past experience
Jobber, Principles and Practise of Marketing
15
7) Reacting to competitors’ price
changes
When to follow?
Increases:
• Rising costs
• Excess of Demand
• Price-insensitive
•
•
customers
Price rise is
compatible with brand
image
Harvest or hold
objective
Cuts:
• Falling costs
• Excess of Supply
• Price-sensitive
•
•
customers
Price fall is compatible
with brand image
Build or hold objective
16
7) Reacting to competitors’ price
changes
When to ignore?
Increases:
Cuts:
• Stable or falling costs
• Excess of supply
• Price-sensitive
• Rising costs
• Excess of demand
• Price-insensitive
•
•
•
customers
Price rise incopatible
with brand image
Build objective
•
customers
Price fall incompatible
with brand image
Harvest objective
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7) Reacting to competitors’ price
changes
ÆTactics
• A quick price reaction: if urgent need to
improve profit margins
• A slow reaction: when image of being the
customers friend is being sought
18
8) Ethical issues in pricing
• Price fixing
• Predatory pricing
• Deceptive pricing
• Penetration pricing and obesity
• Price discrimination
• Product dumping
19
Sources
• Jobber, Principles and practice of Marketing
• http://www.mhhe.com/economics/sharp/student/ch13_d
•
etails.mhtml
http://www.econweb.com/MacroWelcome/sandd/notes.h
tml
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