Chapter 12:
PRICING STRATEGY
Daniel Gebhart
Peter Mühlbachler
Clemens Ornstein
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Roadmap
1.
2.
3.
4.
5.
6.
7.
8.
The economist‘s approach
Cost-orientated pricing
Competitor orientated pricing
Marketing orientated pricing
Factors of marketing orientated pricing
When and how to initiate price changes
Reacting to competitor‘s price changes
Ethical issues
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1. The economist‘s approach
Demand curves conzeptualize relationship
between price and quantity
Price elasticity determines effect of price
change
Preferences and other actors held constant
Field experiments difficult to implement
NO SINGLE DEMAND CURVE IN REAL LIFE
3
Shapiro & Jackson‘s pricing
methods
Pricing
cost
competition
marketing
4
2. Cost-orientated pricing
Full cost pricing
• Sales estimate set in advance
• Full cost = Fixed cost + direct cost
• Price = (full cost + mark up) : estimated sales
price goes up as sales go down
Focusses on internal costs
Direct cost pricing
• Price = direct cost + markup
Full cost not covered
5
3. Competitor orientated
pricing
Going-Rate Pricing
• Price = Market Price
No Differential Advantage
Competitive Bidding
• Buyer specifies product properties
• Buyer puts contract out to tender
• Expected profit = profit x probability of winning
Probability difficult to estimate
Desparate rival trades off profit for chance of winning
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4. Marketing orientated pricing
Costs
Value to customer
Political factors
Marketing
orientated
pricing
Effect on distributors
& retailers
Price-Quality
relationship
Product line pricing
Negotiating margins
explicability
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4. Marketing orientated pricing
Costs
Marketing Strategy
Value to customer
Political factors
Effect on distributors
& retailers
Marketing
orientated
pricing
Price-Quality
relationship
Product line pricing
Negotiating margins
Competition
explicability
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5. Marketing Strategy
Pricing new products
Positioning strategy: where and how to compete
Launch strategy: price in accordance with other elements of
the marketing mix
Promotion
High
P
r
i
c
e
Low
High
Rapid Skimming
Slow Skimming
Low
Rapid Penetration
Slow Penetration
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Characteristics of high price
market segments
1.
2.
3.
4.
5.
6.
High value to the customer
High ability to pay
Billpayer and consumer are different
Lack of competition
Excess demand
High pressure to buy
10
Conditions for charging low
prices
1.
2.
3.
4.
5.
6.
7.
Only feasible alternative
Market penetration or domination
Experience curve effect, low costs
Make money later
Make money elsewhere
Barrier to entry
Predation
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5. Marketing Strategy
Pricing existing products
4 Strategic objectives:
Build: lowest price
Hold: match price
Harvest: premium prices
Reposition: price change
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5. Value to the customer
Buy-response method
Trade-off analysis
• Measure trade-off between price and other product features
•(preference contribution)
Experimentation
• Controlled store experiment: stores vary price levels, comparison
of sales level and profit contribution
• Test marketing: effect of price measured in two areas
Econmic value to the customer analysis(EVC)
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Ad EVC:
Used in industrial markets
Requires well-trained salesforce
Reference
Product
New
Product Y
New
Product X
Purchase Price
Purchase Price
Purchase Price
Start-up Costs
Start-up Costs
Start-up Costs
Post
Purchase
Costs
Post
Purchase
Costs
Post
Purchase
Costs
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5. Furter factors
of marketing
orientated pricing
3. Price quality relationship
• price gives quality cues
• used where objective measurement is impossible
4. Product line pricing
• price has to fit existing product line
5. Explicability
• price has to be justifiable
6. Competition
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Ad competition
Different products
solving problem
in a similiar way
Tertiary competitors
Different products
solving problem
in a different way
Secondary
competitors
Immediate
competitors
Technically
similiar
products
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5. Further factors
of marketing
orientated pricing
7. Negotiating margins
• price waterfall: enable price to differ from list price
8. Effect on distribtors & retailers
• margins are neccessary for them
9. Political Factors
• government intervention might force price down
10. Costs
• must be covered
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6. Initiating price changes
Increases
Cuts
Circumstances
Value greater than price
Rising costs
Excess demand
Harvest objective
Value less than price
Excess supply
Build objective
Price war unlikely
Pre-empt competetive entry
Tactics
Price jump
Staged price increases
Escalator clauses
Price unbundling
Lower discounts
Price fall
Staged price reductions
Fighter brands
Price bundling
Higher discounts
Estimating
competitor
reaction
Strategic object
self interest
Competetive situation
Past experience
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7. Reacting to competitor‘s
price changes
Increases
Cuts
When to follow
Rising costs
Excess demand
Price-insensitive customers
Price rise compatible with
brand image
Harvest or hold objective
Falling costs
Excess supply
Price-sensitive customers
Price fall compatible with
brand image
Build or hold objectives
When to
ignore
Stable or falling costs
Excess supply
Price-sensitive customers
Price rise incompatible with
brand image
Build objective
Rising costs
Excess demand
Price-insensitive customers
Price fall incompatible with
brand image
Harvest objective
Tactics
Quick response
slow response
Margin improvement urgent
Gains to be made by being
customer’s friend
Offset competitive threat
High customer loyalty
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8. Ethical issues
Price fixing
Predatory pricing
Deceptive pricing
Penetration pricing and obesity
Price discrimination
Product dumping
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Sources
Jobber: Principles and Practice of Marketing
(5th edition), McGrawHill 2007
Perloff: Microeconomics (4th edition),
Pearson 2007
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