Kent 29
BAD 67051
Marketing Management
Lecture 3
Pricing
Managing Pricing
I. Pricing Programs
A. What is Price?
Price is the VALUE of a bundle of
attributes to the customer.
I. Pricing Programs
A. What is Price?
B. Importance of Price?
Price as a Marketing Mix
Variable
Target
Market
Desired
Attributes
Product:
Engineering Excellence
High Status
High Quality Components
Promotion:
“Classy & Upscale”
Media?
Style?
Distribution:
Exclusive
QUESTION
What Price Fits the Mix:
Premium? Market? Discount?
Possible Range of Prices
VARIABLE
COST
=
Absolute
Minimum
VALUE to
Customer
=
Absolute
Maximum
Pricing Strategy Fundamentals
1. Determine the Strategic Pricing
Objectives
2. Know the Importance of Pricing to Your
Target Audience
• (e.g., Perceived Value)
3. Know the Demand for Your Product
(how will price affect it?)
• (e.g., Price Elasticity of demand)
Pricing Strategy Fundamentals
4. Understand Costs
• Your Own
• Your Competitors’
Pricing Strategy Fundamentals
5. Determine Your Pricing Strategy
• Make Contingency Plans for special
situations
• Variations in Demand
• Geographic Variations
• Market Segment Differences
• Channel Differences
Income Oriented Objectives
A. Target Return on Investment (ROI)
•Achieve high turnover
•Drop product lines that cannot reach
required RO
B. Maximize Profits
•Control costs and adjust price
•Some items in a mix may achieve this
goal
C. Increase cash flow
•Adjust prices and discounts
•Encourage purchases and rapid payment
Income Oriented Objectives
D. Keep a Going Concern
•Adapt prices to "hold on"
•Going concern is easier to sell
E. Survive
•Set prices to "scrape by"
•Survive economic storm or achieve
owner retirement
Sales Oriented Objectives
A. Maintain Market Share
•Keep sales in roughly the same position
relative to those of competitors
•Firms want to keep leadership positions
B. Encourage Sales Growth
•Adjust price and discounts
•Encourage more purchases by existing
buyers and attract new buyers
Competition-Oriented
Objectives
A. Meet Competition:
•Set prices and discounts about equal to
those of competitors
•Avoid price competition; price stabilization
B. Avoid Competition:
•Set prices at a level that will discourage
competition in the firm's market
•Develop a distinctive image or use as a
defensive move
Competition-Oriented
Objectives
C. Undercut Competition:
•Set prices lower than the competition's
•Project bargain image or increase share
Objectives of Social Concern
A. Behave Ethically
• Due to special considerations, set prices
at levels lower than they could have been
• Avoid government regulations; long-term
view
B. Maintain Employment
• Set prices at levels that will maintain
production and employment of workers
• Support community commitment;
increase attraction for a buyer
II. Details of Two Approaches
to Pricing
A. Cost Driven Pricing
1. Mark-up or Cost-plus
1. Mark-up or Cost-plus
Total Cost = Fixed Cost + Variable Cost
OR
Total Cost = Fixed Cost + (Estimated Quantity
x Unit Variable Cost)
1. Mark-up or Cost-plus
TO SET PRICE:
1) Estimate Total Cost Per Unit
2) Apply the “Formula”
e.g., TOTAL COST + 50%
(see spread sheet example)
Problem
IGNORES demand
Advantage
SIMPLE
A. Cost Driven Pricing
1. Mark-up or Cost-plus
2. Target Return on Investment or
Target Pricing
Review Break Even
Break Even Point
(in Units)
=
FC
(SP-VC)
5000000
(15.00-6.25)
571,428.6 units
Review Break Even
Break Even Point
FC
(in Dollars)
= 1-(VC/SP)
5,000,000
1-(6.25/15)
$8,571,429
2. Target Return on
Investment or Target Pricing
Costs
&
Revenue
Total Revenue
$
Total Cost
Fixed Costs
800
a.
b.
c.
d.
Units (000’s)
Estimated Unit Cost = $12.50
Estimated Sales Volume = 800,000 units
TOTAL COST = $10,000,000
Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit
2. Target Return on
Investment or Target Pricing
d. Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit
e. Needed (Target) Revenue =
Total Cost + Profit
= $10,000,000 + $2,000,000 = $12,000,000
f. Unit Price
= REVENUE / VOLUME
= $12,000,000 / 800,000
=$15.00 / Unit Price
2. Target Return on
Investment or Target Pricing
g. Problems
--Must be able to forecast the demand
--Will the customer pay the price?
B. Market or Demand Driven
Pricing
1. Perceived Value Pricing
1. Perceived Value Pricing
Scripto
--Weak with teens and young adults
--Found 42% of Eraser Mate bought by 11
- 14 year olds
--Established “Value” in Focus Group
Research
--Verified in Placement Tests
--Market Success
B. Market or Demand Driven
Pricing
1. Perceived Value Pricing
2. Demand and Elasticity
--Kinked Demand Curves
III. Pricing By Market
Leaders
A. Price Skimming
1. Price Skimming Defined
2. Relationship to Product Life Cycle
(PLC)
3. Advantage
4. Disadvantage
B. Umbrella Pricing
1. Umbrella Pricing Defined
1. Umbrella Pricing Defined
Price / Cost
Skim
Umbrella
Cost Curve
Time/Experience
B. Umbrella Pricing
1. Umbrella Pricing Defined
2. Relationship to Product Life Cycle
(PLC)
3. Advantage
4. Disadvantage
C. Slide Down the Demand
Curve
1. Slide Down the Demand Curve Defined
1. Slide Down the Demand
Curve Defined
Price / Cost
Skim
Cost Curve
Time/Experience
C. Slide Down the Demand
Curve
1. Slide Down the Demand Curve Defined
2. Relationship to Product Life Cycle
(PLC)
3. Advantage
4. Disadvantage
D. Penetration Pricing
1. Penetration Pricing Defined
1. Penetration Pricing Defined
Price / Cost
Small Margin
Price
Cost Curve
Time/Experience
D. Penetration Pricing
1. Penetration Pricing Defined
2. Relationship to Product Life Cycle
(PLC)
3. Advantage
4. Disadvantage
IV. Follower Pricing
A. Meet Competition (Parity Pricing)
B. Build Share (Penetration Pricing)
V. Pre-emptive or Extinction
Pricing
1. Defined
2. Not Recommended (Illegal)