Pricing
After today’s class you should understand:
• The factors to consider in pricing
• How pricing relates to other parts of the
marketing mix
• How pricing strategies vary across the
product lifecycle.
Internal Factors to Consider in
Pricing
• Marketing Objectives
–
–
–
–
Survival (Penetration)
Current Profit Maximization (Skimming)
Market Share Leadership (Penetration)
Product Quality Leadership (Skimming)
• Costs
– Caapcity (Don’t vary with production)
» overhead
– Variable (Vary directly with every unit produced)
» Materials
– Expenses (Controllable and Vary depending on the sales
goals for the period.)
» Promotional/Selling Costs
The Learning Curve and Pricing
• As people do the same thing over and over
they do it faster and with less mistakes. This
is known as the learning curve.
• Companies which make a lot of a product
tend to have variable cost advantages.
• In addition, companies which make a lot of a
product have low fixed costs per unit.
• Thus, they can price lower and still make the
same gross margin as another company. This
can be a strategic competitive advantage.
The Learning Curve-An
Example
Company A
Units
50,000
Fixed Costs $100,000
Fixed Costs
per unit
$2.00
Variable
costs per unit $1.00
Total Costs
per unit
$3.00
Company B
100,000
$125,000
$1.25
$.75
$2.00
Price Elasticity of Demand
% change in quantity demanded
% change in price
• The more elastic the demand the more it pays
for the seller to lower the price.
Quick Think: What are the
Factors influencing Price
Elasticity
Drivers of the factors
influencing price elasticity
The other elements of the marketing mix.
Product
Place
Promotion
Buyer Reaction to Price
Changes
• Reference prices are prices that customers
carry around in their mind when they look at a
given product.
• Promotional pricing tends to lower reference
prices.
• Once you’ve lowered the reference price it is
very difficult to raise it again.
• Ways to successfully raise price
– Negotiated pre-agreements
– Successful arguments based on cost or inflation
increases
– Unbundling
– Salesforce management
Competitor responses to Price
Changes
• Competitors are most likely to react when
–
–
–
–
The competitor is large
The number of competitors in the market is small
When the product is uniform
When buyers are well-informed
• Competitor interpretations of price cuts
– A market share grab
– A company in trouble
– Company wants the industry as a whole to reduce prices
and increase the size of the pie.