CHAPTER 8
PRICING STRATEGY
PRICING STRATEGY
• Price Theory and Practice
• Incremental Pricing
• Bases for Price Decisions
• Price Discounts
• Special Pricing Issues
PRICE THEORY AND PRACTICE
• Price Theory (Economics)
- Dominance of pricing
• Pricing in Practice (Business)
- Influence of non-price factors
P
D
D
D
(non-price)
1
D
1
Q
Shifting the demand curve to the right
USEFUL CONCEPTS FOR
PRICING STRATEGY
• Price Elasticity
– Elastic demand
– Inelastic demand
• Cost Concepts
– Fixed cost
– Variable cost
INCREMENTAL PRICING
Using contribution to profit as the criteria for
measuring profitability rather than net profit.
Contribution to Profit = Total Revenue – Variable Cost
Net Profit = Total Revenue – Total Cost
CONDITIONS FAVORABLE FOR
INCREMENTAL PRICING
• Heavy Fixed Cost
• Excess Production Capacity
• Price-Sensitive Niche
• Isolate from Core Market
INCREMENTAL PRICING EXAMPLES
• Wall Street Journal
• Hotels
• Matinee movies
• Happy hour
WALL STREET JOURNAL
(Yearly Rate)
Business Rate
$150
Student Rate
$50
Library Rate
$300
INCREMENTAL PRICING OF
SERVICES BY TIME
Hours in the Day
Matinee movies
Days of the Week
Weekend hotels
Seasons of the Year
Income tax preparation
BASES FOR PRICE DECISIONS
• Based on Demand of Buyer
• Based on Cost of Seller
• Based on Competitor Prices
DEMAND-BASED PRICING
• New product pricing
• Perceived Value
• Yield Management
NEW PRODUCT PRICING
• New Product Skimming
• New Product Penetration
NEW PRODUCT SKIMMING
• Set high initial price
• Recover R&D quickly
• Drop prices over time
PRODUCT SKIMMING EXAMPLES
• Intel chips
• Flat panel TVs
• Smart Phones
NEW PRODUCT PENETRATION
• Set low initial price
• Gain market share
• Discourage competition
PRODUCT PENETRATION EXAMPLES
• Southwest airlines
• Two-Buck Chuck wine
• Samsung
PERCEIVED VALUE PRICING
• Rolex Watches
• 3M Post-It-Notes
• Business Lunches
YIELD MANAGEMENT PRICING
• Airlines
• Hotels
• Utility Pricing
COST-BASED PRICING
• Cost Plus
• Billable Hours
• Add-on Charges
• Markups
COST-BASED EXAMPLES
• Lawyer sets billable cost at $400 per hour
• Boeing has a cost-plus contract with NASA
• Star Furniture marks up their furniture 50%
above cost
ADD-ON PRICE EXAMPLES
• Airlines
• Credit cards
• Telephone services
SPIRIT BAGGAGE FEES
Book Over Phone
$10
Roller Bag
$30
Water
$3
Boarding Passes
Printed at Airport
$10
Booking Over Internet
$17
COMPETITION – BASED PRICING
• Competitive Price Wars
• Lower Cost
• Administered Pricing
COMPETITION-BASED EXAMPLES
• HEB Price War
• Two Buck Chuck Wine
• Price of Basic Steel
TWO BUCK CHUCK WINE
• Sold only in Trader Joe’s gourmet stores
• Overproduction of California grapes
• Produce own grapes at very low cost
PARKER HANNIFIN
PRICING STRATEGY
“A” Products
High-volume commodities
“B” Products
More specialized niches
“C” Products
Limited Competition
“D” Products
No direct competitor
PRICE DISCOUNTS
• Cash Discounts
– 5% off at Spec’s if you pay by cash
• Seasonal Discounts
– Cheaper prices on December 26
• Trade Discounts
– Cheaper prices to Wholesalers
• Promotional Discounts
– Weekend specials at Supermarkets
SPECIAL PRICING ISSUES
• Pricing Choices
• Other Pricing Options
• Psychological Pricing
• Questionable Pricing
• Price Stability/Competition
PRICING CHOICES
• Fixed Pricing
– Price is fixed by the seller at any one
period of time
• Negotiated Pricing
– Price is negotiated between a buyer
and a seller for each transaction
FIXED PRICING
• Paying the monthly telephone bill
• Buying canned goods at the supermarket
• Parking at the Reliant Stadium
NEGOTIATED PRICING
• Buying an automobile
• Selling a house
• Garage sale
• Showrooming
OTHER PRICING OPTIONS
• Freemium Pricing
• Reference Pricing
• A La Carte Cable Pricing
PSYCHOLOGICAL PRICING
• $199.95
• $.99
• Buy one, get one free
QUESTIONABLE PRICING
• Bait and Switch
• Price Gouging
• Price Fixing
• Pricing of E-Books
PRICE MODELS FOR E-BOOKS
• Wholesale model
• Agency model
WHOLESALE PRICING MODEL FOR
SELLING E-BOOKS
• Book publisher sets list price at $25
• Seller buys at $12.50 and sells for $25
• Amazon.com buys at $12.50 and sells for $9.99
AGENCY PRICING MODEL FOR
SELLING E-BOOKS
• Book publisher sets list price at $25
• Apple receives 30% of list price $7.50
sold through iPads
• All sellers are required to sell book at
$25 (including Amazon.com)
WHO WANTS PRICE COMPETITION?
• Discount retailers
• Foreign competitors
• Firms with low costs
• Internet Sellers
WHO WANTS PRICE STABILITY?
• Oligopolies
• Small businesses
• Professional services
• Traditional brokers and agents