• Pricing Strategy and Determination
LEARNING OBJECTIVES
• Define price and explain why cost-based
Define price
and
explain are
whyused
cost-based
pricing
methods
so widely,
pricing methods
are used
so widely, despite
despite their
drawbacks.
their drawbacks
• Incorporate demand considerations into
pricing and determine a short-term
Incorporate
demand considerations
into pricing
profit-maximizing
price.
and determine a short-term profit-maximizing
• Identify and explain strategic drivers of
price
prices.
Identify and explain strategic drivers of prices
LEARNING OBJECTIVES
• Explain and evaluate reasons why base
Explain prices
and evaluate
why
changereasons
over time
in base
both prices
business
change and
overconsumer
time in both
business and
markets.
consumer
markets
• Explain
basic legal and ethical constraints
on pricing behavior.
Explain basic legal and ethical constraints on
pricing behavior
WHAT IS PRICE?
• Price is some unit of value given up by
party in return for something from
another party.
WHAT DETERMINES BASE PRICE?
• Insert Figure 14.1
Base Price
Selection
Possible Adjustments
To Base Price
Over time
Cost
WHAT DETERMINES BASE PRICE?
• Insert Figure 14.2
WHAT DETERMINES BASE PRICE?
• Cost-Plus Pricing
 Easiest, often misleading
 A simple allocation of fixed and variable costs
 Standard mark-up - a standard profit margin
 Target return pricing - a standard amount of
profit per item
 Ignores demand (price sensitivity) and fails to
account for competition
WHAT DETERMINES BASE PRICE?
• Demand Pricing
 Based on the elasticity of demand
• Higher prices are favored with inelastic
– Price increases offset volume losses
• Lower prices are favored with elastic
– Volume increases offset price reductions
• Consumers are indifferent with unitary demand
 Breakeven analysis
 Demand schedules
Break-Even Analysis
• Insert Table 14.1
The Demand Schedule
• Insert Table 14.2
The Demand Schedule
• Insert Table 14.3
The Demand Schedule
• Insert Table 14.4
The Demand Schedule
• Insert Figure 14.3
The Demand Schedule
• Insert Figure 14.4
The Demand Schedule
• Insert Figure 14.5
WHAT DETERMINES BASE PRICE?
• Demand Pricing
 Profit-Maximization
• Calculate the profit at each price point on a
demand curve and choose the highest
• In other words, which price produces the highest
total contribution
• Verified by observing marginal revenue and cost
figures
WHAT DETERMINES BASE PRICE?
• Demand Pricing
 Where does demand information come from?
•
•
•
•
Analytic modeling
Experiments
Customer surveys
Managerial judgment
WHAT DETERMINES BASE PRICE?
• Insert Table 14.6
WHAT DETERMINES BASE PRICE?
• Insert Table 14.7
WHAT DETERMINES BASE PRICE?
Demand
• Insert Figure
(Customer14.6
Price Response)
Legal/Ethical
Concerns
Strategic Concerns:
•Positioning/Competition
•Objectives
•New Product Pricing
•Price/Quality Signaling
Base Price
Selection
Cost
Possible Adjustments
To Base Price
Over Time
PRICING STRATEGIES: PRICE
DRIVERS
Low cost
focus
Differentiation
focus
price
unique
Competitive Strategy Positioning Continuum
PRICING STRATEGIES: PRICE
DRIVERS
Low cost
focus
Differentiation
focus
price
unique
Competitive Strategy Positioning Continuum
PRICING STRATEGIES: PRICE
DRIVERS
Low cost
focus
Differentiation
focus
price
unique
Competitive Strategy Positioning Continuum
PRICING STRATEGIES: PRICE
DRIVERS
• Objectives
 Goal-setting/Objective-setting
 Pricing to achieve a target ROI
 Pricing to stabilize price and margin
 Pricing to reach a target market share
 Pricing to meet or prevent competition
 Pricing for profit maximization
 Pricing for survival
New Product Pricing
Skimming
Pricing
Strategy
Penetration
Pricing
Strategy
Maturity
Growth
Introduction
• New product pricing
Skimming Vs. Penetration
Decline
New Product Pricing
Skimming
Pricing
Strategy
Maturity
Growth
Introduction
• High initial price for quick ROI
• Inelastic demand
• Price insensitivity by the market
Decline
New Product Pricing
Penetration
Pricing
Strategy
Maturity
Growth
Introduction
• Low initial price with elastic demand
• Volume for lower production costs
• Imminent competition
Decline
New Product Pricing
• Price-Quality judgments
 Customers uncertain about brand quality prior
to purchase look to price
 Customers look to price in high risk purchases
EXPLAINING ADJUSTMENTS TO BASE
PRICE OVER TIME
Demand
(Customer Price Response)
Legal/Ethical
Concerns
Strategic Concerns:
•Positioning/Competition
•Objectives
•New Product Pricing
•Price/Quality Signaling
Product Life
Cycle Stage
Competitive
Price Moves
Base Price
Selection
Cost
Possible Adjustments
To Base Price
Over Time
Price Flexing:
Consumers
•Price Promotion
•Couponing
•Segmented Pricing
•Customization
Price Flexing
Business Customers
•Price Shading
•Cash/Payment Disc.
•Volume Disc.
•Geographic Pricing
•Sales Promo. Allow.
•Creative Alternatives
•Customization
LEGAL AND ETHICAL ISSUES IN
PRICING
• Price Fixing
 Violation of Sherman Anti-Trust Act
 Conspiring to restrain trade
LEGAL AND ETHICAL ISSUES IN
PRICING
• Resale Price Maintenance
 When a manufacturer and retailer agree on a
minimum price to be charged to consumers at
retail
• Manufacturers can set suggested prices (MSRP)
• Legal to stop selling to retailers who ignore MSRP
LEGAL AND ETHICAL ISSUES IN
PRICING
• Predatory Pricing
 Aggressive pricing to drive out newer, smaller
rivals
 After removal of rival, prices are raised again
LEGAL AND ETHICAL ISSUES IN
PRICING
• Exaggerated Comparative Price
Advertising
 Using comparison prices of dubious validity
 Product introduced at artificially high prices for
a short time then dropped to a new low longterm price
LEGAL AND ETHICAL ISSUES IN
PRICING
• Ethical Concerns
 Price gouging laws
 ATM fee practices
 Raising prices for necessities in disaster areas
Supplemental Material
Price Flexing Discounts/Allowances
• Reasons base prices change over time:
 Price Flexing - Discounts/Allowances
To Consumer
To Trade
Trade-in Allowances
Functional Or Trade
Cash Discounts
Seasonal
Rebates
Quantity
Cash
Sales Promotion
Price Flexing Discounts/Allowances
To Consumer
Trade-in Allowances
Cash Discounts
Rebates
• Used to encourage
consumers to
upgrade to newer
or more expensive
products
Price Flexing Discounts/Allowances
To Consumer
Trade-in Allowances
Cash Discounts
Rebates
• Seasonal or agebased discounts
used to encourage
purchases
Price Flexing Discounts/Allowances
To Consumer
Trade-in Allowances
Cash Discounts
Rebates
• After the purchase
payment made to
the consumer by
the producer
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
• Compensate the trade
for functions
performed:







Buying & Selling
Transportation
Storage
Financing
Risk-taking
Providing Information
Standardizing & Grading
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
• Permits seasonal
marketers to
maintain steady
production and to
sustain operations
in out-of-season
lulls
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Quantity
Price
Seasonal
Cash
Spring
Sales Promotion
Summer
Fall
Winter
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
• Induce larger-quantity
purchases and to
reward customers for
making fewer
purchases but
purchasing in larger
quantities
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
• Encourage prompt
payment from
customers. Invoice
includes payment
terms and period of
time that the cash
discount is available
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
• Two percent off the
total invoice price if
paid within 10 days of
the invoice date.
Otherwise the total
invoice price is due in
30 days
Cash
Sales Promotion
2/10, Net 30
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
• Used by producers
to encourage
greater purchases
or used to induce
retailers to provide
shelf or display
space
Price Flexing Discounts/Allowances
To Trade
Functional Or Trade
Seasonal
Off-Invoice
Allowances
Quantity
Cash
Sales Promotion
Bill-Back Allowances
Stocking Allowances
Geographic Pricing Policies
FOB
Pricing
Uniform
Delivered
Pricing
Zone
Basing-Point
Pricing
Pricing
Geographic Pricing Policies
FOB
Basing-Point
Pricing
Pricing
Zone
Pricing
Uniform
Delivered
Pricing
• Using freight absorption pricing (FOB - Free On
Board) the seller pays or absorbs the transportation
charges
Geographic Pricing Policies
FOB
Basing-Point
Pricing
Pricing
Zone
Pricing
Uniform
Delivered
Pricing
• Using zone pricing all consumers in the same zone
pay the same transportation charge
Geographic Pricing Policies
FOB
Basing-Point
Pricing
Pricing
Zone
Pricing
Uniform
Delivered
Pricing
• Using basing-point pricing, all freight costs are
priced as if they originated from the same basing
point
Geographic Pricing Policies
FOB
Basing-Point
Pricing
Pricing
Zone
Pricing
Uniform
Delivered
Pricing
• Using uniform delivered pricing all consumers pay
the same transportation charges (average shipping
expense to all customers)
Pricing Policies
Prestige
Pricing
Loss-Leader
Pricing
Odd-Even
Pricing
Product Line
Pricing
Pricing Policies
Prestige
Pricing
Loss-Leader
Pricing
Odd-Even
Pricing
Product Line
Pricing
• Pricing at relatively high levels so as to convey
an image of high quality or exclusivity
Pricing Policies
Prestige
Pricing
Loss-Leader
Pricing
Odd-Even
Pricing
Product Line
Pricing
• Pricing policy which offers products at prices
below or near cost to attract consumers from
competitors’ stores
Pricing Policies
Prestige
Pricing
Loss-Leader
Pricing
Odd-Even
Pricing
Product Line
Pricing
• Price lining is producing or marketing multiple products
at different price points
• Bundling is marketing two or more products in a single
package for a special price
Pricing Policies
Prestige
Pricing
Loss-Leader
Pricing
Odd-Even
Pricing
Product Line
Pricing
• Odd pricing refers to a price ending with an odd
number just under a round number
• Even pricing is used to convey high quality