Pricing Alternatives.. - Southern Methodist University
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Professor Chip Besio Cox School of Business Southern Methodist University Pricing Considerations Objectives: Enhance brand image Provide customer value Obtain an adequate ROI Maximize profits Maintain price stability in an industry or market Factors Affecting Pricing Internal Factors Costs Product, Strategy Pricing Decisions External Factors Competitors Customers Pricing Considerations Factors Effecting Pricing: Demand sets price ceiling Cost sets price floor Consumer value perceptions Consumer price sensitivity Government regulations Pricing Considerations Factors Effecting Pricing: Product/Service differentiation Organization’s financial goals Stage of Product Life Cycle Marketing Channel margin impact Prices of other products in mix Customer Considerations PRICE SENSITIVITY Product categories are not uniformly responsive to prices -- some are more sensitive to price levels than others Customers also may respond differently than one another to price levels Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price Price Pricing Considerations PRICE SENSITIVITY A. Inelastic Demand Demand hardly changes with a small change in price P2 P1 Price Q2 Q1 Quantity Demanded per Period P2 B. Elastic Demand Demand changes greatly with a small change in price P1 Q 2 Q 1 Quantity Demanded per Period Product-Based Pricing Approaches Product Line Pricing Setting price steps between product line items i.e. $299, $399 Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Source: Prentice Hall Cost Considerations Fixed Costs (Overhead) Variable Costs Costs that don’t vary with sales or production levels. Costs that do vary directly with the level of production. Executive Salaries Rent Raw materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Recall that costs may depend on the production level Cost Based Pricing Strategies Full Cost Strategies Variable Cost Strategies New-Offering Strategies Competitive Bidding Cost Based Pricing Strategies Full Cost Strategies Markup Pricing Break-even Pricing ROR Pricing Cost Based Pricing Strategies Variable Cost Strategies Stimulate Demand Shift Demand Cost-Based Pricing Approaches Cost-Plus Pricing - Adds a standard mark up to the cost of the product Useful when there are a great many products or demand is hard to forecast Simple to implement Breakeven or Target Profit Pricing - Price is set to meet a specific profit target Also takes consumer demand into account Cost-Based Pricing COST-PLUS Sellers are more certain about costs than demand Minimizes price competition Perceived fairness for both buyers and sellers Pricing Strategies Competitive Bidding Demand is Known & Constant Marketing Mix Variables Uncontrollable Sophisticated Mathematical Models ○ Calculate Profit Levels ○ Calculate Probability of Winning at Different Price Levels Cost Based Pricing Strategies New-Offering Strategies Skimming Penetration Intermediate New Product Intro Strategies SKIMMING INTENT Capture “cream” – PENETRATION less price sensitive buyers FOCUS High Profit Margin – sacrifice volume Sell Whole Market – no “elite” market High Volume –sacrifice profit margin RESULT Invite Competitors, Short-term Profits Keep Competition Out – B.O.E. New Product Intro Strategies Skimming Strategy Price High Initially Reduce Over Time Inelastic Demand - Buyers Price Range Unique Offering New Product Intro Strategies Skimming Strategy Production or Marketing Costs Unknown Limited Capacity to Deliver Realistic Perceived Value New Product Intro Strategies Penetration Strategy Price Low Initially Elastic Demand Offering Not Unique Competition Entering Quickly New Product Intro Strategies Penetration Strategy No Distinct Price Segments Volume Increases Dramatically Impact Costs Objective - Large Market Share New Product Intro Strategies Intermediate Strategy More Prevalent Less Dramatic Pricing Strategies Experience Curve Pricing below cost in short-term ○ Build volume thus lowering costs Costs decline because ○ Learning by labor ○ Labor specialization ○ New process adoption ○ Product re-design ○ Materials substitution ○ Ability to spread fixed costs Pricing Strategies Experience Curve Advantages could be mitigated by ○ Technology innovation – competitor ○ Key patent control – competitor ○ Material-supply limitations ○ Government regulations Pricing Strategies Pricing Strategies Competitive Bidding Demand is Known & Constant Marketing Mix Variables Uncontrollable Sophisticated Mathematical Models ○ Calculate Profit Levels ○ Calculate Probability of Winning at Different Price Levels Customer Considerations PRICE AS A SIGNAL Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality When is price used as a signal? When there is little information about product quality available Primarily for experience or credence goods Customer Considerations VALUE PRICING Cost-Based Pricing Value-Based Pricing Product Customer Cost Value Price Price Value Cost Customers Product General Price Adjustment Strategies Psychological Pricing • Adjusting Prices for Psychological Effect. •Price Used as a Signal Promotional Pricing •Temporarily Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events Geographical Pricing • Adjusting Prices to Account for the Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. International Pricing • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
