Pricing Pricing by jianghongl


             What Is a Price?
• Narrow Definition: The amount of money
  charged or paid for a product or service.

• Broad Definition: The sum of all values
  consumers exchange for the product or
  – Time Costs
  – Cognitive and Emotional Costs
  – Transaction Costs
Internal and External Factors Affect Prices
Value-Based Pricing vs. Cost-Based Pricing
  Internal Factors Affecting Pricing Decisions

• Company and Product Costs:
  – Fixed Costs:
     • Costs that do not vary with production or sales level.
  – Variable Costs:
     • Costs that vary directly with the level of production.
      Cost-Based Pricing Methods
• Cost-plus pricing
   – Add a standard markup to the cost of the product
• Break-even pricing
   – Pricing to break-even (Why?!)
• Target-profit pricing
   – Pricing to meet a profit objective.

• Formulas
   – Standard Markup
   – Break-even
   – Target Profit
Break-Even Chart for Determining Price
   Internal Factors Affecting Pricing Decisions

• Marketing Mix Strategy:
  – Price must be coordinated with the other three P’s
    (Product, Promotion and Place) to form a
    consistent and effective marketing program.
  External Factors Affecting Pricing Decisions

• The Market and Demand:
  – Costs set price floors; demand sets price ceilings.
  – Supply and Demand Curves
  – Pricing in different types of markets:
     •   Pure competition
     •   Monopolistic competition
     •   Oligopolistic competition
     •   Pure monopoly
  – Price elasticity of demand.
  – Cross price elasticity of demand.
  What kind of markets do the following
   companies/products compete in?
(Pure competition, Monopolistic Competition, Oligopoly, or Pure Monopoly)
   External Factors Affecting Pricing Decisions

• Competition’s Prices Affect Our Price
   –   What are our competitors charging? How and Why?
   –   Will our pricing attract, restrict, or drive out competitors?
   –   How does our value compare to the competition’s?
   –   How strong/permanent are current competitors?
   –   How does competition influence price sensitivity?
   –   Avoiding price wars

• Other External Factors
   – Economy
        •   Inflation
        •   Purchasing Power
        •   Business Cycle (Boom, Recession, Depression)
        •   Counter-cyclical products
          Questions du Jour

Which products sell better in a lousy economy?

  Can companies ever raise prices in a lousy
      New-Product Pricing Strategies –
            Market Skimming

– Initially set a high price   • Best used when:
  for a new product so as        – Higher quality /
  to “skim” revenues               ”premium” product.
  layer by layer from the        – Lower Fixed Cost
  market.                          structure.
– Lower prices over time,        – Competitors with similar
  “skimming” revenue               quality cannot easily
  from different demand            undercut price.
– Initially make fewer, but
  more profitable sales.
     New-Product Pricing Strategies –
          Penetration Strategy

– Set a low initial price   • Best used when:
  so the brand to             – Market is highly price
  “penetrates” the              sensitive.
  market quickly.             – High fixed cost structure.
– Eventually raise prices     – Need to keep
  when wide adoption            competition out or
  and brand loyalty have        effects are only
  been achieved.                temporary.
Which pricing strategy (skimming
or penetration) is normally used
when a new prescription drug is
       introduced in the U.S.?
   Product Mix Pricing Strategies
• Product line pricing
• Optional-product
• Captive-product pricing
• By-product pricing
• Product bundle pricing
            Product Line Pricing
• Sets price steps between
  various product line items
  based on:
   – Cost differences between
   – Customer demand for

• Price-Value Gradients
           Optional-Product Pricing

• Definition:
  – Pricing optional or accessory products sold with
    the main product
  – Examples:
     • Cruise control added to basic car.
     • Computer sold with additional RAM (memory)
     • Rental car sold with “luxury” or size upgrade
  – Often abused in “Bait and Switch” tactics
            Captive-Product Pricing

• Definition:
  – Pricing products that must be used with the main
  – Base product is relatively “cheap” or free
  – Replacement product is relatively “expensive”
  – Examples:
     • Replacement cartridges for Gillette razors.
     • Toner/ink for HP printers.
     • Replacement car parts sold at car dealers
            Product Bundle Pricing

• Definition:
  – Multiple products sold together for one price
  – Creates perception of savings
  – Eases decision-making and ordering for consumers
  – Examples:
     • Computer package: PC, monitor, software, and printer.
     • McDonald’s Value Meal: Burger, Fries and Drink
     • Vacation package: Flight, hotel and meals
           Question du Jour

When are companies better off bundling prices?

   When are companies better off charging
        separate prices for each item?
       Price Adjustment Strategies
•   Discount and allowance pricing
•   Price discrimination (Segmented pricing)
•   Psychological pricing
•   Promotional pricing
•   Dynamic pricing
      Discounts and Allowances
• Discounts
   – Cash
   – Quantity
   – Seasonal

• Allowances
   – Trade-in
   – Promotional
                         Seasonal Discount: Christmas cards purchased out of season, such as
                                     in March or July, are often sold at a discount.

• Dangers of discounts
                Price Discrimination
                (Segmented Pricing)
• Definition:
  – Selling a product or service for
    different prices to different people,
    where differences in price are not
    driven by different costs.

• Types:
  1. First Degree – by person                 Pricing at Disney World
  2. Second Degree – self-selection         hotels varies by time of year.
  3. Third Degree – by market
          Psychological Pricing
• Considers the psychological effects of prices –
  usually irrational responses.
• Economic consideration of prices diminished.
• Standard practice among most retailers
            Even-Odd Pricing
• Why do marketers use the following prices?
           Question du Jour

What impression are consumers left with when
      they see even-numbered prices like

                 $12 ?
       Price as Signal of Quality
• The typical Price-Quality Inference

• Effects of price changes on quality inferences

• When pricing is NOT used as a quality signal
  – Extensive product knowledge/expertise
  – Repeat buys
             Reference Prices
• What is a fair price for gas?
       Possible Consumer Reference Prices

•   “Fair Price”        • Expected future price
•   Average Price       • Usual discounted price
•   Typical price       • Phantom prices
•   Last price paid
•   Upper-bound price
•   Lower-bound price
•   Competitor prices
  Promotional Pricing Techniques

                     • Cash Rebates
                     • Special-Event Pricing
                     • Loss Leaders

• Low-Interest (or
  Free) Financing
• Deals (BOGOs)
• Clearance Sales
    Promotional Pricing –
Deals, Clearance Sales and 0% Financing

        Promotional pricing creates
    excitement and a sense of urgency.
Hi-Low Pricing vs. EDLP

 Which strategy is more profitable?
      Dynamic Pricing

 Adjusting prices continually to
  meet the characteristics and
needs of continuously changing
     supply and demand.
Internet Price Shopping

           Have consumers benefitted?
            Initiating Price Changes
• Price cuts
   –   Falling sales or market share – demand issues
   –   Grab market share from competitors
   –   Lower production/service costs
   –   Respond to competitor’s price drop
   –   Consumers have less purchasing power

• Price Increases
   –   Cost inflation
   –   Over-demand
   –   Match competitor’s increase
   –   Market leadership
   –   Time
     When Cutting Price is a Bad Idea

How would consumers likely
react if Joy suddenly cut its
price in half?
Assessing and Responding to
 Competitor Price Changes
Public Policy Issues in Pricing

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