Pricing of Products

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					  Pricing Products:
Pricing Considerations and Strategies




                                        1
What Is Pricing?

 Process of determining what a company will
     receive in exchange for its products




                                              2
Pricing to Meet Business
Objectives
 Pricing objectives are goals that
 producers hope to attain in pricing
 products for sale
   Profit-Maximizing Objectives

         Pricing for E-Business Objectives
    Market Share Objectives
       Market share is a company’s

        percentage of total market sales
        for a specific product type
    Other Pricing Objectives

                                              3
    Cost-Oriented Pricing
Cost-oriented
pricing considers the
firm’s desire to make a
profit and its need to
cover production costs
   Markup is the amount
    added to an item’s cost
    to sell it at a profit

                              4
                   Cost
Fixed cost: Costs that do not vary with production
or sales level
Variable cost: Costs that vary directly with the level
of production
Total costs: The sum of the fixed and variable costs
for any given level of production
Cost at different levels of production:
   Short run average cost
   Long run average cost




                                                  5
COST CALCULATIONS
                           Fixed Cost
Unit cost= Variable cost + ---------
                           Unit Cost

                    Unit cost
Mark up price =     -----------
                    1- Desired return on sales




                                                 6
Breakeven Analysis
 Breakeven analysis assesses costs versus
 revenues for various sales volumes
   Variable cost is a cost that changes with the

    quantity of a product produced or sold
   Fixed cost is a cost unaffected by the quantity

    of a product produced or sold
   Breakeven point is the sales volume at which

    the seller’s total revenue from sales equals total
    costs with neither profit nor loss



                                                     7
CALCULATIONS
               Fixed Cost
Break Even = ------------------
            Price – Variable cost




                                    8
Breakeven Analysis




                     9
Pricing Existing Products
 Pricing above prevailing market prices
 for similar products

 Pricing below market prices

 Pricing at or near market prices




                                          10
Pricing New Products
 Price skimming is setting an initial high
 price to cover new product costs and
 generate a profit


 Penetration pricing is setting an initial
 low price to establish a new product in
 the market




                                             11
Fixed versus Dynamic Pricing

Dynamic pricing works because information flow
on the Web notifies millions of buyers of
instantaneous change in product availability.
  Sellers can alter prices privately, on a one-to-

   one, customer-to-customer basis.


Fixed pricing is still the most common option for
cybershoppers.



                                                    12
      New Product Pricing
      Strategies
   Market Skimming           Use Under These
                             Conditions:
 Setting a High Price for      Product’s Quality and
  a New Product to               Image Must Support Its
  “Skim” Maximum                 Higher Price.
  Revenues from the             Costs Can’t be so High that
  Target Market.                 They Cancel the Advantage
 Results in Fewer, But          of Charging More.
  More Profitable Sales.        Competitors Shouldn’t be
                                 Able to Enter Market Easily
                                 and Undercut the High
                                 Price.
                                                        13
      New Product Pricing
      Strategies
Use Under These                   Market Penetration
Conditions:
   Market Must be Highly        Setting a Low Price for a
    Price-Sensitive so a Low      New Product in Order to
    Price Produces More           “Penetrate” the Market
    Market Growth.                Quickly and Deeply.
   Production/ Distribution
    Costs Must Fall as Sales     Attract a Large Number of
    Volume Increases.             Buyers and Win a Larger
   Must Keep Out Competition     Market Share.
    & Maintain Its Low Price
    Position or Benefits May
    Only be Temporary.
                                                              14
Product Mix-Pricing Strategies:
Product Line Pricing
               Involves setting price
               steps between various
               products in a product
               line based on:
                   Cost differences between
                    products,
                   Customer evaluations of
                    different features, and
                   competitors’ prices.


                                         15
    Product Mix- Pricing
    Strategies
Optional-Product
   Pricing optional or
    accessory products sold
    with the main product.
    i.e camera bag.
Captive-Product
   Pricing products that
    must be used with the
    main product. i.e. film.


                               16
    Product Mix- Pricing
    Strategies

By-Product            Product-
   Pricing low-      Bundling
    value by-
                          Combining
    products to get   

    rid of them and       several products
    make the main         and offering the
    product’s price       bundle at a
    more                  reduced price.
    competitive.         i.e. Iftar
   i.e. sawdust,         Package.
    Zoo Doo
                                             17
Discount and Allowance
Pricing
Adjusting Basic Price to Reward Customers
          For Certain Responses


  Cash Discount         Seasonal Discount

 Quantity Discount      Trade-In Allowance

Functional Discount   Promotional Allowance
                                              18
Segmented Pricing

Selling Products At Different Prices Even
 Though There is No Difference in Cost


Customer - Segment      Location Pricing

  Product - Form         Time Pricing

                                            19
Psychological Pricing
              Considers the psychology of
              prices and not simply the
              economics.
              Customers use price less
              when they can judge quality
              of a product.
              Price becomes an important
              quality signal when
              customers can’t judge
              quality; price is used to say
              something about a product.
                                        20
                                                        This Sprint ad offers f ree long distance on Fridays.




    Promotional Pricing                                                               motion on Fridays ra her
                                                   WhycanSprint affordt ooffer this pro
                                                   than onanother day (like Mo
                                                                             nday)?
                                                                                                         t




Loss Leaders                              Temporarily Pricing
                                          Products Below List
 Special-Event Pricing                     Price to Increase
                                           Short-Term Sales
         Cash Rebates
                                               Through:
               Low-Interest Financing

                      Longer Warranties
                              Free Merchandise
                                           Discounts
                                                                                         21
     Other Price Adjustment
     Strategies
                        •Adjusting Prices to Account
                          for the Geographical Location
Geographical Pricing      of Customers.
                        • i.e. FOB-Origin, Uniform-
                          Delivery, Zone Pricing, Basing
                          Point, & Freight-Absorption.

                        • Adjusting Prices for
International Pricing     International Markets.
                        • Price Depends on Costs,
                          Consumers, Economic
                          Conditions, Competitive
                          Situations & Other Factors.
                                                           22
  Initiating Price Changes


       Why?                   Why?
  Excess Capacity         Cost Inflation
Falling Market Share       Overdemand:
  Dominate Market         Company Can’t
Through Lower Costs    Supply All Customer’s
                              Needs

                                               23
      Reactions to Price Changes
Price Cuts Are Seen by Buyers As: Competitors Reactions When:

       Being Replaced by              Number of Firms is
         Newer Models                      Small

     Current Models Are Not           Product is Uniform
          Selling Well
     Company is in Financial            Buyers are Well
           Trouble                         Informed
        Quality Has Been
           Reduced
        Price Comes Down
              Further
                                                           24
Assessing/Responding to
Competitor’s Price Changes




                             25
              Public Policy Issues in Pricing


Manufacturer A                       Retailer 1

                    Retail price
                    maintenance.                         Deceptive   Consumers
                                                         Pricing
Price-fixing        Discriminatory   Price-fixing
Predatory pricing   Pricing          Predatory Pricing



                                     Retailer 2
Manufacturer B


                                           Deceptive
                                           Pricing
                                                                          26
Public Policy Issues in Pricing

   Pricing Within Channel Levels




 Price                    Predatory
 Fixing                     Pricing




                                      27
       Pricing Across Channel Levels

     Price        Resale Price         Deceptive
Discrimination    Maintenance           Pricing

Ensure Sellers    Manufacturer      Occurs When a
  Offers the     Can’t Require       Seller States
 Same Price        Dealers to       Prices or Prices
 Terms to a         Charge a         Savings that
 Given Level     Specified Retail      Available
   Of Trade        Price for Its     To Consumers
                     Product


                                                       28

				
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