Pricing Strategies and Determination.ppt

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					Pricing Strategies
and Determination



           chapter 14
                     Harcourt, Inc.
                              Objectives


n   Explain pricing factors
n   Compare and contrast cost-based
    pricing methods
n   Identify strategic concerns important
    in pricing decisions
                               Objectives


n   Evaluate reasons why base prices
    change over time
n   Understand new technology
    implications for pricing behavior,
    especially price customization
                       What is Price?

n   Price is the sacrifice that one party
    pays another to receive something
    in exchange
n   For our case, price is a monetary
    value charged by an organization
    for the sales of its products
    Pricing
     Fairfield Inns




The Martin Agency
   Pricing
Alamo Car Rental




   Hal Riney and
        Partners
    Determining the Base Price
n   Cost-Plus Pricing
    n   Easiest, Often misleading
    n   A simple allocation of fixed and
        variable costs
    n   Standard mark-up - a standard profit
        margin
    n   Target return pricing - a standard
        amount of profit per item
    n   Ignores demand (price sensitivity) and
        fails to account for competition
     Determining the Base Price
n   Demand Pricing
    n   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
    n   Breakeven analysis
    n   Demand schedules
Determining the Base Price

n   Demand Pricing
    n   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
Determining the Base Price

n   Demand Pricing
    n   Where does demand information
        come from?
         • Analytic modeling
         • Experiments
         • Customer surveys
         • Managerial judgement
       Determining the Base Price
                                   Ethical               Legal
Strategic Pricing                 Concerns              Concerns
    Concerns




 Low cost                                           Differentiation
  focus                                                  focus

   price                                                unique
           Competitive Strategy Positioning Continuum
       Determining the Base Price
                                   Ethical               Legal
Strategic Pricing                 Concerns              Concerns
    Concerns




 Low cost                                           Differentiation
  focus                                                  focus

   price                                                unique
           Competitive Strategy Positioning Continuum
       Determining the Base Price
                                   Ethical               Legal
Strategic Pricing                 Concerns              Concerns
    Concerns




 Low cost                                           Differentiation
  focus                                                  focus

   price                                                unique
           Competitive Strategy Positioning Continuum
        Determining the Base Price
                               Ethical            Legal
Strategic Pricing             Concerns           Concerns
    Concerns

    n   Objectives
        n   Goal-setting/Objective-setting
        n   Pricing to achieve a target ROI
        n   Pricing to stabilize price and margin
        n   Pricing to reach a target market share
        n   Pricing to meet or prevent competition
        n   Pricing for profit maximization
        n   Pricing for survival
                Determining the Base Price
Strategic        Ethical
                           Legal Concerns
                Concerns
 Pricing
Concerns                                       Penetration
                Skimming Pricing             Pricing Strategy
                    Strategy                Maturity            Decline




                           Growth
 Introduction


       n    New product pricing
            n    Skimming Vs. Penetration
          Determining the Base Price
                                                          Ethical    Strategic
                                        Legal Concerns
                                                         Concerns
                                                                      Pricing
                          Penetration                                Concerns

       Skimming         Pricing Strategy

        Pricing              Maturity                               Decline

        Strategy
               Growth
Introduction


   n   High initial price for quick ROI
   n   Inelastic demand
   n   Price insensitivity by the market
          Determining the Base Price
                                                          Ethical    Strategic
                                        Legal Concerns
                                                         Concerns
                                                                      Pricing
                        Skimming Pricing                             Concerns

     Penetration            Strategy

       Pricing               Maturity                               Decline

      Strategy
               Growth
Introduction


   n   Low initial price with elastic demand
   n   Volume for lower production costs
   n   Imminent competition
       Determining the Base Price
                             Ethical          Legal
Strategic Pricing           Concerns         Concerns
    Concerns



      n   Price-Quality judgements
          n   Customers uncertain about brand
              quality prior to purchase look to
              price
          n   Customers look to price in high
              risk purchases
        Determining the Base Price
Strategic
                            Ethical
 Pricing
Concerns
                           Concerns
                                           Legal Concerns



            n   Price Fixing
                n   Violation of Sherman Anti-
                    Trust Act
                n   Conspiring to restrain trade
        Determining the Base Price
Strategic
                         Ethical
 Pricing
Concerns
                        Concerns
                                          Legal Concerns



n   Price Discrimination
    n   Violation of Robinson-Patman Act
    n   Illegal only when business to business
            • Exception for cost justification
            • Exception for competitor price matching
            • Exception for no apparent harm to
              competition
         Determining the Base Price
Strategic
                        Ethical
 Pricing
Concerns
                       Concerns
                                          Legal Concerns


n   Resale Price Maintenance
    n   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
         Determining the Base Price
Strategic
                          Ethical
 Pricing
Concerns
                         Concerns
                                         Legal Concerns



     n   Predatory Pricing
            n   Aggressive pricing to drive out
                newer, smaller rivals
            n   After removal of rival, prices are
                raised again
        Determining the Base Price
Strategic
                       Ethical
 Pricing
Concerns
                      Concerns
                                    Legal Concerns


  n   Exaggerated Comparative Price
      Advertising
       n    Using comparison prices of dubious
            validity
       n    Product introduced at artificially
            high prices for a short time then
            dropped to a new low long-term
            price
           Determining the Base Price
Strategic Pricing
                                          Legal Concerns
    Concerns         Ethical Concerns




         n   Price gouging laws
         n   ATM fee practices
         n   Raising prices for necessities
             in disaster areas
    Adjustments to Base Prices
n   Reasons base prices change over
    time:
    n   Variation in objectives over product
        life cycle
          • Introductory low prices, higher
            decline prices
    n   Competitive price moves
          • Competitive forces dictate
            modification of pricing
          • Rubbermaid, the U.S. Steel Industry
     Price Flexing Discounts/Allowances

n   Reasons base prices change over time:
    n   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   n   Used to
   Cash Discounts
                           encourage
                           consumers to
      Rebates              upgrade to newer
                           or more
                           expensive
                           products
   Price Flexing Discounts/Allowances

To Consumer

 Trade-in Allowances   n   Seasonal or age-
   Cash Discounts
                           based discounts
                           used to encourage
      Rebates              purchases
   Price Flexing Discounts/Allowances

To Consumer

 Trade-in Allowances   n   After the
   Cash Discounts
                           purchase payment
                           made to the
      Rebates              consumer by the
                           producer
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Compensate the
                           trade for functions
      Seasonal             performed:
                               Buying & Selling
      Quantity             n

                           n   Transportation
                               Storage
       Cash
                           n

                           n   Financing
                               Risk-taking
  Sales Promotion
                           n

                           n   Providing Information
                           n   Standardizing & Grading
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Permits seasonal
      Seasonal             marketers to
                           maintain steady
      Quantity             production and to
       Cash                sustain
                           operations in out-
  Sales Promotion
                           of-season lulls
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade
      Seasonal


                       Price
      Quantity
       Cash
                               Spring   Summer   Fall   Winter
  Sales Promotion
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Induce larger-
                           quantity purchases
      Seasonal             and to reward
      Quantity             customers for
                           making fewer
       Cash                purchases but
  Sales Promotion          purchasing in larger
                           quantities
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Encourage prompt
                           payment from
      Seasonal             customers. Invoice
      Quantity             includes payment
                           terms and period of
       Cash                time that the cash
  Sales Promotion          discount is available
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Two percent off the
                           total invoice price if
      Seasonal             paid within 10 days
      Quantity             of the invoice date.
                           Otherwise the total
       Cash                invoice price is due
  Sales Promotion          in 30 days
                             2/10, Net 30
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade   n   Used by producers
      Seasonal             to encourage
                           greater purchases
      Quantity             or used to induce
       Cash                retailers to
                           provide shelf or
  Sales Promotion
                           display space
   Price Flexing Discounts/Allowances

To Trade

 Functional Or Trade
                           Off-Invoice
      Seasonal             Allowances
      Quantity
                       Bill-Back Allowances
       Cash
  Sales Promotion
                       Stocking Allowances
        Other Forms of Price Flexing
n   Price shading
    n   Salesperson reduces
        base price because of the
        need to secure a
        large/important client
n   Price customizing
    n   New technology allows
        for transaction-by-
        transaction
        customization
        Other Forms of Price Flexing
n   Price promotion
    n   Sales, incentive pricing
    n   Retailers began forward-
        buying or diverting product
    n   Every Day Low Pricing
        (EDLP) is reducing the use
        of price promotion
n   Couponing
    n   Free-standing inserts (in
        newspapers)
    n   Point of purchase
        Other Forms of Price Flexing
n   Pricing for different segments
    n   Geographic segments
         • Different prices in different zones
    n   Usage segments
         • Different prices for high volume users
    n   Demographic segments
         • Different prices for students, children, etc.
    n   Time segments
         • On- and off-season rates
Geographic Pricing Policies

 FOB               Uniform
                  Delivered
Pricing            Pricing




 Zone           Basing-Point
Pricing           Pricing
       Geographic Pricing Policies
     FOB                  Basing-Point

    Pricing                 Pricing
                 Zone                     Uniform
                                         Delivered
                Pricing                   Pricing




n   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                      Uniform
                                         Delivered
                Pricing                   Pricing




n   Using zone pricing all consumers in the same
    zone pay the same transportation charge
       Geographic Pricing Policies
     FOB                   Basing-Point

    Pricing                  Pricing
                 Zone                      Uniform
                                          Delivered
                 Pricing                   Pricing




n   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                     Uniform
                                         Delivered
                Pricing                   Pricing




n   Using uniform delivered pricing all
    consumers pay the same transportation
    charges (average shipping expense to all
    customers)
                  Pricing Policies

              Prestige
              Pricing

Loss-Leader              Odd-Even
  Pricing                 Pricing


         Product Line
            Pricing
                              Pricing Policies

                          Prestige
                          Pricing

            Loss-Leader              Odd-Even
              Pricing                 Pricing

                     Product Line
                        Pricing



n   Pricing at relatively high levels so as to
    convey an image of high quality or
    exclusivity
                              Pricing Policies

                          Prestige
                          Pricing

            Loss-Leader              Odd-Even
              Pricing                 Pricing

                     Product Line
                        Pricing



n   Pricing policy which offers products at
    prices below or near cost to attract
    consumers from competitors’ stores
                               Pricing Policies

                           Prestige
                           Pricing

             Loss-Leader              Odd-Even
               Pricing                 Pricing

                      Product Line
                         Pricing


n   Price lining is producing or marketing multiple
    products at different price points
n   Bundling is marketing two or more products in a
    single package for a special price
                               Pricing Policies

                           Prestige
                           Pricing

             Loss-Leader              Odd-Even
               Pricing                 Pricing

                      Product Line
                         Pricing


n   Odd pricing refers to a price ending with an
    odd number just under a round number
n   Even pricing is used to convey high quality

				
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