Pricing strategy Chapter 11

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1 Pricing strategy Chapter 11 Group 8 Julia Kosch, Katharina Sitter, Shi Yue, Lukas Weghofer 1 Overview 1. Introduction 2. The economist s approach to price determination 3. Full cost and direct cost pricing 4. Competitor orientated pricing 5. Marketing-orientated pricing 6. Initiating price changes 7. Reacting to competitors price changes 8. Ethical issues in pricing 2

1) Introduction Price one of the 4 P s return for manufacturing and marketing the product other 3 P s are costs has to cover costs otherwise losses undercharging (lost margin) and overcharging (lost

2 1) Introduction Price one of the 4 P s return for manufacturing and marketing the product other 3 P s are costs has to cover costs otherwise losses undercharging (lost margin) and overcharging (lost sales) can have dramatic effects on profitability important part of positioning strategy sends quality cues to customers. 3 2)Economists approach to pricing Demand curves: relationship between quantity demanded & different price levels Econweb, Introduction to macroeconomic elastic: fall in price large increase in demand Inelastic: fall in price small increase in demand Sharp et all, economics of social issues, Mc-Graw Hill 4

3 Shapiro and Jackson identified 3 methods used by managers to set prices 1. internal orientated pricing is based on costs 2. competitor orientated pricing focuses on competitor activities 3. marketing orientated pricing acts on value customers place on a product 5 3) Full cost and direct cost pricing Cost orientated pricing, the 2 forms are: -full cost -direct (marginal) cost pricing 3.1 Full cost pricing fixed and direct costs increase in price sales fall sales estimation made before price is set internal costs rather than customers willingness to pay indication of minimum price to make a profit 6

4 3.2 Direct cost pricing costs that likely to rise as output rises doesn t cover full costs useful for service marketing e.g seats in an aircraft or rooms in hotels can t be stored lowest price sensible to take business if alternative is to let the machinery (seats, rooms) unused can t be used in longterm fixed costs must be covered to make profits 7 4.) Competitor-orientated pricing Going-rate pricing - when there is no differentiation between products - for economists it is the principle of perfect competition Competitive bidding buyer selects the supplier that quotes the lowest price important to know competitor`s bids statistic model: expected profit= profit*probability of winning disadvantages of the model: difficult to express the probability to win the model can only be used for long term calculations 8

5 5.) Marketing-orientated pricing 5.1 Marketing strategy Pricing new products: - positionig strategy (choice of target market and creating a differential advantage - launch strategy Promotion high low Price rapid slow high skimming skimming rapid slow low penetration penetration Jobber, Principles and Practice of Marketing 9 5.) Marketing-orientated pricing Characteristics of high price market segments: -High value for customers -High ability to pay -Consumer and bill payer are different -Lack of competition -High pressure to buy Conditions for charging low prices: - only alternative -Wish to gain market presence - cost reduction trough experience curve - make money later/elsewhere -entrybarrier -predatory pricing 10

6 5.) Marketing-orientated pricing 5.2 Value to customer buy respond method: customers are asked if they`d buy a product at varying prices trade off analysis: measures the trade off between price and other features experimentation: to place a product on sale at different locations with different prices 11 5.) Marketing-orientated pricing Economic Value to Customer (EVC): -Used in industrial markets -The higher the EVC, the higher the price can be -X could be cheaper than reference product -with an EVC the life cycle costs would be the same -every price below is an incentive to buy Life-cycle cost Purchase EVC= price Start up costs Post-purchase costs Reference product New product X Jobber, Principles and Practise of Marketing 12

7 5.) Marketing-orientated pricing 5.3 Price-quality relationship People often use price as an indicator for quality 5.4 Product line pricing the price needs to fit into the existing product line 5.5 Explicability economic justification of prices 5.6 Competition 3 layers: direct, secondary and tertiary competition 13 5.) Marketing-orientated pricing 5.7 Negotiating margins allow prices to fall from list level but still permit profitable transactions 5.8 Effect on distributor/retailer They only include a product into their range if they think it will sell well 5.9 Political factors sometimes governments intervene 5.10Costs can act as an restraint 14

8 6.) Initiating price changes Circumstances Increases Cuts Value greater than price Value less than price Rising costs Excess supply Excess demand Build objective Harvest objective Price war unlikely Pre-empt competitive entry Tactics Price jump Price fall Staged price increases Staged price reductions Escalator clauses Fighter brand Price unbundling Price bundling Lower discounts Higher discounts Estimating competitor Stratregic objectives reaction Self-interest Competitive situation Past experience Jobber, Principles and Practise of Marketing 15 7) Reacting to competitors price changes When to follow? Increases: Rising costs Excess of Demand Price-insensitive customers Price rise is compatible with brand image Harvest or hold objective Cuts: Falling costs Excess of Supply Price-sensitive customers Price fall is compatible with brand image Build or hold objective 16

9 7) Reacting to competitors price changes Increases: When to ignore? Cuts: Stable or falling costs Excess of supply Price-sensitive customers Price rise incopatible with brand image Build objective Rising costs Excess of demand Price-insensitive customers Price fall incompatible with brand image Harvest objective 17 7) Reacting to competitors price changes Tactics A quick price reaction: if urgent need to improve profit margins A slow reaction: when image of being the customers friend is being sought 18

10 8) Ethical issues in pricing Price fixing Predatory pricing Deceptive pricing Penetration pricing and obesity Price discrimination Product dumping 19 Sources Jobber, Principles and practice of Marketing etails.mhtml tml 20

15/02/ Developing Pricing Strategies and Programs. Chapter Questions. Synonyms for Price

15/02/ Developing Pricing Strategies and Programs. Chapter Questions. Synonyms for Price 1 14 Developing Pricing Strategies and Programs Chapter Questions How do consumers process and evaluate prices? How should a company set prices initially for products or services? How should a company