Chapter 8 Pricing Strategy and Management

1. Chapter 8Pricing Strategy and Management

2. Conceptual Orientation to Pricing Demand factors (Value to buyers) (price ceiling) Competitive factors Final pricingInitial discretion pricing Corporate objectives discretion and regulatory constraints Direct variable costs (price floor)

3. Perceived benefits Value = Price Price as an Indicator of Value • for a given price, value decreases as perceived benefits decrease and vice versa • price also affects consumer perceptions of prestige; as price increases, demand may also increase

4. Percentage change in quantity demanded E = Percentage change in price where E is the coefficient of elasticity Price Elasticity of Demand • if the % change in quantity demanded is greater than the % change in price, demand is said to be elastic – E is greater than 1. • if the % change in quantity demanded is less than the % change in price, demand is said to be inelastic – E is less than 1.

5. Factors that Influence Price Elasticity of Demand • the more substitutes a product or service has, the greater its price elasticity • the more uses a product or service has, the greater its price elasticity • the higher the ratio of the price of the product or service to the income of the buyer, the greater the price elasticity

6. Product-Line Pricing • Product-Line Pricing involves determining: • the lowest-priced product and price • the highest-priced product and price, and • price differentials for all other products in the line

7. Pricing Strategies • full-cost price strategies – consider both variable and fixed costs • variable-cost price strategies – consider only variable costs, not total costs

8. Full-Cost Pricing • markup pricing: fixed amount added to the total cost of the product • break-even pricing: per-unit fixed costs + per-unit variable costs • rate-of-return pricing: set to obtain a desired ROI

9. Variable-Cost Pricing Variable-cost pricing is demand-oriented pricing. Two purposes: • stimulate demand • shift demand Assumption is that variable-cost pricing will stimulate demand and increase revenues.

10. New-Offering Pricing Strategies • skimming pricing strategy • penetration pricing strategy • intermediate pricing strategy

11. Use Skimming Pricing Strategy when: • demand likely to be price inelastic • different price-market segments, appealing to buyers with a higher acceptable price • offering is unique enough to be protected from competition • production or marketing costs are unknown • capacity constraint exists • organization wants to generate funds quickly • realistic perceived value of the product exists

12. Use Penetration Pricing Strategy when: • demand likely to be price elastic • offering is not unique enough to be protected from competition • competitors expected to enter market quickly • no distinct price-market segments • possibility of cost savings with large volume of sales • organization’s major objective is to obtain a large market share

13. Intermediate Pricing Strategy • falls between skimming and penetration • most prevalent in practice • more likely to be used in majority of pricing decisions

14. Pricing and Competitive Interaction • the action and reaction of rival companies in setting and changing prices for their offerings • managers should focus more on long-term – “look forward and reason backwards” • Competitors’ goals and objectives ? • Assumptions competitor made about itself ? • Strengths and weaknesses of competitor ?

15. Product/Service Type undifferentiated differentiated Market Growth Rate stable/decreasing increasing Price Visibility to Competitors high low Consumer Price Sensitivity high low Overall Industry Cost Trend declining stable Industry Capacity Utilization low high Number of Competitors many few Industry Characteristics and Risk of Price Wars Characteristics High Risk Low Risk