Pricing Strategy and Management

1. Professor Chip Besio Cox School of Business Southern Methodist University Pricing Strategy and Management

2. Pricing Considerations • Objectives: • Enhance brand image • Provide customer value • Obtain an adequate ROI • Maximize profits • Maintain price stability in an industry or market

3. Internal Factors Costs Product, Strategy Factors Affecting Pricing Pricing Decisions External Factors Competitors Customers

4. Pricing Considerations • Factors Effecting Pricing: • Demand sets price ceiling • Cost sets price floor • Consumer value perceptions • Consumer price sensitivity • Government regulations

5. Pricing Considerations • Factors Effecting Pricing: • Product/Service differentiation • Organization’s financial goals • Stage of Product Life Cycle • Marketing Channel margin impact • Prices of other products in mix

6. Customer ConsiderationsPRICE SENSITIVITY • Product categories are not uniformly responsive to prices -- some are more sensitive to price levels than others • Customers also may respond differently than one another to price levels Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

7. A. Inelastic Demand - Demand hardly changes with a small change in price P2 Price P1 Q2 Q1 Quantity Demanded per Period B. Elastic Demand - Demand changes greatly with a small change in price P2 Price P1 Q2 Q1 Quantity Demanded per Period Pricing ConsiderationsPRICE SENSITIVITY

8. Product Line Pricing Setting price steps between product line items i.e. $299, $399 Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Product-Based Pricing Approaches Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Source: Prentice Hall

9. Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Cost Considerations • Recall that costs may depend on the production level • Total Costs • Sum of the Fixed and Variable Costs for a Given • Level of Production

10. Cost BasedPricing Strategies • Full Cost Strategies • Variable Cost Strategies • New-Offering Strategies • Competitive Bidding

11. Cost BasedPricing Strategies • Full Cost Strategies • Markup Pricing • Break-even Pricing • ROR Pricing

12. Cost BasedPricing Strategies • Variable Cost Strategies • Stimulate Demand • Shift Demand

13. Cost-Based Pricing Approaches • Cost-Plus Pricing - Adds a standard mark up to the cost of the product • Useful when there are a great many products or demand is hard to forecast • Simple to implement • Breakeven or Target Profit Pricing - Price is set to meet a specific profit target • Also takes consumer demand into account

14. Cost-Based PricingCOST-PLUS Sellers are more certain about costs than demand Minimizes price competition Perceived fairness for both buyers and sellers

15. Pricing Strategies • Competitive Bidding • Demand is Known & Constant • Marketing Mix Variables Uncontrollable • Sophisticated Mathematical Models • Calculate Profit Levels • Calculate Probability of Winning at Different Price Levels

16. Cost BasedPricing Strategies • New-Offering Strategies • Skimming • Penetration • Intermediate

17. New Product Intro Strategies • Capture “cream” – less price sensitive buyers • High Profit Margin – sacrifice volume • Invite Competitors, Short-term Profits • Sell Whole Market – no “elite” market • High Volume –sacrifice profit margin • Keep Competition Out – B.O.E. SKIMMING PENETRATION INTENT FOCUS RESULT

18. New Product Intro Strategies • Skimming Strategy • Price High Initially • Reduce Over Time • Inelastic Demand - Buyers Price Range • Unique Offering

19. New Product Intro Strategies • Skimming Strategy • Production or Marketing Costs Unknown • Limited Capacity to Deliver • Realistic Perceived Value

20. New Product Intro Strategies • Penetration Strategy • Price Low Initially • Elastic Demand • Offering Not Unique • Competition Entering Quickly

21. New Product Intro Strategies • Penetration Strategy • No Distinct Price Segments • Volume Increases Dramatically Impact Costs • Objective - Large Market Share

22. New Product Intro Strategies • Intermediate Strategy • More Prevalent • Less Dramatic

23. Customer ConsiderationsPRICE AS A SIGNAL • Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality • When is price used as a signal? • When there is little information about product quality available • Primarily for experience or credence goods

24. Customer Product Cost Value Price Price Cost Value Product Customers Customer ConsiderationsVALUE PRICING Value-Based Pricing Cost-Based Pricing

25. General Price Adjustment Strategies Psychological Pricing Promotional Pricing • Adjusting Prices for Psychological • Effect. • Price Used as a Signal • Temporarily Reducing Prices to • Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events • Adjusting Prices to Account for the • Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, • Zone Pricing, Basing-Point, & • Freight-Absorption. • Adjusting Prices for International • Markets. • Price Depends on Costs, Consumers, • Economic Conditions & Other Factors. Geographical Pricing International Pricing