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CHAPTER 8

CHAPTER 8. PRICING STRATEGY. PRICING STRATEGY. Price Theory and Practice Incremental Pricing Bases for Price Decisions Price Discounts Special Pricing Issues. PRICE THEORY AND PRACTICE. Price Theory (Economics) - Dominance of pricing Pricing in Practice (Business)

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CHAPTER 8

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  1. CHAPTER 8 PRICING STRATEGY

  2. PRICING STRATEGY • Price Theory and Practice • Incremental Pricing • Bases for Price Decisions • Price Discounts • Special Pricing Issues

  3. PRICE THEORY AND PRACTICE • Price Theory(Economics) - Dominance of pricing • Pricing in Practice (Business) - Influence of non-price factors

  4. 1 D P D 1 D D Q (non-price) Shifting the demand curve to the right

  5. USEFUL CONCEPTS FOR PRICING STRATEGY • Price Elasticity • Elastic demand • Inelastic demand • Cost Concepts • Fixed cost • Variable cost

  6. INCREMENTAL PRICING Using contribution to profit as the criteria for measuring profitability rather than net profit. Contribution to Profit = Total Revenue – Variable Cost Net Profit = Total Revenue – Total Cost

  7. CONDITIONS FAVORABLE FOR INCREMENTAL PRICING • Heavy Fixed Cost • Excess Production Capacity • Price-Sensitive Niche • Isolate from Core Market

  8. INCREMENTAL PRICING EXAMPLES • Wall Street Journal • Hotels • Matinee movies • Happy hour

  9. WALL STREET JOURNAL(Yearly Rate) Business Rate $150 Student Rate $50 Library Rate $300

  10. INCREMENTAL PRICING OF SERVICES BY TIME Hours in the Day Matinee movies Days of the Week Weekend hotels Seasons of the Year Income tax preparation

  11. BASES FOR PRICE DECISIONS • Based on Demand of Buyer • Based on Cost of Seller • Based on Competitor Prices

  12. DEMAND-BASED PRICING • New product pricing • Perceived Value • Yield Management

  13. NEW PRODUCT PRICING • New Product Skimming • New Product Penetration

  14. NEW PRODUCT SKIMMING • Set high initial price • Recover R&D quickly • Drop prices over time

  15. PRODUCT SKIMMING EXAMPLES • Intel chips • Flat panel TVs • Smart Phones

  16. NEW PRODUCT PENETRATION • Set low initial price • Gain market share • Discourage competition

  17. PRODUCT PENETRATION EXAMPLES • Southwest airlines • Two-Buck Chuck wine • Samsung

  18. PERCEIVED VALUE PRICING • Rolex Watches • 3M Post-It-Notes • Business Lunches

  19. YIELD MANAGEMENT PRICING • Airlines • Hotels • Utility Pricing

  20. COST-BASED PRICING • Cost Plus • Billable Hours • Add-on Charges • Markups

  21. COST-BASED EXAMPLES • Lawyer sets billable cost at $400 per hour • Boeing has a cost-plus contract with NASA • Star Furniture marks up their furniture 50% above cost

  22. ADD-ON PRICE EXAMPLES • Airlines • Credit cards • Telephone services

  23. SPIRIT BAGGAGE FEES Book Over Phone $10 Roller Bag $30 Water $3 Boarding Passes $10 Printed at Airport Booking Over Internet $17

  24. COMPETITION – BASED PRICING • Competitive Price Wars • Lower Cost • Administered Pricing

  25. COMPETITION-BASED EXAMPLES • HEB Price War • Two Buck Chuck Wine • Price of Basic Steel

  26. TWO BUCK CHUCK WINE • Sold only in Trader Joe’s gourmet stores • Overproduction of California grapes • Produce own grapes at very low cost

  27. PARKER HANNIFIN PRICING STRATEGY “A” Products High-volume commodities “B” Products More specialized niches “C” Products Limited Competition “D” Products No direct competitor

  28. PRICE DISCOUNTS • Cash Discounts – 5% off at Spec’s if you pay by cash • Seasonal Discounts – Cheaper prices on December 26 • Trade Discounts – Cheaper prices to Wholesalers • Promotional Discounts – Weekend specials at Supermarkets

  29. SPECIAL PRICING ISSUES • Pricing Choices • Other Pricing Options • Psychological Pricing • Questionable Pricing • Price Stability/Competition

  30. PRICING CHOICES • Fixed Pricing – Price is fixed by the seller at any one period of time • Negotiated Pricing – Price is negotiated between a buyer and a seller for each transaction

  31. FIXED PRICING • Paying the monthly telephone bill • Buying canned goods at the supermarket • Parking at the Reliant Stadium

  32. NEGOTIATED PRICING • Buying an automobile • Selling a house • Garage sale • Showrooming

  33. OTHER PRICING OPTIONS • Freemium Pricing • Reference Pricing • A La Carte Cable Pricing

  34. PSYCHOLOGICAL PRICING • $199.95 • $.99 • Buy one, get one free

  35. QUESTIONABLE PRICING • Bait and Switch • Price Gouging • Price Fixing • Pricing of E-Books

  36. PRICE MODELS FOR E-BOOKS • Wholesale model • Agency model

  37. WHOLESALE PRICING MODEL FOR SELLING E-BOOKS • Book publisher sets list price at $25 • Seller buys at $12.50 and sells for $25 • Amazon.com buys at $12.50 and sells for $9.99

  38. AGENCY PRICING MODEL FOR SELLING E-BOOKS • Book publisher sets list price at $25 • Apple receives 30% of list price $7.50 sold through iPads • All sellers are required to sell book at $25 (including Amazon.com)

  39. WHO WANTS PRICE COMPETITION? • Discount retailers • Foreign competitors • Firms with low costs • Internet Sellers

  40. WHO WANTS PRICE STABILITY? • Oligopolies • Small businesses • Professional services • Traditional brokers and agents

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