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Mastering Pricing Strategies for Competitive Advantage

Understand consumer psychology, setting prices, analyzing costs, competitive pricing, methods, and policies to optimize pricing strategies.

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Mastering Pricing Strategies for Competitive Advantage

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  1. CHAPTER 14 DEVELOPING PRICING STRATEGY AND PROGRAM

  2. UNDERSTANDING PRICING Price is the sum of all the values that consumers exchange for the benefits of having or using the product service. Price is the only element of marketing mix that – • Produces revenue, all other elements represents cost • Is flexible / which can be changed quickly

  3. Consumer psychology and pricing • Reference pricing • Price-quality inferences • Price cues

  4. SETTING THE PRICE Six-step procedures Selecting the pricing objective Determining demand Estimating costs Analyzing competitors’ costs, prices & offers Selecting a pricing method Selecting the final price

  5. Step 1:Selecting the pricing objective Survival Maximum current profit Maximum market share Maximum market skimming Product quality leadership

  6. Step 2:Determining demand Price P2 P1 P2 P1 Q2 Q1 Q2 Q1 Quantity demanded per period Quantity demanded per period A. Inelastic demand B. Elastic demand

  7. Demand is likely to be less elastic when – • There are few substitutes or competitors • Buyers do not readily notice the higher price • Buyers are slow to change their buying habits • Buyers think the higher price is justified • The product is a low-cost item or is bought infrequently • The total expenditure for a product is low relative to their income • The product is unique or when it is high in quality, prestige, or exclusiveness

  8. Step 3:Estimating costs Types of costs and levels of production: • Fixed costs - That do not vary with production or sales level. (rent, executive salaries) • Variable costs - That vary directly with the level of production. • Total cost - The sum of fixed and variable costs for any given level of production. • Average cost - The cost per unit at that level of production

  9. Accumulated production 10 8 6 4 2 Current price Cost per unit Experience curve 100,000 200,000 400,000 800,000

  10. Step 4:Analyzing competitors’ costs, prices & offers The firm should first consider the nearest competitor’s prices and offers and decide whether it can charge more, the same or less than the competitors.

  11. Step 5:Selecting a pricing method • Markup pricingAdding a standard markup to the cost of the product. Example: A toaster manufacturer had the following costs and expected sales – Variable cost = TK. 10 Fixed cost = TK. 300,000 Expected unit sales = 50,000

  12. The manufacturer’s cost per toaster is – Unit cost = Variable cost + (Fixed costs / Unit sales) = TK. 10 + (TK. 300,000 / 50,000) = TK. 16 Suppose the manufacturer wants a 20% markup on sales. The markup price is – Markup price= Unit cost / (1 – Desired return on sales) = TK. 16 / (1 – 0.2) = TK. 20

  13. Target-return pricingThe price that would yield its target rate of ROI. Suppose the manufacturer has invested TK.1 million on the business and wants to set a price to earn a 20% ROI. The target-return price is – = unit cost + (desired return X invested capital) / unit sales = TK. 16 + (.20 X TK. 1,000,000) / 50,000 = TK. 20

  14. Going-rate pricing • The firm bases its price largely on competitor’s prices with less attention paid to its own costs or to demand. • Where costs are difficult to measure or competitive response is uncertain, firms feel that the going price is a good solution.

  15. Step 6:Selecting the final price Impact of other marketing activities Company pricing policies Gain-and-risk-sharing pricing Impact of prices on other parties

  16. ADAPTING THE PRICE

  17. PRICE DISCOUNT AND ALLOWANCES Cash discount – to buyers who pay their bills promptly Quantity discount – to buyers who buy large volumes Functional discount - to trade channel members who perform certain functions Seasonal discount – to buyers who buy merchandise/ service out of season Allowances– an extra payment designed to gain reseller participation in special program

  18. DIFFERENTIATED PRICING Price discrimination occurs when a company sells a product/ service at two or more prices, that do not reflect a proportional difference in costs. The seller charges - • A separate price to each customer depending on the intensity of his/her demand. • Less to buyers who buy a large volume • Different amounts to different classes of buyers like –

  19. Customer-segment pricing - Different prices are charges for different customer groups for the same product. Product-form pricing - Different versions of the product are priced differently but not according to differences in their costs. Location pricing - A company charges different prices for different locations even though the product/cost is same.

  20. Time pricing - A firm varies its price by the season, the month, the day and even the hour. Image pricing Some companies price the same product at two different levels based on image differences. Channel pricing A product is priced differently based on channel differences.

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