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Pricing Considerations and Strategies

Understand the importance of pricing decisions, factors influencing prices, and various strategic pricing approaches for maximizing profits and achieving marketing objectives.

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Pricing Considerations and Strategies

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  1. 9 Pricing Considerations and Strategies

  2. What is a Price? • Narrowly, price is the amount of money charged for a product or service. • Broadly, price is the sum of all the _____ that consumers exchange for the benefits of having or using the product or service. • Dynamic Pricing:

  3. Factors Affecting Pricing Decisions

  4. Survival Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc. Marketing Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. High Prices to Cover Higher Performance Quality and R&D. Internal Factors Affecting Pricing Decisions

  5. Product Design Nonprice Positions Target Costing Price Distribution Promotion Internal Factors Affecting Pricing Decisions: Marketing Mix Strategy Customers Seek Products that Give Them the Best Value in Terms of Benefits Received for the Price Paid.

  6. Internal Factors Affecting Pricing Decisions • Costs: • Fixed Costs: • Costs that do not vary with production or sales level. • Variable Costs: • Costs that vary directly with the level of production.

  7. Internal Factors Affecting Pricing Decisions • Organizational Considerations: • Must decide who within the organization should set prices. • This will vary depending on the size and type of company.

  8. Factors Affecting Pricing Decisions

  9. External Factors Affecting Pricing Decisions • The Market and Demand: • Costs set the lower limit of prices. • The market and demand set the upper limit.

  10. Pricing in Different Types of Markets Pure Competition: Many buyers and sellers where each has little effect on the going market price Monopolistic Competition: Many buyers and sellers who trade over a range of prices Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies

  11. Demand Curve A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.

  12. Major Considerations in Setting Price

  13. General Pricing Approaches • Cost-Based Pricing • Cost-plus pricing • Break-even pricing • Value-Based Pricing • Competition-Based Pricing

  14. Certainty About Costs Unexpected Situational Factors Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product Simplest Pricing Method Ethical Pricing is Simplified Attitudes of Others Price Competition Is Minimized Ignores Current Demand & Competition Fairer to Buyers & Sellers Cost-Based Pricing

  15. Break-Even Chart

  16. Value-Based Pricing • Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

  17. Cost-Based Versus Value-Based Pricing

  18. Methods for Setting Prices Going-Rate Company Sets Prices Based on What Competitors Are Charging Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge ? ? Competition-Based Pricing

  19. Market-Skimming Set a high price for a new product to “skim” revenues layer by layer from the market. When to use: Product’s quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price. New-Product Pricing Strategies

  20. Market Penetration Set a low initial price in order to “penetrate” the market quickly and deeply. When to use: Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary. New-Product Pricing Strategies

  21. Product Line Pricing • Involves setting price steps between various products in a product line based on: • Cost differences between products • Customer evaluations of different features • Competitors’ prices

  22. Optional- and Captive-Product Pricing • Optional-Product • Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). • Captive-Product • Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

  23. Pricing Strategies By-Product Pricing: Setting a price for by-products in order to make the main product’s price more competitive Product Bundle Pricing: Combining several products and offering the bundle at a reduced price

  24. Discounts and Allowances Allowances Discounts Trade-In Promotional Cash Quantity Functional Seasonal

  25. Segmented Pricing

  26. Psychological Pricing • Considers the psychology of prices and not simply the economics. • Consumers usually perceive higher-priced products as having higher quality. • Consumers use price less when they can judge quality of a product.

  27. Promotional Pricing Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Low-Interest Financing Loss Leaders Approaches: Special-Event Pricing Longer Warranties Cash Rebates Free Maintenance Discounts

  28. Geographical Pricing • FOB-origin pricing • Uniform-delivered pricing • Zone pricing • Basing-point pricing • Freight-absorption pricing

  29. International Pricing • Price depends on many factors, including: • Economic conditions • Competitive situations • Laws and regulations • Development of the wholesaling and retailing system • Costs

  30. Price Increases Price Cuts Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs Why? Cost Inflation Overdemand: Company Can’t Supply All Customers’ Needs Initiating Price Changes

  31. Buyers’ Reactions to Price Changes What would you think if the price of Joy was suddenly cut in half?

  32. Number of Firms is Small Competitors Mostly React When: Product is Uniform Buyers are Well Informed Reactions to Price Changes Being Replaced by Newer Models Price Cuts Are Seen by Buyers As: Current Models Are Not Selling Well Company is in Financial Trouble

  33. Assessing and Responding to Competitor Price Changes

  34. Public Policy and Pricing

  35. Public Policy Issues in Pricing Pricing Within Channel Levels Price Fixing Predatory Pricing Both Are Prohibited by Law

  36. Pricing Across Channel Levels Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that are not Available To Consumers (Bait and switch) Retail Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade

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