Pricing Strategy

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Developing Pricing Strategies and Programs

Marketing Management

Price Changing in the Internet
Internet reverse the fixed pricing trend, since:
Buyers can: Get instant price comparisons from thousands of vendors. Name their price and have it met. Get products free. Both Buyers and Sellers can: Negotiate prices in online auctions and exchanges Sellers can: Monitor customer behavior and tailors offers to individuals. Give certain customers access to special prices.

Consumer Psychology and Pricing
Economists assume:
The consumer are “price takers”. Consumers accept price at “face value”.

Marketers recognize, that consumers often actively:
Process information Interpreting price from their knowledge Formal communications Informal communications Other factors

Consumer Psychology and Pricing (cont.)
Consumer perceptions of price based on: Reference Price To compare an observed price to an internal reference price their remember Price-Quality Inference Use price as an indicator of quality Price Ending Price should end in an odd number Pricing Cues Limited availability

Setting the Price
Six step procedure
1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitor’s cost, prices and offers 5. Selecting a pricing method 6. Selecting the final price

Step 1 Selecting the Pricing Main Objectives

Survival
> Overcapacity, intense competition or changing consumer wants.

Maximum Current Profit
> Emphasizing current performance.

Maximum Market Share
> Market Penetration Pricing Strategy.

Step 1 Selecting the Pricing Main Objectives

Maximum Market Skimming
> Skim the maximum revenue from various segments.

Product-quality Leadership
> High quality = premium price.

Other Objectives

Determining Demand
Price Sensitivity
> Understanding customers’ sensitivity in price to estimate demand.

Step 2

Estimating Demand Curve
Measure to attempt to measure demand curves: > Surveys > Price Experiments > Statistical analysis

Price Elasticity of Demand
> Responsiveness of Demand through price changing

Inelastic and Elastic Demand

Figure 14.2

Step 3 Estimating Costs
Types of Costs and Levels of Production
> Fixed Cost > Variable Cost > Total Cost > Average Cost

Accumulated Production Target Costing

Cost per unit as a function of Accumulated Production: The Experience Curve

Figure 14.4

Analyzing Competitor’s Costs, Prices and Offers Research
Analyze competitors current financial situation, recent sales, customer loyalty and corporate objectives.

Step 4

Compare Evaluate

Selecting a Pricing Method

Step 5

Markup pricing

Example Variable cost = $10 Fixed cost = $300,000 Expected unit sales = 50,000 20% markup on sales

Selecting a Pricing Method

Step 5

Target-Return pricing

Example Invested capital = $1,000,000 Targeted ROI = 20%

Break-Even Chart for Determining Target-Return Price and Break-Even Volume

Figure 14.6

Selecting a Pricing Method Perceived value pricing
Buyers image on product performance, channel deliverables, warranty quality, customer support, supplier’s reputation, trustworthiness, and esteem.

Step 5

Value pricing
Becoming a low-cost producer without sacrificing quality.

Going-Rate pricing

Selecting a Pricing Method Auction-Type Pricing
English auctions (auction bid) Dutch auctions (descending bid) Sealed-bid auctions

Step 5

Selecting the Final Price Impact of other marketing activities Company pricing policies Gain-And-Risk-Sharing pricing Impact of price on other parties

Step 6

Adapting the Price
Geographical Pricing (Cash, Countertrade, Barter) Price Discount and Allowances Promotional Pricing Differentiated Pricing

Geographical Pricing (Cash, Countertrade, Barter)

The company decides how to price its product to different locations and countries. Countertrade Barter Compensation deal Buyback arrangement Offset

Price...
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