Post on 21-Dec-2015
Price as a Marketing Mix Variable
Target Market
DesiredAttributes
Product:Engineering ExcellenceHigh StatusHigh Quality Components
Promotion:“Classy & Upscale”Media?Style?
Distribution:Exclusive
QUESTIONWhat Price Fits the Mix:Premium? Market? Discount?
Pricing Strategy Fundamentals
1. Determine the Strategic Pricing Objectives
2. Know the Importance of Pricing to Your Target Audience• (e.g., Perceived Value)
3. Know the Demand for Your Product (how will price affect it?)• (e.g., Price Elasticity of demand)
Pricing Strategy Fundamentals
5. Determine Your Pricing Strategy• Make Contingency Plans for special
situations• Variations in Demand• Geographic Variations• Market Segment Differences• Channel Differences
A. Target Return on Investment (ROI)•Achieve high turnover •Drop product lines that cannot reach required RO
B. Maximize Profits•Control costs and adjust price•Some items in a mix may achieve this goal
C. Increase cash flow•Adjust prices and discounts•Encourage purchases and rapid payment
Income Oriented Objectives
D. Keep a Going Concern•Adapt prices to "hold on"•Going concern is easier to sell
E. Survive•Set prices to "scrape by"•Survive economic storm or achieve owner retirement
Income Oriented Objectives
A. Maintain Market Share•Keep sales in roughly the same position relative to those of competitors•Firms want to keep leadership positions
B. Encourage Sales Growth•Adjust price and discounts•Encourage more purchases by existing buyers and attract new buyers
Sales Oriented Objectives
Competition-Oriented Objectives
A. Meet Competition:•Set prices and discounts about equal to those of competitors•Avoid price competition; price stabilization
B. Avoid Competition:•Set prices at a level that will discourage competition in the firm's market•Develop a distinctive image or use as a defensive move
Competition-Oriented Objectives
C. Undercut Competition:•Set prices lower than the competition's•Project bargain image or increase share
Objectives of Social ConcernA. Behave Ethically• Due to special considerations, set prices at
levels lower than they could have been• Avoid government regulations; long-term viewB. Maintain Employment• Set prices at levels that will maintain
production and employment of workers• Support community commitment; increase
attraction for a buyer
1. Mark-up or Cost-plus
Total Cost = Fixed Cost + Variable Cost
OR
Total Cost = Fixed Cost + (Estimated Quantity
x Unit Variable Cost)
TO SET PRICE:
1) Estimate Total Cost Per Unit
2) Apply the “Formula”e.g., TOTAL COST + 50%
(see spread sheet example)
ProblemIGNORES demand
AdvantageSIMPLE
1. Mark-up or Cost-plus
2. Target Return on Investment or Target
Pricing
a. Estimated Unit Cost = $12.50
b. Estimated Sales Volume = 800,000 units
c. TOTAL COST = $10,000,000
d. Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit
$Costs
& Revenue
Total Revenue
Total Cost
Fixed Costs
Units (000’s)800
2. Target Return on Investment or Target Pricing
d. Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit
e. Needed (Target) Revenue =
Total Cost + Profit
= $10,000,000 + $2,000,000 = $12,000,000
f. Unit Price
= REVENUE / VOLUME
= $12,000,000 / 800,000
=$15.00 / Unit Price
2. Target Return on Investment or Target Pricing
g. Problems
--Must be able to forecast the demand
--Will the customer pay the price?
1. Perceived Value Pricing
Scripto
--Weak with teens and young adults
--Found 42% of Eraser Mate bought by 11 - 14 year olds
--Established “Value” in Focus Group Research
--Verified in Placement Tests
--Market Success
B. Market or Demand Driven Pricing
1. Perceived Value Pricing
2. Demand and Elasticity
--Kinked Demand Curves
A. Price Skimming
1. Price Skimming Defined
2. Relationship to Product Life Cycle (PLC)
3. Advantage
4. Disadvantage
B. Umbrella Pricing
1. Umbrella Pricing Defined
2. Relationship to Product Life Cycle (PLC)
3. Advantage
4. Disadvantage
C. Slide Down the Demand Curve
1. Slide Down the Demand Curve Defined
2. Relationship to Product Life Cycle (PLC)
3. Advantage
4. Disadvantage
D. Penetration Pricing
1. Penetration Pricing Defined
2. Relationship to Product Life Cycle (PLC)
3. Advantage
4. Disadvantage