Pricing Considerations and Approaches Chapter 11.
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Transcript of Pricing Considerations and Approaches Chapter 11.
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Objectives• Understand the internal factors Understand the internal factors
affecting a firm’s pricing decisions.affecting a firm’s pricing decisions.• Understand the external factors Understand the external factors
affecting pricing decisions, affecting pricing decisions, including the impact of consumer including the impact of consumer perceptions of price and value.perceptions of price and value.
• Be able to contrast the three Be able to contrast the three general approaches to setting general approaches to setting prices.prices.
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• ““Buyer-driven Buyer-driven commerce” commerce” concept offers concept offers lower prices to lower prices to consumers and the consumers and the ability to sell ability to sell excess inventory excess inventory to sellersto sellers
• 13.5 million user 13.5 million user customer basecustomer base
• Tremendous Tremendous growthgrowth
• Most deals relate Most deals relate to travel or time to travel or time sensitive / sensitive / perishable servicesperishable services
• Not all ventures Not all ventures have been have been profitableprofitable
• Some customers Some customers find it difficult to find it difficult to commit to commit to purchase prior to purchase prior to learning detailslearning details
Priceline.comPriceline.com
Case Study
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Price Has Many NamesPrice Has Many Names
What is Price?
• RentRent• FeeFee• RateRate• CommissionCommission• AssessmentAssessment
• TuitionTuition• FareFare• TollToll• PremiumPremium• RetainerRetainer
• BribeBribe• SalarySalary• WageWage• InterestInterest• TaxTax
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Definition
• PricePrice The amount of money charged The amount of money charged
for a product or service, or the for a product or service, or the sum of the values that sum of the values that consumers exchange for the consumers exchange for the benefits of having or using the benefits of having or using the product or service.product or service.
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• Dynamic Pricing on the Web allows Dynamic Pricing on the Web allows SELLERS to:SELLERS to: Charge lower prices, reap higher margins.Charge lower prices, reap higher margins. Monitor customer behavior and tailor Monitor customer behavior and tailor
offers.offers. Change prices on the fly to adjust for Change prices on the fly to adjust for
changes in demand or costs.changes in demand or costs. Negotiate prices in online auctions and Negotiate prices in online auctions and
exchanges.exchanges.
What is Price?
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• Dynamic Pricing on the Web Dynamic Pricing on the Web allows BUYERS to:allows BUYERS to: Get instant price comparisons Get instant price comparisons
from thousands of vendors.from thousands of vendors. Find and negotiate lower prices.Find and negotiate lower prices. Negotiate prices in online Negotiate prices in online
auctions and exchanges.auctions and exchanges.
What is Price?
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• Price and the Marketing Mix:Price and the Marketing Mix: Only element to produce Only element to produce
revenuesrevenues Most flexible elementMost flexible element Can be changed quicklyCan be changed quickly
• Price Competition Price Competition • Common Pricing MistakesCommon Pricing Mistakes
What is Price?
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Factors to Consider When Setting Price
• Marketing Marketing objectivesobjectives
• Marketing mix Marketing mix strategiesstrategies
• CostsCosts
• Organizational Organizational considerationsconsiderations
• Market positioning Market positioning influences pricing strategyinfluences pricing strategy
• Other pricing objectives:Other pricing objectives: SurvivalSurvival Current profit maximizationCurrent profit maximization Market share leadershipMarket share leadership Product quality leadershipProduct quality leadership
• Not-for-profit objectives:Not-for-profit objectives: Partial or full cost recoveryPartial or full cost recovery Social pricingSocial pricing
Internal Internal Factors Factors
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Factors to Consider When Setting Price
• Marketing Marketing objectivesobjectives
• Marketing mix Marketing mix strategiesstrategies
• CostsCosts
• Organizational Organizational considerationsconsiderations
• Pricing must be Pricing must be carefully coordinated carefully coordinated with the other with the other marketing mix marketing mix elementselements
• Target costing is often Target costing is often used to support used to support product positioning product positioning strategies based on strategies based on priceprice
• Nonprice positioning Nonprice positioning can also be usedcan also be used
Internal Internal Factors Factors
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Factors to Consider When Setting Price
• Marketing Marketing objectivesobjectives
• Marketing mix Marketing mix strategiesstrategies
• CostsCosts
• Organizational Organizational considerationsconsiderations
• Types of costs:Types of costs: VariableVariable FixedFixed Total costsTotal costs
• How costs vary at How costs vary at different production different production levels will influence levels will influence price settingprice setting
• Experience (learning) Experience (learning) curve effects on pricecurve effects on price
Internal Internal Factors Factors
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Factors to Consider When Setting Price
• Marketing Marketing objectivesobjectives
• Marketing mix Marketing mix strategiesstrategies
• CostsCosts
• Organizational Organizational considerationsconsiderations
• Who sets the price?Who sets the price? Small companies: CEO Small companies: CEO
or top managementor top management Large companies: Large companies:
Divisional or product Divisional or product line managersline managers
• Price negotiation is Price negotiation is common in industrial common in industrial settingssettings
• Some industries have Some industries have pricing departmentspricing departments
Internal Internal Factors Factors
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Factors to Consider When Setting Price
• Nature of market Nature of market and demandand demand
• Competitors’ costs, Competitors’ costs, prices, and offersprices, and offers
• Other Other environmental environmental elementselements
• Types of marketsTypes of markets Pure competitionPure competition Monopolistic competitionMonopolistic competition Oligopolistic competitionOligopolistic competition Pure monopolyPure monopoly
• Consumer perceptions Consumer perceptions of price and valueof price and value
• Price-demand Price-demand relationshiprelationship Demand curveDemand curve Price elasticity of Price elasticity of
demanddemand
External External Factors Factors
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Factors to Consider When Setting Price
• Nature of market Nature of market and demandand demand
• Competitors’ costs, Competitors’ costs, prices, and offersprices, and offers
• Other Other environmental environmental elementselements
• Consider competitors’ costs, Consider competitors’ costs, prices, and possible prices, and possible reactions when developing reactions when developing a pricing strategy a pricing strategy
• Pricing strategy influences Pricing strategy influences the nature of competitionthe nature of competition Low-price low-margin Low-price low-margin
strategies inhibit strategies inhibit competitioncompetition
High-price high-margin High-price high-margin strategies attract strategies attract competitioncompetition
• Benchmarking costs against Benchmarking costs against the competition is the competition is recommendedrecommended
External External Factors Factors
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Factors to Consider When Setting Price
• Nature of market Nature of market and demandand demand
• Competitors’ costs, Competitors’ costs, prices, and offersprices, and offers
• Other Other environmental environmental elementselements
• Economic conditionsEconomic conditions Affect production costs Affect production costs Affect buyer perceptions Affect buyer perceptions
of price and valueof price and value
• Reseller reactions to Reseller reactions to prices must be prices must be consideredconsidered
• Government may restrict Government may restrict or limit pricing optionsor limit pricing options
• Social considerations Social considerations may be taken into may be taken into accountaccount
External External Factors Factors
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• Cost-Based Pricing: Cost-Based Pricing: Cost-Plus Cost-Plus PricingPricing Adding a standard markup to costAdding a standard markup to cost Ignores demand and competitionIgnores demand and competition Popular pricing technique because:Popular pricing technique because:
It simplifies the pricing processIt simplifies the pricing process Price competition may be minimizedPrice competition may be minimized It is perceived as more fair to both It is perceived as more fair to both
buyers and sellersbuyers and sellers
General Pricing Approaches
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Cost-Based Pricing ExampleCost-Based Pricing Example
Variable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000
Expected sales: 100,000 units Desired Sales Markup: Expected sales: 100,000 units Desired Sales Markup: 20% 20%
Variable Cost + Fixed Costs/Unit Sales = Unit CostVariable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup PriceUnit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25$25 / (1 - .20) = $31.25
General Pricing Approaches
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• Cost-Based Pricing: Cost-Based Pricing: Break-Even Break-Even Analysis and Target Profit PricingAnalysis and Target Profit Pricing Break-even charts show total cost and Break-even charts show total cost and
total revenues at different levels of unit total revenues at different levels of unit volume.volume.
The intersection of the total revenue and The intersection of the total revenue and total cost curves is the break-even point.total cost curves is the break-even point.
Companies wishing to make a profit must Companies wishing to make a profit must exceed the break-even unit volume.exceed the break-even unit volume.
General Pricing Approaches
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Break-Even Analysis and Target Profit PricingBreak-Even Analysis and Target Profit Pricing
General Pricing Approaches
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
Thousands of Dollars
0 10 20 30 40
1000
800
600
400
200
Break-even point
Target Profit $200,000
Quantity To Be Sold To Meet Target Profit
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• Value-Based Pricing:Value-Based Pricing: Uses buyers’ perceptions of value rather Uses buyers’ perceptions of value rather
than seller’s costs to set price.than seller’s costs to set price. Measuring perceived value can be Measuring perceived value can be
difficult.difficult. Consumer attitudes toward price and Consumer attitudes toward price and
quality have shifted during the last quality have shifted during the last decade.decade. Introduction of less expensive versions of Introduction of less expensive versions of
established brands has become common.established brands has become common.
General Pricing Approaches
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• Value-Based Pricing:Value-Based Pricing: Business-to-business firms seek to Business-to-business firms seek to
retain pricing powerretain pricing power Value-added strategies can helpValue-added strategies can help
Value pricing at the retail levelValue pricing at the retail level Everyday low pricing (EDLP) vs. high-Everyday low pricing (EDLP) vs. high-
low pricinglow pricing
General Pricing Approaches
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• Competition-Based Pricing:Competition-Based Pricing: Also called going-rate pricingAlso called going-rate pricing May price at the same level, above, May price at the same level, above,
or below the competitionor below the competition Bidding for jobs is another variation Bidding for jobs is another variation
of competition-based pricingof competition-based pricing Sealed bid pricingSealed bid pricing
General Pricing Approaches