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Bmgt350- chapter 18

Bmgt350- chapter 18 - Chapter 18 How to Set a Price on a...

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Chapter 18 How to Set a Price on a Product Four step process: 1. Establish pricing goals a. Pricing objectives fall into 3 categories: profit oriented, sales oriented, and status quo. b. Profit maximization objective may require a bigger initial investment than the firm can commit c. Reaching the desired market share often means sacrificing short-term profit d. Meeting the competition is the easiest pricing goal to implement 2. Estimate demand, costs and profits a. Total revenue is a function of price and quantity demanded and that quantity demanded depends on elasticity b. After establishing pricing goals, managers estimate total revenue at a variety of prices and then determine corresponding costs for each price c. Estimate how much profit, if any, and how much market share can be earned at each possible price 3. Choose a price strategy to help determine a base price a. Price strategy defines the initial price and gives direction for price involvements over the product life cycle b. A company’s freedom in pricing a new product and devising a price strategy depends on the market conditions and the other elements of the marketing mix c. Strategic pricing decisions tend to be made without an understanding of the likely buyer or the competitive response d. The three basic price strategies include price skimming, penetration pricing and status quo pricing i. Price skimming- called a “market plus” approach to pricing because it denotes a high price relative to the prices of competing products. 1. Companies often use this strategy for new products when the product is perceived by the target market as having unique advantages. 2. Companies use skimming and then lower prices over time 3. Works best when the market is willing to buy the product even though it carries an above-average price 4. Also works well when a product is protected legally, when it represents a technological breakthrough, or when it has in some other way blocked the entry of competitors. 5. As long as demand is greater than supply, skimming is an attainable strategy
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6. A successful skimming strategy enables management to recover its product development costs quickly 7. A skimming strategy encourages competitors to enter the market ii. Penetration pricing- means charging a relatively low price for a product as a way to reach the mass market. 1. It’s at the opposite end of the spectrum from skimming 2. The low price is designed to capture a large share of a substantial market, resulting in lower production costs 3. To reach the break-even point, penetration pricing requires a higher volume of sales than would a skimming policy 4. Tends to discourage competition 5. Tends to be effective in a price-sensitive market 6. Price sensitivity and greater competitive pressure should lead to a lower initial price and a relatively slow decline in the price later or to a stable low price 7. Wal-mart is typically associated with penetration pricing 8. If a firm has a low fixed cost structure and each sale provides a large contribution to
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Bmgt350- chapter 18 - Chapter 18 How to Set a Price on a...

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