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armstrong09_basic - Pricing Considerations and Strategies...

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Unformatted text preview: Pricing Considerations and Strategies Chapter 9 Road Map: Previewing the Concepts • Identify and explain the external and internal factors affecting a firm's pricing decisions. • Contrast the three general approaches to setting prices. • Describe the major strategies for pricing imitative and new products. 9-2 Road Map: Previewing the Concepts • Explain how companies find a set of prices that maximizes the profits from the total product mix. • Discuss how companies adjust their prices to take into account different types of customers and situations. • Discuss the key issues related to initiating and responding to price changes. 9-3 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 values that consumers exchange for the benefits of having or using the product or service. Dynamic Pricing: charging different prices depending on individual customers and situations. 9-4 • Internal Factors Affecting Pricing Decisions • Marketing Objectives: Survival, current profit maximization, market share leadership, and product quality leadership. 9-5 Company must decide on its strategy for the product. General Objectives: Internal Factors Affecting Pricing Decisions • Marketing Mix Strategy: Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. 9-6 Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. Target costing: Internal Factors Affecting Pricing Decisions • Fixed Costs: Costs: Variable Costs: Costs that do not vary with production or sales level. Costs that vary directly with the level of production. 9-7 Internal Factors Affecting Pricing Decisions • Must decide who within the organization should set prices. This will vary depending on the size and type of company. 9-8 Organizational Considerations: External Factors Affecting Pricing Decisions • Costs set the lower limit of prices. The market and demand set the upper limit. The Market and Demand: 9-9 Pricing in Different Types of Markets • • • • Pure competition Monopolistic competition Oligopolistic competition Pure monopoly 9 - 10 Cost­Plus Pricing • • Adding a standard markup to the cost of the product. Popular because: Sellers more certain about cost than demand Simplifies pricing When all sellers use, prices are similar and competition is minimized Some feel it is more fair to both buyers and sellers 9 - 11 Value­Based Pricing • Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. 9 - 12 Competition­Based Pricing • Going­Rate Pricing: • Sealed­Bid Pricing: Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand. 9 - 13 New­Product Pricing Strategies Market­ Skimming • Set a high price for a new product to “skim” revenues layer by layer from the market. Company makes fewer, but more profitable sales. • • • 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. 9 - 14 New­Product Pricing Strategies Market­ Penetration • Set a low initial price in order to “penetrate” the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share. • 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. 9 - 15 Product­Line 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 9 - 16 Optional­ and Captive­ Product Pricing • Optional­Product • Captive­Product Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). 9 - 17 Pricing Strategies • By­Product Pricing • Product Bundle Pricing 9 - 18 Discounts and Allowances • Discounts Cash Quantity Functional Seasonal Trade­in • Allowances Promotional 9 - 19 Segmented Pricing • Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types: Customer­segment Product­form Location pricing Time pricing • 1. 2. 3. 4. 9 - 20 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. 9 - 21 Promotional Pricing • • • Low­Interest Financing Longer Warranties Free Maintenance • • • • Discounts Cash Rebates Special­ Event Pricing Loss Leaders 9 - 22 Geographical Pricing • • • • • FOB­origin pricing Uniform­delivered pricing Zone pricing Basing­point pricing Freight­absorption pricing 9 - 23 International Pricing • Price depends on many factors, including: Economic conditions Competitive situations Laws and regulations Development of the wholesaling and retailing system Costs 9 - 24 Initiating Price Changes • Price Cuts: Excess capacity Falling market share Dominate market through lower costs Overdemand • Price Increases: 9 - 25 Public Policy and Pricing • • • • • Price fixing Predatory pricing Retail price maintenance Discriminatory pricing Deceptive pricing 9 - 26 ...
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