Pricing Strategy

Pricing Strategy - Price Price Amount of money paid for...

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Unformatted text preview: Price Price Amount of money paid for product/service Buyer sacrifice = buyer benefits Price and Promises For a product Quality Performance Packaging Delivery After sale service For a service Experience Impact of deliverable Appearance of salesman Turnaround time deadlines Setting Prices Setting Select the pricing objective Determine demand Estimate costs Analyze competitors costs, prices, offers Selecting a pricing method Select the final price Price – Demand Determination Price Price Sensitivity Customers are price sensitive to products that have high costs or they purchase frequently Customers are less price sensitive when price is a small part of the total cost of a product Distinctive products Low customer awareness of substitutes Inability to compare substitutes Price is small part of customer’s income Part of price is paid by another party Product is used in conjunction with others previously bought Product is perceived to have status, prestige Product cannot be stored Price – Demand Determination Price Demand Curves Analyze past prices, quantities purchased, other factors Price experiments Survey customers Elasticity of Demand – demand tends to be inelastic… Few substitutes/few competitors Customers do not notice price change Customers are slow to change habits Customers view higher prices as justified Price – Estimating Costs Price Fixed costs – those that do not vary with production or sales Variable costs – vary directly with level of production Total costs = sum of fixed and variable costs Average cost – cost per unit at some level of production Experience curve – decline in average cost with accumulated production Activity based costing – identification of real costs associated with serving each customer Target costing – costs associated with company functions Price – Estimating Competitors’ Costs Costs Estimate – depends on nature of firms offering e.g. more features – higher price/costs e.g. fewer features – lesser price/costs Price – Select a Pricing Method Price Mark­up Variable cost per unit = $20 Fixed cost = $400,000 Expected unit sales = 75,000 Unit sales = VC + FC/Unit Sales = $20 + $400,000/75,000 = $25.33 Mark­up price = unit cost/(1­desired return) = $25.33/(1­.20) = $31.66 Price – Select a Pricing Method Price Target Return – determine the price that would yield its target return on investment (ROI) Target return = unit cost + (desired return X invested capital) unit costs Target return price = $20 + .20 * $1,500,000 = $20 + $300,000 = $24 75,000 75,000 PRICE AND VALUE PRICE Low price? Value – best price Value – any price Pricing objectives Pricing Profit Sales Market share Image Survival Pricing Strategy Pricing What is the cost of service? How does it compare to similar services? How is your service competitive? What kind of ROI are your expecting with this pricing strategy? Pricing Alternatives Pricing High­end = distinctive product Low­end = operating costs Medium = Location New Product Pricing New Penetration – low price, low margins Generate cash Establish product Skimming – high price/high margins elasticity of demand economies of scale KNEE JERK PRICING KNEE DECISIONS TO SIMULATE DEMAND Quality reductions Raising prices without good reason Playing games with prices Price Cuts??? Price Has Competitor Cut Price? No Maintain price; Watch competitors Yes Will Reduced price Hurt sales? No No Price cut Likely to be Permanent? Amount of Price reduction? Yes Yes By less than ___% Consider other ways To “reduce” price By ___% to ___% Reduce price by __% of competitor’s cut By more than ___% Drop price to meet Competitor’s Skim-the-Cream Pricing Skim-the-Cream Prices are set high When demand for the high price segment is exhausted, price is reduced When demand for the second price segment is exhausted, price is reduced again and so on Penetration Price Penetration Prices are set low when demand is though to be highly price elastic the segment of customers willing to pay a price in the upper range is small Pricing Psychology Pricing Cost­plus – select a gross margin that results in a desired profit level No thought for customer willingness to pay or perception of value Psychological Pricing odd­even pricing customary pricing symbolic pricing price lining Price Lines Price Allow customers to differentiate quality based on price price points = elasticity Promotional Pricing Promotional Loss leader pricing – price reduction on high volume brands to stimulate traffic Special event – seasons/holidays/birthdays Cash rebates – to encourage purchase in specified time period – to clear inventory without reducing stated price Low interest financing – alternative to price cut Longer payment terms – lower monthly payments Warranties/Service contracts – free or add ons Psychological discounting – end in 9, two fors, Variable Pricing Variable change prices to coincide with fluctuations in costs or demand Multiple Unit Pricing Multiple firm offers customers a discount for buying larger quantities Discounts Discounts Quantity – price reduction to large volume buyers Seasonal – reduction in price to buyers who purchase out­of­season Cash – price reduction to prompt bill payer Trade – offered to channel members who provide certain functions Allowance – extra payments to gain reseller participation in programs (e.g. trade­ins, promotions) Quantity Discount Quantity cumulative non­cumulative Discount Cumulative Discount Cumulative Cases Purchased during Year 1-50 51-125 126-250 over 250 Discount Percentage 0.0 2.0 4.0 7.0 With a cumulative quantity discount, the buyer’s purchases are added up over the year and the discount percentage applies to the total volume of purchases made during the year. The buyer above purchased five hundred cases during the year and would be entitled to a 7 percent discount from list price. Discount Non-Cumulative Discount Non-cumulative Cases Purchased on Individual Order 1-10 11-25 26-40 over 40 Discount Percentage 0.0 2.0 3.5 6.0 A buyer who places a single order for twelve cases gets a 2 percent discount from list price on that particular order. But suppose the buyer places fifty orders for ten cases each over the period of a year. Under a non­cumulative quantity discount, the buyer would not receive any quantity discount during the year. Trade Discount Trade Reduction in price granted to a channel member for performing marketing activities Retail selling price of an item is $200. Manufacturer quotes a chain discount of 30 and 10 percent. The wholesaler gets the 30 and 10 percent discount and is supposed to keep the 10 percent and pass on the 30 percent to the retailer. Retailer pays wholesaler: $200 less 30 percent $200 less $60 $140 $140 less 10 percent $140 less $14 $126 Wholesaler pays manufacturer: Other Discounts Other Seasonal Discount used to induce buyers to place orders in advance of need help manufacturers level out production another example is the “off­hour” discount e.g. air conditioners swimming pools hotels e.g. airlines telephone For Simple Cost-Plus Pricing Price = total fixed cost + total variable cost + projected profit Price = units produced Price = in the example, Price = = Price $175,000 + $780,000 + $50,000 = $3,350 = $3,350 300 Markup Pricing Markup the firm sets prices by calculating per unit merchandise costs and then determining the markup percentages needed to cover selling costs and profit mark­up = difference between sale price & cost Mark-up Price Calculation Mark-up Merchandise Costs Price = 100 – mark-up percent)/100 $3500 Price = (100-40)/100 =$5,583.33 Cash Discount Rebate Target Pricing prices are set to provide a specified rate of return for the level of production forecast by the firm Price = Investment costs X target return ( volume ) + average total costs Target Pricing Calculation (1) Capital investment for new plant ­ $2,000,000 (1) (2) Target return on investment ­ 20% : (3) Target income for year: (1) x (2) ­ $400,000 (4) Standard volume for year in units ­ 700 (5) Target return per unit: (3)/(4) $571.43 (1) Average variable costs at standard volume $2600.00 (7) Average fixed costs at standard volume $2855.00 (8) Average total costs: (6) + (7) $5455.00 (9) Selling price to retailers: (5) +(8) $6126.43 Break Even Analysis Break Determines the sales quantity, in units or dollars, at which total cost equals total revenue for a given price Price – Select a Pricing Method Price Break Even Break even volume = fixed cost/(price­variable cost) = $400,000/($25.33­$20) = 75,046 If the company sells 100,000 units at $25.33 it earns a profit of $533,000 (100,000 units * $5.33) Break even analysis can be modified to take into account the profit sought by a firm total fixed costs + profit price - variable costs/unit break even (units) = break even (dollars) = 1 total fixed costs + profit variable cost/unit price Key Questions about Pricing Key 1. How long can a price be maintained? 2. How frequently should prices be changed? 3. Should the same price be charged to all customers? 4. Will off­ending prices increases sales volume? 5. Will high prices enable a company to achieve a prestige image? Key Questions about Pricing 6. Should prices be subject to 6. 7. 8. 9. negotiation and bargaining? Should price specials be advertised to increase store traffic or customer leads? Should multiple­unit prices be set to expand until sales? How wide a range of prices should a firm employ? Key Questions about Pricing 10.Who should pay freight, insurance, 10. and other shipping costs? 11.What types of discounts should be given? 12.Should competitors’ terms be matched? A Genuinely New Product Commands the Highest Prices of All Highest There is no direct competition. Consumers have no frame of reference to establish a value in their own mind. Consumers who consider themselves “innovators” want to be the first on the block and on the cutting edge and will pay top dollar. Other Times to Price High Other When you have a brand that’s been traditionally priced for an upscale market and the product offers strong value­ reinforcing cues. When you want to establish snob appeal. When your product is demonstrably better than the competition and incorporates features you're sure the consumer wants and is willing and able to pay for. Other Times to Price High When you have a product that offers security in a social setting. When you have an upscale brand that is traditionally higher priced than competitive brands. When you have a strong safety or security story to tell that would make people feel neglectful for choosing a “cheaper” (read “inferior”) product. When you move a product from a typically low­ priced category and reposition it for a new use in a typically higher priced category. When to Price for the Middle When Ground Ground When you’re knocking off a higher­priced product. When you don’t have a major new benefit to offer. When your product is not an impulse item and a consumer has many choices. When a product is “new to your business” but is firmly established in the consumer’s mind. When to Price for the Middle Ground Ground When you have a mid­priced equity that cannot be extended into a high­end product. It would be hard (if not impossible) to change a mid­priced Chevy Celebrity into a high­end automobile. When you have a repackaged product that has not broken any new positioning ground. When to Price Low When When you can produce a product at less cost than anyone else When your consumer equity is in a low­priced positioning When you’re selling with a generic name instead of a brand name When you can obtain a major advantage by selling a no­frills product or want to fill out a product line (high, low, medium price points) such a as a bare bones Walkman to compete with other personal stereos that might have more features but an inferior brand name Sample Supply Curve Price of Coffee Supply Curve $4.00 $3.50 150 300 Quantity of Coffee Supplied Equilibrium Price Price of Coffee High Supply curve Profit Maximizing Quantity Demand Curve Low High Low Quantity of Coffee ...
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This note was uploaded on 12/21/2010 for the course BUSA 5336 taught by Professor Jeff during the Summer '09 term at UT Arlington.

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