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• Pricing

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What is Price?

• Price is the value that customers give up or
  exchange to obtain a desired product.
• Payment may be in the form of
• money,
• service or goods (bartering),
• favors.
• votes,
• or anything else that has value to the other
  party.

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Fig. 8-2, Pricing Strategy Process Template
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Market-Based Pricing Strategies
An analysis of customer needs and the benefits a
product creates relative to competitor products.
Price is set relative to competition to create a
superior value.

• 1. Skim Pricing
• 2. Value-in-Use Pricing
• 3. Market-Based Value Pricing
• 4. Segment Pricing
• 5. Strategic Account Pricing
• 6. Psychological Pricing

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Skim Pricing

• Skim Pricing2. Value-in-Use Pricing3.
  Market-Based Value Pricing4. Segment Pricing5.
  Strategic Account Pricing 6. Psychological
  Pricing

Skim Price - Charging a high, premium price
combined with superior customer value.

• Works best
• in a quality-sensitive market (product benefits
  that customers want at any cost)
• with few competitors and little chance of
  competitors entering
• for a business with a sustainable differential
  advantage
• several customer segments with different levels
  of price sensitivity

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2. Value-in-Use Pricing(Economic Value Pricing)
1. Skim Pricing2. Value-in-Use Pricing3.
Market-Based Value Pricing4. Segment Pricing5.
Strategic Account Pricing 6. Psychological
Pricing

• Pricing to create savings for a customer based on
  a lower total life cost when compared to a
  competitors cost
• Customer may save money on acquisition costs,
  usage costs, and maintenance costs

• Works best
• Works in growth stage of product life cycle
• Does not require lowering of prices
• Price may be higher than competition as long as
  total cost to consumer is lower

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3. Market-Based Value Pricing (Perceived Value
Pricing)
1. Skim Pricing2. Value-in-Use Pricing3.
Market-Based Value Pricing4. Segment Pricing5.
Strategic Account Pricing 6. Psychological
Pricing

• Perceived Value Pricing Pricing to create a
  greater customer value based on customer
  perceptions of product, service, company
  benefits, and the perceived cost of acquiring
  those benefits.

Requires good understanding of customer needs and
competitor positions
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4. Segment Pricing
1. Skim Pricing2. Value-in-Use Pricing3.
Market-Based Value Pricing4. Segment Pricing5.
Strategic Account Pricing 6. Psychological
Pricing

• Pricing strategy is matched to needs of segment
• price-sensitive wants lowest price even with no
  added benefits
• quality-sensitive will pay premium for benefits

Customers choose the segment offering that fits
their usage patterns and price sensitive levels
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Cellular Phone Market-Based Segment Pricing
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5. Strategic Account Pricing
1. Skim Pricing2. Value-in-Use Pricing3.
Market-Based Value Pricing4. Segment Pricing5.
Strategic Account Pricing 6. Psychological
Pricing

• Customers that are large and very important to a
  businesss sales and profits
• Pricing customized to the unique needs of the
  account

• Works best
• Longer range pricing perspective
• Prices may adjust over several years
• Goal is to maintain strong relationship

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6. Psychological Pricing
1. Skim Pricing2. Value-in-Use Pricing3.
Market-Based Value Pricing4. Segment Pricing5.
Strategic Account Pricing 6. Psychological
Pricing

• Odd-Even Pricing

Marketers assume there is a psychological
response to odd prices that differs from the
responses to even prices. For example 1.99
vs. 2.00
Price Lining
Similar items in a product line sell at different
prices, called price points For example
refrigerator prices of 600, 800, 1,000
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Cost-Based Pricing Strategies
The cost of the product plus a desired margin.
In markets where product differentiation is
minimal, cost-based pricing is often a reasonable
alternative to market-based pricing.

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

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1. Floor Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

Internal, cost-based price based on desired level
of profitability

• Used in early stage of product life cycle
• Used when customers are less price sensitive
• May be based on desired margin or ROI

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2. Cost-Plus Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

Price determined by using a standard markup on
cost

• Used in early stages of product life cycle
• Standard markups vary by industry

Business Manufacturers Wholesalers Wholesale Ret
ailers Buyers Sector Price Index Markup Price Mar
kup Index Furniture 100 38.9 138.90 63.6 227 Gas
oline 100 19.8 119.80 22.8 147 Groceries 100 23.
5 123.50 28.5 159 Sporting Gds 100 34.8 134.80
57.8 213 Liquor 100 21.6 121.60 37.1 167 Averag
e 100 27.7 127.70 38.8 177
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3. Penetration Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

A New Product is Introduced at a Very Low
Price i.e. Intels Pentium chip

• Volume drives down cost
• Volume leader gains cost advantages and continues
  to lower costs
• Lower costs inhibit new market entrants and
  encourage exit
• Used in growth stage
• Used when product is not well differentiated
• Used for price-sensitive customers in markets
  with many competitors

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4. Low-Cost Leader Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

Pricing more aggressively in an attempt to build
market share and volume based on a cost
advantage. Business seeks to always offer the
lowest price and no competitor can beat it For
example Walmart

• Occurs in late stages of product life cycle
• Little product differentiation
• Prices very competitive

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5. Competitive Bid Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

Suppliers selected based on lowest bid price
Bidders must meet pre-qualifications and
delivery dates
In use in markets where there is little or no
product differentiation
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6. Harvest Pricing

• Floor Pricing
• Cost-Plus Pricing
• Penetration Pricing
• Low-Cost Leader Pricing
• Competitive Bid Pricing
• Harvest Pricing

Businesses raise prices in anticipation of a
reduction in volume Based on cost and need for
higher margins

• Used in decline stage of product life cycle when
  margins are low and volumes flat or declining
• Prices continue to increase until business exits
  market

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Break-even Analysis

• Determines the number of units that need to be
  sold in order to break even.
• Breakeven volume is the volume needed to cover
  fixed expenses on the basis of a particular
  margin per unit.
• Break-even Volume Fixed Expenses/ Margin per
  Unit

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Break-Even Analysis
Price 100 Variable costs 60 Contribution 40 Fix
ed cost 200,000
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Break-Even Analysis
Price 100 Variable costs 60 Contribution 40 Fix
ed cost 200,000
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Break-Even Analysis
Determines the Number of Units that a Firm Must
Produce Sell at a Given Price to Cover All Costs
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Cost in Dollars (thousands)
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3
2
1
0
1000
2000
3000
4000
5000
Sales Volume in Units (thousands)
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Price Elasticity

• When a price is inelastic, all aspects of
  performance are improved when prices are
  increased.
• When a price is elastic, sales revenue will
  increase with a price cut and decrease with a
  price increase

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Determinants of Price Elasticity

• Ease of Switching
• Supply/Demand Conditions
• Competitor Price Response

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Ease of Switching

• Ease of switching is based on these factors
• Product Differentiation
• Cost of Switching
• Customer Loyalty

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Supply/Demand Conditions

• These factors explain how supply and demand
  affect elasticity
• Supply conditions
• Demand conditions
• Substitutes

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Competitor Price Response

• What will the competitors do if we change our
  price?

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Substitutes and Complements

• Products that have positive cross-elasticity are
  substitutes
• Lowering the price of one decreases demand for
  the other and vice versa
• Products that have negative cross-elasticity are
  complementary
• lowering the price of one increases demand for
  both

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Demand Curves for Normal and Prestige Products
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Shifts in Demand Curves

• Non-price factors that influence shifts in demand
  curves
• advertising campaigns promoting the product,
• weather and seasonal factors,
• development of new products,
• economic conditions.

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Price Elasticity of Demand
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Figure 8.10Price Elasticity and Performance
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Pricing Tactics for Multiple Products

• Price Bundling
• Selling two or more goods or services as a single
  package for one price.
• e.g. Season music tickets for a single price,
  computer with a monitor, keyboard, and software.

• Captive Pricing
• Pricing tactic a firm uses when it has two
  products that work only when used together.
• Sells one at a very low-price (razor), and make a
  profit on second high-margin item (blades).