The Management of Price

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The Management of Price

• Professor Charles D. Schewe

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The Nature of Pricing
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The Marketing Management Exchange Equation
Revisited
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The Marketing Management Exchange Equation

• Product
• Place
• Promotion

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Management of Price

• Price Determination

• Price Administration

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Factors to Consider When Setting Prices
Internal Factors
Price is the Amount of Money Charged for a
Product or Service.
Pricing Decisions
External Factors
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Major Considerations in SettingPrices
Product Costs
Consumer Perceptions of Value
No Possible Profit at This Price
No Possible Demand at This Price
High Price
Low Price
Competitors Price and Other External
Internal Factors
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Internal Factors Affecting PricingDecisions
Marketing Objectives
Marketing-Mix Strategy
Costs
Organizational Considerations
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The Strategic Price-Setting Process

• The Organizations Strategic Plan

• Pricing Objectives

• Costs, Demand, Competition

• Pricing Strategy Options

• Demand Related Approaches

• Legal and Social Considerations

• Price Adjustment Tactics

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Marketing Objectives that Affect Pricing
Decisions
Survival Low Prices to Cover Variable Costs
and Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the Price that
Produces the Maximum Current Profit, Cash Flow or
ROI.
Marketing Objectives
Market Share Leadership Low as Possible Prices
to Become the Market Share Leader.
Product Quality Leadership High Prices to Cover
Higher Performance Quality and R D.
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Setting Pricing Policy
1. Selecting the pricing objective
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The Three Cs Modelfor Price Setting
Costs
Competitors prices and prices of substitutes
Customers assessment of unique product features
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The Role of Costs
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Types of Costs
Fixed Costs (Overhead) Costs that dont vary
with sales or production levels. Executive
Salaries Rent
Variable Costs Costs that do vary directly with
the level of production. Raw materials

• Total Costs
• Sum of the Fixed and Variable Costs for a Given
• Level of Production

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The Role of Costs

• Types of Costs
• Fixed, Variable, Marginal Costs

• Cost Related Approaches
• Formula Pricing

• Cost-Plus Pricing

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What is Cost-Plus Pricing and Why is it Popular?
Adding a Standard Markup to the Cost of the
Product.
Sellers Are More Certain About Costs Than
Demand
Minimizes Price Competition
Perceived Fairness to Both Buyers and Sellers
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The Role of Costs

• Types of Costs
• Fixed, Variable, Marginal Costs
• Cost Related Approaches
• Formula Pricing
• Cost-Plus Pricing

• Target Return Pricing

• Breakeven Pricing

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Breakeven Analysis or Target Profit Pricing
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Target Profit
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The Role of Costs

• Types of Costs
• Fixed, Variable, Marginal Costs
• Cost Related Approaches
• Formula Pricing
• Cost-Plus Pricing
• Target Return Pricing
• Breakeven Pricing

• Experience Curve Pricing

• Marginal Cost Pricing

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The Role of Demand

• The Nature of Demand
• Inverse Relationship
• Prestige Products

• Price Elasticity

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Price Elasticity of Demand
A. Inelastic Demand - Demand Hardly Changes
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
B. Elastic Demand - Demand Changes Greatly
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
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The Role of Demand

• The Nature of Demand
• Inverse Relationship
• Prestige Products

• Price Elasticity

• Price Ranges

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The Role of Competition

• Types of Competition
• Generic
• Form
• Brand

• Direct and Indirect

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Competition-Based Pricing
Setting Prices
Going-Rate Company Sets Prices Based on
What Competitors Are Charging.
Sealed-Bid Company Sets Prices Based on What
They Think Competitors Will Charge.
?
?
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Cost-Based Vs. Value-Based Pricing
Cost-Based Pricing
Value-Based Pricing
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Pricing Strategies
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Pricing Strategies

• Pricing New Products

• Skimming Strategy

• Penetration

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Setting Initial Product Prices
Market Skimming
Market Penetration

• Setting a Low Price for a New Product in Order
  to Attract a Large Number of Buyers.
• Results in a Larger Market Share.
• Walmart

• Setting a High Price for a New Product to Skim
  Maximum Revenues from the Target Market.
• Results in Fewer, More Profitable Sales.
• Intels 1,000 Chip

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Conditions Favoring a Skimming Strategy

• Demand Insensitive to Price

• Different Price Segments

• Consumers Unaware of Production and
• Marketing Costs

• Little Likelihood of Quick Competitive
• Price Setting

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Conditions Favoring a Penetration Strategy

• Demand Price Sensitive

• No Different Price Segments

• Products Not Status Items

• Competition Likely to Respond Quickly

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Price - Quality Strategies
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Pricing Strategies

• Pricing Approaches Over the Life Cycle

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Pricing Over the Product Life Cycle

• Introduction Stage

• Difficulty of Pricing Decisions
• Depends on Newness of Product

• May Offer Special Introductory Price Deal
• for Short Period

• Skimming or Penetration Decision

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Pricing Over the Product Life Cycle

• Growth Stage
• At Beginning of Stage, Reduce Prices to
  Discourage Competition
• Offer Many Price lines
• As Growth Slows, Reduce Prices to Broaden
  Products Appeal
• Aggressive Pricing to Hold Off Competition

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Pricing Over the Product Life Cycle

• Maturity Stage
• Avoid Price Cutting
• Price Stability is Best
• Flexibility is Necessary

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Pricing Over the Product Life Cycle

• Decline Stage Two Options
• Cut Prices to Sell Inventory and Delete Product,
  or
• Cut Costs and Keep Price Stable

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Pricing Strategies

• Pricing Approaches Over the Life Cycle

• Prestige Pricing

• Perceived Value Pricing

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Some important pricing definitions

• Utility The attribute that makes it capable of
  want satisfaction
• Value The worth in terms of other products
• Price The monetary medium of exchange.

• Value Example Caterpillar
• Tractor is 100,000 vs. Market 90,000
• 90,000 if equal
• 7,000 extra durable
• 6,000 reliability
• 5,000 service
• 2,000 warranty
• 110,000 in benefits - 10,000 discount!

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Pricing Strategies

• Pricing Approaches Over the Life Cycle
• Prestige Pricing
• Perceived Value Pricing

• Value in Use Pricing

• Customary Pricing

• Price Leader Strategy

• Survival Pricing

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Other Price Adjustment Techniques

• Psychological Pricing
• Odd-Even Pricing
• Price Lining
• Promotional Pricing
• Unit Pricing
• Demand Backward Pricing

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Other Price Adjustment Techniques

• Changing the Offering
• Changing the Quantity or Quality
• Changing the Basic Product
• Changing the Bundle of Benefits
• Changing the Exchange Transaction

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Other Price Adjustment Techniques

• Discounts

• Cash

• Quantity
• Noncumulative
• Cumulative

• Trade or Functional

• Seasonal

• Promotional

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Geographic Pricing

• Freight Absorption

• Basing Point Pricing
• Single Basing Point
• Multiple Basing Point

• Phantom Freight

• Zone Pricing

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Price-Adjustment Strategies
Geographical Pricing

• Adjusting Prices to Account
• for the Geographical Location
• of Customers.
• i.e. FOB-Origin, Uniform-
• Delivered, Zone Pricing, etc.
• Adjusting Prices for
• International Markets.
• Price Depends on Costs,
• Consumers, Economic
• Conditions Other Factors.

International Pricing
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Public Policy and Pricing
Public Policy on Pricing Centers on Three
Potentially Damaging Pricing Practices.
Price Fixing
Price Discrimination
Deceptive Pricing