Chapter 8 Pricing Strategy and Management

Conceptual Orientation to Pricing

Demand factors

(Value to buyers)

(price ceiling)

Competitive factors Final pricing discretion Initial pricing Corporate objectives and regulatory constraints Direct variable costs
(price floor)

discretion

Price as an Indicator of Value

Perceived benefits Value = Price

for a given price, value decreases as perceived benefits decrease and vice versa price also affects consumer perceptions of prestige; as price increases, demand may also increase

Price Elasticity of Demand

E = Percentage change in quantity demanded Percentage change in price
where E is the coefficient of elasticity

if the % change in quantity demanded is greater than the % change in price, demand is said to be elastic E is greater than 1.

if the % change in quantity demanded is less than the % change in price, demand is said to be inelastic E is less than 1.

Factors that Influence Price Elasticity of Demand

the more substitutes a product or service has, the greater its price elasticity

the more uses a product or service has, the greater its price elasticity

the higher the ratio of the price of the product or service to the income of the buyer, the greater the price elasticity

Product-Line Pricing

Product-Line Pricing involves determining:

1)

the lowest-priced product and price

2)

the highest-priced product and price, and

3)

price differentials for all other products in the line

Pricing Strategies

full-cost price strategies consider both variable and fixed costs

variable-cost price strategies consider only variable costs, not total costs

Full-Cost Pricing

markup pricing : fixed amount added to the total cost of the product

break-even pricing : per-unit fixed costs + per-unit variable costs

rate-of-return pricing : set to obtain a desired ROI

Variable-Cost Pricing
Variable-cost pricing is demand-oriented pricing. Two purposes:

stimulate demand shift demand

Assumption is that variable-cost pricing will stimulate demand and increase revenues.

New-Offering Pricing Strategies

skimming pricing strategy penetration pricing strategy intermediate pricing strategy

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Use Skimming Pricing Strategy when:

demand likely to be price inelastic different price-market segments, appealing to buyers with a higher acceptable price

offering is unique enough to be protected from competition production or marketing costs are unknown capacity constraint exists organization wants to generate funds quickly realistic perceived value of the product exists

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Use Penetration Pricing Strategy when:

demand likely to be price elastic offering is not unique enough to be protected from competition

competitors expected to enter market quickly no distinct price-market segments possibility of cost savings with large volume of sales organizations major objective is to obtain a large market share

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Intermediate Pricing Strategy

falls between skimming and penetration

most prevalent in practice

more likely to be used in majority of pricing decisions

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Pricing and Competitive Interaction

the action and reaction of rival companies in setting and changing prices for their offerings

managers should focus more on long-term look forward and reason backwards

Competitors goals and objectives ? Assumptions competitor made about itself ? Strengths and weaknesses of competitor ?

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Industry Characteristics and Risk of Price Wars

Characteristics
Product/Service Type Market Growth Rate Price Visibility to Competitors Consumer Price Sensitivity Overall Industry Cost Trend Industry Capacity Utilization Number of Competitors

High Risk
undifferentiated stable/decreasing high high declining low many

Low Risk
differentiated increasing low low stable high

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few