413 Pricing 3 - 31 Marco

Pricing Strategies and Tactics
Luiz Afonso dos Santos

Senna, PhD
lsenna@producao.ufrgs.br
Luiz Afonso dos Santos Senna - PhD
Fatores na fixao de Preo
Fatores Externos afetando as decises de preos

Fatores Externos incluem a natureza do mercado
e da demanda, competio e outros elementos
ambientais
Mercado e demanda
Custos definem o limite inferior e a demanda
define o limite de preo.

As relaes preo-demanda so fuindamentais
par aos teomadres de deciso em transportes
Preo em diferentes tipos de mercados
Mercados de Competio Pura
Bens/servios uniformes
No existe um nico vendedor ou comprador com
efeito significativo sobre o preo de mercado
Marketing mix possui pouco impacto
Preo em diferentes tipos de mercados
Competio Monopolstica
Compradores e vendedores trocam sobre uma gama

de preos
nfase em diferenas por meio de diferenciao
atravs de marketing mix
Competio Oligopolstica
Poucos vendedores altamente sensveis aos preos

de cada um e de estratgias de marketing
Objetivos de Pricing
Consideraes primrias na fixao de preos

Preo baseado em custos X baseado em valor
Cost-based versus value-based pricing

Source: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011)
Pricing, Competio e
Estrutura de Mercado
Porters Five Forces Model (old)

How does our pricing strategy fit into this
framework? What economic principles apply?
N e w E n tra n ts
S u p p lie r P o w e r
I n t e r n a l R iv a lr y
S u b s t it u t e s a n d C o m p le m e n t s
B u ye r P o w er
Market Structure Internal rivalry

Market structure and pricing decisions are closely
related. But how to define the market?

The degree to which the firm gets to choose price is
determined in large part by market structure

There are two extreme cases: perfect competition
and monopoly
Assessing and responding to a competitors price cut (depending

on the market structure)
Perfect Competition
Conditions necessary:
Large
numbers of buyers and sellers
Homogeneous
Free
product
entry and exit
Perfect
information
Perfect Competition
Demand curve for any given firm is horizontal.
Price is set by market at Pe

S
Pe
Pe
Firm can sell as much or as little as desired at
market price, but nothing if they raise P.

Monopoly
Conditions necessary
Single seller of product
No close substitutes
Significant barriers to entry
There are few examples of perfect
competition and pure monopoly.

Most firms have a differentiated product, and
there are substitutes.
Pricing in Perfect Competition

Do not choose price.
Choose output quantity. TC includes opportunity
cost of capital invested.

What will be our profit (loss) from our output
decision?
Should we produce now? (SR)
Should we stay in the industry? (LR)
Costs at different levels of production
Cost per unit at different levels of production

Pricing in a Monopoly
Profit maximization will be achieved by setting
price so that MC=MR.

It is not reached by setting price as high as
possible.
Like any firm, the monopolist is constrained
by their demand curve.
One cannot choose both P and Q.
The Shut-Down Rule

At what point should the firm cease
production of a certain item?

When might it pay to produce at a loss?
In SR, many costs are fixed. Just because a
firm is making losses, it does not necessarily

mean it should shut down (short run), or even
go out of business (long-run).
The Shut-Down Rule cont.

Profit = TR TC; TR=P*Q, TC = VC + FC
(TR - VC) - FC = [(P - AVC)Q] FC
Separate out fixed costs, focus on variable elements

As long as P>AVC, there is a positive contribution to fixed
costs.
If firm shuts down (Q = 0), then Profit = - FC
If shut down: Firm has a loss of fixed costs.
The Shut-Down Rule cont.

In SR, firm may minimize losses by continuing to
produce.
If losses are expected permanently, get out.
Case of multiple products:
C = FC + VC1 + VC2
The Shut-Down Rule

= (TR1 - TVC1) + (TR2 - TVC2) - FC
= (P1*Q1 - AVC1*Q1) + (P2*Q2 - AVC2*Q2) - FC
= [(P1 - AVC1)*Q1]+ [(P2 - AVC2)*Q2] - FC
Results:
1.
SR - each product should be produced if Pi>AVCi
2.
In LR, the firm should continue operating only if

expected 0 (Profits are non-negative)
Price Discrimination
Selling the same good to different people at
different prices
Conditions necessary:
Identifiable customer groups with differing price

elasticities
Maintain separation of groups--prevent resale.
Types of Price Discrimination

First degree
Identify and
charge each customer

what they are willing to pay
Limit:
D = MR, no consumer surplus .
Second degree
Quantity discounts.
Volume purchases
are given lower prices. Need to
measure goods and services bought
by consumers.
Types of Price Discrimination

Third degree
Segment
markets in some way. Charge

all in the segment the same prices.
Treat each segment as a separate
market then do MR=MC in each
Are coupons as a price discrimination
mechanism?
Oligopoly Strategies
Common theme - Rivalrous behavior
Pricing - limit pricing - set prices low as signal
to possible entrants or other competitors your

willingness and ability to defend your market
share.
Must
have credibility.
Trading
SR profit for more profits later
Use the legal / regulatory systems
File patent application
Challenge business charter application
File regulatory challenge
Pre-emptive entry - Wal-Mart
Capacity and production
Announce
capacity expansion
Revise/modify
products - more
difficult to copy
Advertising
Raise
cost of entry for others
Oligopoly and Monopolistic Competition

Oligopoly
Few
sellers - usually large ones

Recognized interdependence in
pricing and output decisions
Need to consider response of rivals in
pricing decisions
Typically significant barriers to entry

Monopolistic Competition
Large
number of interdependent
sellers
Differentiated
Good
Easy
product
substitutes
entry and exit

Most industries are one or the other
Oligopoly: many heavy manufacturing
Autos, steel, chemicals, pharmaceuticals
Monopolistic Competition
Service companies, retail stores, large

corporations (McDonalds, Wendys)
The important point is that demand is downward
sloping
Cartels
Illegal in most countries but encouraged in
others
Conditions helpful:
Small
number of firms
Homogeneous product
Entry barriers
Similarity of members
Cartels
Problems with cartels:
Cheating
on agreement
Price
cutting behaviour
Tend
to fall apart
Note: When might firms in an industry ask for
(demand) regulation?
Pricing Strategies
Profit maximizing rule:
Set production at level where MR = MC
Non - Maximizing pricing rules
there are a variety of these
Pricing for Multi-Product Firm

Two products, x and y. TRfirm = TRx + TRy
If there are any spillovers from x to y, then you
may get complications.
dTR dTRx dTRy

MRx =
dQx
dQx
dQx
dTR dTRy dTRx

MRy =
dQ y
dQ y
dQ y
Multi-Product Firm cont.

The two terms on the right side of the
equation represent interactions. They can be

either positive or negative.
If x and y are complementary goods, the
effect is positive.
If x and y are substitutes, the effect is
negative. One units gain is the others loss.
Two part pricing

Charge P = MC
charge a fixed fee to extract some of the
consumer surplus
Examples:
country clubs
health clubs
electricity providers
Declining block pricing

Charging different prices according to how
much is purchased
Attempt to extract consumer surplus and
transfer value to company
Auction pricing models

Standard auction model
multiple bidders compete with each other
start at some low price, then successive bids
raise price until someone wins
Dutch auction model
start at a high price, lower it until someone bids

ex: dutch flower auctions
How to extract consumer surplus?
Porters Five Forces Model

How does the development of online business
affect this analytic tool? How does the Internet

change the economic principles that apply?
N e w E n tr a n ts
S u p p lie r P o w e r
I n t e r n a l R iv a lr y
S u b s t it u t e s a n d C o m p le m e n t s
B u ye r P o w er
Market structure and the Internet

Traditional industry structure paradigm?
Structure, time and place?
Firm size, customer access and service?
Pricing, and reputation online
Who is competing with whom?
Internet and demand issues

Role of customer service and customer loyalty
online: e-loyalty?
Consumer demand issues - which goods to
buy online, which in person?
How to price online?
Does this signal the end of the Brand?
Pricing and the Internet

Traditional pricing paradigm?
Access to demand data...
Measurement of demand elasticities?
Ability to conduct pricing experiments
Ability to spot market changes - and
move quickly (perhaps)

Access to bigger customer base
Will prices be lower online?
Firm structure and the Internet

Are traditional firm structure concepts now
irrelevant?
Economies of scale? Scope?
How does this affect firm incentives to
vertically integrate (or de-integrate)?
Central role of transaction costs...
The Determinants of
Demand
Demand The relationship between the
quantity of a good desired by people in a

market and the factors that affect that the
quantity desired is referred to as the
demand for the product. We can express
the demand for a product in the form
We have some precise definitions related
to how income and prices of other goods
affect the demand for a good/service
Factors that we expect to affect the demand for the good
include:
Population (n)
Price of the good (pi)
Price of other goods (pj)
Income (y)
Expectations of future prices
Tastes (T)
Substitutes and
Complements
Two
goods, x and y, are said to be

substitutes if an increase in the price of x
(y) increases the demand for good y (x) and a
decrease in the price of x (y) decreases the
demand for y (x) (Butter and margarine)
Two goods, x and y, are said to be
complements if an increase in the price of x
(y) decreases the demand for good y (x) and
a decrease in the price of x (y) decreases the
demand for y (x) (Sugar and coffee)
Income and Demand
A good is said to be normal if an

increase (decrease) in income
increases (decreases) the demand
for the good. A good is said to be
inferior if an increase (decrease) in
income decreases (increases) the
demand for a good
The Demand Curve

The relationship between the quantity demanded
of a good and the price of that good is referred to

as the demand curve.
Figure 5
10
Price ($)
4
3
0
0
10
20
30
40
50
Quantity
60
70
80
90
100
The demand curve gives the relationship
between price and the quantity consumers

will desire to purchase at that price
Note the demand curve is drawn given
that no other factors affecting the demand
for the product, such as income,
population, or tastes, change
Demand for the product is based on
specific, unchanging values for the

other factors that affect demand
The Law of
Demand
As the price of a good decreases (increases),

more (less) of it will be purchased
That is, the demand curve is downward sloping
There are two

relationship:
As the price of a good increases, consumers will substitute into

other goods (substitution effect);
.As the price of a good increases, consumers will have less real
income to purchase all goods (income effect).
factors
that
explain
this
Changes in Demand versus Changes in

Quantity Demanded
A movement along a demand curve is referred to as a change
in quantity demanded.
The quantity demanded changes because of a price
change.
A shift in the demand curve is referred to as a change in
demand.
Demand changes (the demand curve shifts) because of a
change in one of the factors affecting demand other than
price (income, price of other goods, tastes, population)
changes.
Demand for steaks

D1 represents the demand for steaks (lbs/day) given the
price of chicken is $3.50; the number of customers is
1,500 a day; and the average annual household income
is $40 thousand.
Then we might expect the following:
A decrease in demand for steak if the price of chicken, a
substitute for steak, fell from $3.50 to $2.00.

This is shown by a shift in of the demand curve from D1 to D2
An increase in demand for steak if the annual income increases

from $40 to $60 thousand, since steak is a normal good.
This is shown by a shift out of the demand curve from D1 to D3
Figure1
10
Price ($)
0
0
10
20
30
40
50
Quantity
60
70
80
90
100
Algebraic Representation
The preceding figure that follows is given by
QD = 100 - 10P
Linear
relationship
choosing two points.
we
can
graph
by
Easiest points:
Q = 0 0 = 100 - 10P or P = 10, Q = 0
P = 0 implying Q = 100 - 10(0) = 100 and
therefore P = 0, Q = 100
Slope, dQ/dP = -10
The Determinants of Supply

Number of Firms
Price of Product
Cost of inputs
Wages
Capital
Materials
Price of other goods

Expectations of Future Prices
Technology
The Supply Curve

The relationship between the quantity supplied of a
good and the price of that good is referred to as the

supply curve
The supply curve gives the relationship between
price and the quantity produces will wish to sell at
that price
Note the supply curve is drawn given that no other
factors affecting the supply for the product
Supply of the product is based on specific,
unchanging values for the other factors that affect
supply
Figure 3
16
14
12
10
0
0
10
20
30
40
50
Q
60
70
80
The Law of Supply

As the price of a good increases (decreases), more
(less) of it will be produced and offered for sale.

The supply curve is upward sloping.
This is explained by the assumption that marginal

(incremental) cost increases as output increases.
Changes in Supply versus Changes

in Quantity Supplied
A movement along a supply curve is
referred to as a change in quantity

supplied.
The quantity supplied changes because

of a price change.
A shift in the supply curve is referred to
as a change in supply.
Supply changes (the supply curve shifts)

because of a change in one of the factors
affecting supply other than price changes.
Comparisons
What happens to Price & Quantity when:
Incomes increase
Wages fall
Prices of other goods change
Making predictions of the impact on the market of
these types of changes is referred to as Comparative
Statics
Comparisons
These changes are all changes in demand or
changes in supply
Shifts in demand or supply curve
4 possibilities:
Increase in demand (shift out demand curve)

Decrease in demand (shift in demand curve)
Increase in supply (shift out supply curve)
Decrease in supply (shift in supply curve)
Pricing Strategy
How does a company decide what price to
charge for its products and services?

What is the price anyway? doesnt price
vary across situations and over time?
Some firms have to decide what to charge
different customers and in different
situations
They must decide whether discounts are to
be offered, to whom, when, and for what
reason
Why is Pricing Important?

In a company with average economics*,
1% increase in volume = 3.3% increase in
profit
1% increase in price = 11.1% increase in
profit
Improvements in price typically have 3-4
times the effect on profit as proportionate
increases in volume.
*Based on average of 2,463 companies
Price vs. Nonprice Competition

In price competition, a seller regularly offers
products priced as low as possible and

accompanied by a minimum of services
In non price competition,
competition a seller has
stable prices and stresses other aspects of
marketing
With value pricing,
pricing firms strive for more
benefits at lower costs to consumer
With relationship pricing, customers have
incentives to be loyal-- get price incentive if
you do more business with one firm
Nonprice Competition
Some firms feel price is the main competitive
tool, that customers always want low prices

Other firms are looking for ways to add
value, thereby being able to avoid low prices
Sometimes prices have to be changed in
response to competitive actions
Many firms would prefer to engage in non
price competition by building brand equity
and relationships with customers
The Process: An Illustration

SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:

Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:

Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance
Steps for Determining Prices

Establish Pricing
Objectives
Increase sales
volume?
Prestigious image?
Increase market
share?

Study Costs
Can
you make a
profit?
Can you reduce
costs without
affecting quality or
image?

Estimate Demand
What do customers
expect to pay?
Prices usually are directly
related to demand.

Study Competition

Decide on a
Pricing Strategy
Price higher than the
competition because
your product is
superior
Price lower, then raise
it once your product is
accepted

Set Price
Monitor and evaluate its effectiveness
as conditions in the market change
Pricing Technology
Smart Pricing decisions are based on an
enormous amount of data that Web-based pricing

technology crunches into timely, usable information.
Communicating Prices to Customers electronic
gadgets that provide real-time pricing information
such as electronic shelves, digital price labels
Pricing Technology
RFID Technology wireless technology that
involves tiny chips imbedded in products.

The chip has an antenna, a battery, and a
memory chip filled with a description of the
item
Toll technology
Geographic Considerations
Geographic Considerations
FOB (free on board) plant or FOB origin:
origin
Price quotation that does not include shipping
charges. Buyer pays all freight charges to
transport the product from the manufacturer
Freight absorption:
absorption system for handling
transportation costs under which the buyer may
deduct shipping expenses from the costs of
goods
Uniform-delivered price:
price system for handling
transportation costs under which all buyers are
quoted with the same price, including transportation
expenses
Zone pricing:
pricing system for handling transportation
costs under which the market is divided into
geographic regions and a different price is set in each
region
Basing-point system:
system system for handling
transportation costs in which the buyers costs
included the factory price plus freight charges from
the basing-point city nearest the buyer. Seeks to
equalize competition between distant marketers
Product and Pricing

Strategies
Product Characteristics
Types
of Products
Stages
of Products
Other Pricing Strategies

Price-Based
Optimization
Skimming
Penetration
Price Adjustment Strategies

Discount Pricing
Bundling
Dynamic Pricing
Pricing Strategies
Penetration Pricing
Penetration Pricing
Price set to penetrate the market
Low price to secure high volumes
Typical in mass market products chocolate bars,
food stuffs, household goods, etc.
Suitable for products with long anticipated life cycles

May be useful if launching into a new market
Market Skimming
Market Skimming
High price, Low volumes
Skim the profit from the market
Suitable for products that have
short life cycles or which will

face competition at some point
in the future (e.g. after a patent
runs out)
Examples include: Playstation,
jewellery, digital technology, new

DVDs, etc.
Market Skimming
Many are predicting a firesale in

laptops as supply exceeds demand
Plasma screens: Currently at
high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images,
available from Education Image Gallery
Value Pricing
Value Pricing
Price set in accordance with
customer perceptions about

the value of the product /
service
Examples include status
products/exclusive products
Companies may be able to set prices

according to perceived value.
Title: BMW At The Frankfurt Auto Show. Copyright:
Getty Images, available from Education Image Gallery
Loss Leader
Loss Leader
Goods/services deliberately sold below cost to
encourage sales elsewhere
Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at 3 in the hope that people will be

attracted to the store and buy other things
Purchases of other items more than covers loss on
item sold
e.g. Free mobile phone when taking on contract
package
Psychological Pricing
Used to play on consumer perceptions
Classic example - $9.99 instead of $10.00!
Odd-even: $5.95, $.79, $699 OR $12, $50
Multiple Unit-3 for !1.00 better than $.34 each
Odd-Even Pricing
Odd numbers convey a bargain
image -- $.79, $9.99, $699
Even
numbers convey a quality

image -- $10, $50, $100
Prestige Pricing sets a higher than
average price to suggest status
Multiple-Unit Pricing 3 for $.99
Suggests a bargain and helps
increase sales volume.

Better than selling the same items
at $.33 each.
Everyday Low Prices (EDLP)
set on a consistent basis
Going Rate (Price Leadership)
Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on
price too high and they lose market share, too low and the
price leader would match price and force smaller rival out of
market
May follow pricing leads of rivals especially where those rivals
have a clear dominance of market shar
Where competition is limited, going rate pricing may be
applicable banks, petrol, supermarkets, electrical goods find

very similar prices in all outlets
Tender Pricing
Tender Pricing
Many contracts awarded on
a tender basis
Firm (or firms) submit their
price for carrying out the

work
Purchaser then chooses
which represents best value
A European consortium led by Airbus

recently won a contract to supply
refuelling services to the RAF priced
at 13 billion!
Most government contracts
Charging a different price for
the same good/service in

different markets
Requires each market to be
impenetrable
Requires different price
Prices for rail travel differ for the same

journey at different times of the day
elasticity of demand in each

market
Air/rail
First class
Business class
Economy class
Discounts and Allowances

Cash Discounts offered to
buyers to encourage them to pay

their bills quickly.
2/10,
net 30
Quantity Discounts offered for
placing large orders

Trade Discounts the way
manufacturers quote prices to
wholesalers and retailers.
Promotional Pricing -- Used with sales
promotion
Loss Leader Pricing offering very
popular items for sale at below-cost

prices
Special-Event
Back-to-school specials
Dollar days
Anniversary sales
Rebates and Coupons

Seasonal Discount offered
outside the customary buying

season

Allowances go directly to the
buyer. Customers are offered a

price reduction if they sell back an
old model of the product they are
purchasing
Destroyer Pricing/Predatory Pricing
Destroyer/Predatory Pricing
Deliberate price cutting or
offer of free gifts/products to

force rivals (normally smaller
and weaker) out of business
or prevent new entrants
Anti-competitive and illegal if
it can be proved
Microsoft have been accused of predatory

pricing strategies in offering free software as
part of their operating system Internet
Explorer and Windows Media Player - forcing
competitors like Netscape and Real Player out
of the market
Typical of oligopoly with
collusion
The Legality and Ethics of

Price Strategy
Unfair
Unfair Trade
Trade Practices
Practices
Price
Price Fixing
Fixing
Issues
Issues
That
That Limit
Limit
Pricing
Pricing
Decisions
Decisions
Price
Discrimination
Predatory
Predatory Pricing
Pricing
114
Unfair Trade Practice Acts

Laws that prohibit wholesalers
and retailers from selling
below cost
Price Fixing
An agreement between two or
more firms on the
price they will charge
for a product (usually in oligopolistic
markets)
The Robinson-Patman Act of 1936 (USA):
Prohibits any firm from selling to two or
more different buyers at different prices if

the result would lessen competition
Robinson-Patman Act Defenses

Seller
Seller Defenses
Defenses
Cost
Cost
Market
Market
Conditions
Conditions
Competition
Competition
118
Predatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business or
out of a market.
Discussion: Impact of Ethics on

Pricing
How should you price if your product is a life-
saving drug?
What are the ethical considerations?
Customers have no choice
Need to pay for the research
When cheaper options doesnt work
Competition decides
120
Some other pricing strategies

These all involve the use of some numerical
understanding.
Absorption/Full Cost Pricing
Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to
cover both fixed and variable costs
Absorption Cost Pricing Price set to
absorb some of the fixed costs of production
Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer
item of production
MC pricing allows flexibility
Particularly relevant in transport where fixed costs may be
relatively high
Allows variable pricing structure e.g. on a flight from London to
New York providing the cost of the extra passenger is

covered, the price could be varied a good deal to attract
customers and fill the aircraft

Example:
Aircraft flying from Bristol to Edinburgh Total Cost (including

normal profit) = 15,000 of which 13,000 is fixed cost*
Number of seats = 160, average price = 93.75
MC of each passenger = 2000/160 = 12.50
If flight not full, better to offer passengers chance of flying at
12.50 and fill the seat than not fill it at all!
*All figures are estimates only
Contribution Pricing
Contribution Pricing
Contribution = Selling Price Variable (direct costs)
Prices set to ensure coverage of variable costs and a
contribution to the fixed costs

Similar in principle to marginal cost pricing
Break-even analysis might be useful in such
circumstances
Target Pricing
Target Pricing
Setting price to target a specified profit level
Estimates of the cost and potential revenue at
different prices, and thus the break-even have

to be made, to determine the mark-up
Mark-up = Profit/Cost x 100
This strategy is used by many clothes
retailers where they can add upto 60% markup on the basic cost of the clothes. So even
with a 50% sales offer they still make a profit!
Cost-Plus Pricing
Cost-Plus Pricing
Calculation of the average cost (AC) plus a
mark up
AC = Total Cost/Output
Influence of Elasticity
Price Inelastic:
% change in Q < % change in P
e.g. a 5% increase in price would be met by a fall in sales of
something less than 5%

Revenue would rise
A 7% reduction in price would lead to a rise in sales of
something less than 7%

Revenue would fall
Any pricing decision must be mindful of the impact of
price elasticity
The degree of price elasticity impacts on the level of
sales and hence revenue
Elasticity focuses on proportionate (percentage)
changes
PED = % Change in Quantity demanded
% Change in Price
Price Elastic:
% change in quantity demanded > % change in price
e.g. A 4% rise in price would lead to sales falling by something
more than 4%
Revenue would fall

A 9% fall in price would lead to a rise in sales of something
more than 9%
Revenue would rise
Select a Pricing Method

Mark-up Pricing - Cost Plus
Target Return Pricing
Perceived Value Pricing
137
Device Pricing vs. Whole Product Pricing

Value of any product to its market is strongly
influenced by prices of competitive products

Competitive devices are analyzed, but
products are priced
Product features have different values:
Customer service
Warranties
Distribution channels (e.g., convenience)
The sum of the features makes up the
product
Determining Perceived Value

What value is placed on the end result?
The cost of alternative solutions to the customer.
A function of:
Prices of comparable (though not identical)

products
The value (+/-) of the products differences vs.
the competitive offering
The value of the Whole Product
Economic Value Analysis
Identify the cost of the competitive product

or process (i.e., the reference value)
Identify all the factors that differentiate the
product.
Determine the value to the customer of
these differentiating factors (i.e., the
differentiation value)
Sum the reference value and the
differentiation value to determine the total
economic value.
Economic Value vs. Perceived Value

Product
Performance
Economic Value
Marketing Effort*
*A key task of marketing is to translate
the economic value into high
customer perceived value
Customers
Perceived
Value
Pricing Decision
Select a Pricing Method

Mark-up Pricing - Cost Plus
Target Return Pricing
Perceived Value Pricing
Value Pricing
Going Rate Pricing (market price)
Reference Pricing (comparison w/substitutes)
Sealed-Bid Pricing
142
Select the Final Price

Desired/Required Distributor Margins
Psychological pricing
Influence of other marketing mix elements
Company pricing policies
Impact of price on others
0
0
.
5
7
3
$
0
0
0
,
0
1
0
0
0
,
0
0
0
,
$2
Conjoint Analysis
Stated Preference Methods
Trade-off Analysis
and
Behavioural models
Behavioural Models
-Logit Model-
e= basis of the logarithm neperiano

i- alternative being considered
J= set of alternatives where i is one of them
Ui= utility function of altarnative i
Uj= utility function of alternative j
Ui = utility function
= parameters to be estimated
Xi= attributes
Data Collection
Revealed Preference
Data gained from experience

Good to know about previous experience and
existing products/services
Stated preference
Data gainded from hipothetical questions in

selected scenarios
Good to gain information about new
services/products

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Pricing Strategies and Tactics

Luiz Afonso dos Santos

Luiz Afonso dos Santos Senna - PhD

Fatores na fixao de Preo

Luiz Afonso dos Santos Senna - PhD

Fatores Externos afetando as decises de preos

define o limite de preo.

Preo em diferentes tipos de mercados

Mercados de Competio Pura

Luiz Afonso dos Santos Senna - PhD

Preo em diferentes tipos de mercados

Compradores e vendedores trocam sobre uma gama

Poucos vendedores altamente sensveis aos preos

Luiz Afonso dos Santos Senna - PhD

Consideraes primrias na fixao de preos

Preo baseado em custos X baseado em valor

Cost-based versus value-based pricing

Luiz Afonso dos Santos Senna - PhD

Porters Five Forces Model (old)

framework? What economic principles apply?

Luiz Afonso dos Santos Senna - PhD

Market Structure Internal rivalry

related. But how to define the market?

determined in large part by market structure

Luiz Afonso dos Santos Senna - PhD

Assessing and responding to a competitors price cut (depending

numbers of buyers and sellers

entry and exit

Luiz Afonso dos Santos Senna - PhD

Price is set by market at Pe

Firm can sell as much or as little as desired at

market price, but nothing if they raise P.

competition and pure monopoly.

Luiz Afonso dos Santos Senna - PhD

Pricing in Perfect Competition

cost of capital invested.

Should we produce now? (SR)

Should we stay in the industry? (LR)

Luiz Afonso dos Santos Senna - PhD

Costs at different levels of production

Cost per unit at different levels of production

price so that MC=MR.

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule

production of a certain item?

firm is making losses, it does not necessarily

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule cont.

(TR - VC) - FC = [(P - AVC)Q] FC

Separate out fixed costs, focus on variable elements

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule cont.

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule

SR - each product should be produced if Pi>AVCi

In LR, the firm should continue operating only if

Luiz Afonso dos Santos Senna - PhD

Identifiable customer groups with differing price

Maintain separation of groups--prevent resale.

Luiz Afonso dos Santos Senna - PhD

Types of Price Discrimination

charge each customer

Luiz Afonso dos Santos Senna - PhD