10-1 © 2006 by nelson, a division of thomson canada limited 10/23/2015 slides developed by: peter...

© 2006 by Nelson, a division of Thomson Canada Limited10-104/20/23

Slides developed by:Slides developed by:

Peter YannopoulosPeter Yannopoulos

Chapter 10Chapter 10

Pricing Strategy

© 2006 by Nelson, a division of Thomson Canada Limited10-2

Strategic pricing involves finding a balance between the customer’s desire to obtain good value and the firm’s need to cover costs and earn profits

Thomas T. Nagle and Reed K. Holden,The Strategy and Tactics of Pricing

Essence of Pricing


Strategic Influences on Price

Strategic Influences on Price

Perceived Customer Value Cost

Competition

Marketing Strategy

Pricing Objectives

Single Versus Multiple Product

Line


Price Elasticity of Demand

P1

P2

Q2 Q1

Price

Quantity


The Price Elasticity of Demand Equation

Q/Q E = - P/P


Price Elasticity of Demand Example

(500 000 – 400 000)/500 000 E = -

(100-108)/100 = -2.5


Cost and Price Dynamics


A Typical Experience Curve

Log Cumulative Industry Output

Log Cost per Unit

(in real dollars)Industry Costs


Sources of the Experience Curve Effect

Product redesign and

standardization

Technologicaladvances

Learning

Economies of scale

Sources of the Sources of the Experience Experience Curve EffectCurve Effect


Product Life Cycle Stages, Industry Price, and Experience Curve

Log Cumulative Industry Output, (‘000s)

Log Price or Cost per Unit(in constant dollars) and AnnualSales (units)

AverageCosts

Average Industry Prices

Annual sales

Introduction Growth Shakeout Maturity


Pricing Implications of the Experience Curve

Log Cumulative Output, Units

Log Price or Cost per Unit(in real dollars)

Company

Costs

IndustryPrice

A

B

C CurrentPrice


Pricing Strategies for New Products

Parity PricingParity Pricing

Price SkimmingPrice Skimming

Penetration PricingPenetration PricingNew Product Pricing

New Product Pricing


Penetration

PricingStrategic Factors

Price

Skimming

Market factors

Large Market size Small

Elastic Elasticity of demand Inelastic

Product factors

Low Product differentiation High

Long Product life span Short

No Product protected by a patent Yes

Price factors

Yes High price will attract competition No

No Customers use higher prices as an indicator of higher quality Yes

Cost factors

No Substantial margins are required to recover product development andother costs

Yes

Yes Substantial cost reductions are expected due to economies of scale No

Competitive factors

Yes Little chance that competitors will enter market shortly with a similarproduct

No

Strategic Factors Influencing the Choice Between Penetration Pricing and Price Skimming


Pricing Existing Products

Prestige Pricing

EverydayLow

Pricing

Cost-plusPricing

Randomized Pricing

Value Pricing

PromotionalPricing

Pricing Pricing Existing Existing ProductsProducts


Value Pricing

1. Determine target price based on consumer, competitive, and other factors

2. Subtract desired channel intermediary markup

3. Subtract desired manufacturer margin4. Target cost to be recouped5. Produce product


Cost-Plus Pricing

1. Produce product with appropriate features and service level

2. Compute full unit cost

3. Add desired manufacturer margin

4. Add desired channel intermediary margin

5. Retail price


Product Line PricingProduct Line Pricing

Cross-SubsidizationPricing

Two-Part Pricing

Price Bundling

Product Line Pricing


Responding to Competitors’ Prices

TriggerPricing

Follow-the-Leader

Pricing

PriceMatching

RespondingRespondingto Competitors’to Competitors’

PricesPrices


Price Customization StrategiesPrice Customization Strategies

Price Customization

by Location

Price Customization by Customer

Price Customization

by TimePricePriceCustomizationCustomization

StrategiesStrategies


Conditions for Price Customization to Work

Firm must be able to divide the market into segments with different price sensitivities

People must not be able to transfer between segments

Different prices must be perceived to be fair by customers


Price-Profitability Analysis


Break-Even Analysis Example

Assume:Fixed cost = $9,000Price = $10Variable Cost = $2Expected company sales = 1,500Market size = 5,000

Assume:Fixed cost = $9,000Price = $10Variable Cost = $2Expected company sales = 1,500Market size = 5,000

Fixed cost $9,000

Break-even (units) = = Price – variable cost $10 - $2

= 1,125 units

Fixed cost $9,000

Break-even (units) = = Price – variable cost $10 - $2

= 1,125 units


Break-Even Market share

Break-even unit sales Break-even market share = [ ] × 100

Market size

1,125 = [ ] × 100

5,000

= 22.5 %

Break-even unit sales Break-even market share = [ ] × 100

Market size

1,125 = [ ] × 100

5,000

= 22.5 %


Safety Margin

Expected company sales – Break-even unit salesSafety = [ ] × 100margin Expected company sales

1,500 – 1,125= [ ] × 100 1,500

= 25 %

Expected company sales – Break-even unit salesSafety = [ ] × 100margin Expected company sales

1,500 – 1,125= [ ] × 100 1,500

= 25 %


Break-Even Sales Change Example

Assume :Price = $8Price change = -$1 Contribution margin = $4Expected company sales = 1,500

Assume :Price = $8Price change = -$1 Contribution margin = $4Expected company sales = 1,500


Break-Even Sales Change Example (concluded)

-Price change% Break-even = [ ] × 100 sales change Contribution + Price change

margin

-(-$1) = [ ] × 100

$4 + (-$1) = 33.3 %

Break-even sales change = 0.33 × 1,500 = 500 units

-Price change% Break-even = [ ] × 100 sales change Contribution + Price change

margin

-(-$1) = [ ] × 100

$4 + (-$1) = 33.3 %

Break-even sales change = 0.33 × 1,500 = 500 units

10-1 © 2006 by nelson, a division of thomson canada limited 10/23/2015 slides developed by: peter...

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