12. pricing strategy

7/30/2019 12. Pricing Strategy

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Pricing Strategy

Andry Alamsyah@andrybrew

IMT, December 2011

Source: Product Strategy for High Technology Company (McGrath)


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Price is the quantity of

payment or compensation

given by one party to another

in return for goods or services.

Customer will compare the

compensation with perception

of the value of goods or

services.


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Developing Pricing for New Product

1. Develop marketing strategy - perform marketing analysis,segmentation, targeting, and positioning.

2. Make marketing mix decisions - define the product, distribution, and

promotional tactics.

3. Estimate the demand curve - understand how quantity demanded varies

with price.4. Calculate cost - include fixed and variable costs associated with the

product.

5. Understand environmental factors - evaluate likely competitor actions,

understand legal constraints, etc.

6. Set pricing objectives - for example, profit maximization, revenuemaximization, or price stabilization (status quo).

7. Determine pricing - using information collected in the above steps,

select a pricing method, develop the pricing structure, and define

discounts.

Source: NetMBA.com


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Pricing Methods

1. Cost-plus pricing - set the price at the production cost plus a certain

profit margin.

2. Target return pricing - set the price to achieve a target return-on-

investment.

3. Value-based pricing - base the price on the effective value to thecustomer relative to alternative products.

4. Psychological pricing - base the price on factors such as signals of

product quality, popular price points, and what the consumer

perceives to be fair.

Source: NetMBA.com


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Price Discounts

1. Quantity discount - offered to customers who purchase in large quantities.

2. Cumulative quantity discount - a discount that increases as the cumulative quantity

increases. Cumulative discounts may be offered to resellers who purchase large

quantities over time but who do not wish to place large individual orders.

3. Seasonal discount - based on the time that the purchase is made and designed to

reduce seasonal variation in sales. For example, the travel industry offers much lower

off-season rates. Such discounts do not have to be based on time of the year; they

also can be based on day of the week or time of the day, such as pricing offered by

long distance and wireless service providers.

4. Cash discount - extended to customers who pay their bill before a specified date.

5. Trade discount - a functional discount offered to channel members for performing

their roles. For example, a trade discount may be offered to a small retailer who may

not purchase in quantity but nonetheless performs the important retail function.

6. Promotional discount - a short-term discounted price offered to stimulate sales.

Source: NetMBA.com


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Effects of Pricing Strategy

Price positions a product in the market


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Prices decline throughout a markets evolution.

Development: costs are initially high and products are

generally at their highest price.

Growth: New market begins to define itself. Customers selecttheir preferences. High-tech product prices generally decline.

Maturity: Price competition accelerates as market moves from

the growth to maturity stage. Price becomes a more

important competitive strategy.

Decline: Some competitors exit the market and dump their

excess inventory at fire-sale prices. Those companies that

remain in the market have to reduce margins. There is little

to differentiate competitive products. There is little

justification for a high-margin, high-price strategy.


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Lower prices increase market penetration.

Sales of calculators from 1967 to 1979


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Offensive Pricing Strategies

Establish price

leadership as the basisfor competing

User experience-curve

pricing to discouragecompetition

Offensive

Pricing

User penetration

pricing to increase

the market

Compete on the

basis of

price/performanc

e

Use promotionaldiscounting to accelerate

purchases


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Defensive Pricing Strategies

Adapt prices to

maintain highestcompetitive price

Use skim pricing to

maximize profit

DefensivePricing

User price to

segment the market

Use value-based

pricing to

maximize profit

Redirect product line slase

by bait-and-switch pricing

Adaptive pricing is the one of the

most popular defensive price

strategies for high-technology

products. In most cases, however, itis the default of no price strategy.

A value-based pricing strategy is

most effective in the early stages of

a market.


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Risks of Offensive Pricing Strategies

1. Price leadership may not be

sustainable.

2. Aggressive pricing could

precipitate a price war.3. Aggressive pricing may not

be supported by a sufficient

cost advantage.


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Sources of Cost Advantage

1. Low-cost design can provide acompetitive cost advantage.

2. Superior manufacturing and economies

of scale build cost advantages.

3. A more efficient supply chain is a

source of cost advantage.4. Superior technology can provide

product cost advantages.

5. A superior development process can

provide product cost advantages.

6. Cost advantages can come from global

scale.


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12. pricing strategy

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