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Luiz Afonso dos Santos Senna - PhD

Pricing Strategies and Tactics

Luiz Afonso dos Santos Senna, PhD

[email protected]


Fatores na fixação de PreçoFatores na fixação de Preço


Fatores Externos afetando as decisões de preços

Mercado e demanda Custos definem o limite inferior e a demanda

define o limite de preço. As relações preço-demanda são fuindamentais

par aos teomadres de decisão em transportes

Fatores Externos incluem a natureza do mercado e da demanda, competição e outros elementos ambientais


Preço em diferentes tipos de mercados

Mercados de Competição Pura Bens/serviços uniformes Não existe um único vendedor ou comprador com

efeito significativo sobre o preço de mercado Marketing mix possui pouco impacto


Preço em diferentes tipos de mercados

Competição Monopolística Compradores e vendedores trocam sobre uma gama

de preços Ênfase em diferenças por meio de diferenciação

através de marketing mix Competição Oligopolística

Poucos vendedores altamente sensíveis aos preços de cada um e de estratégias de marketing


Considerações primárias na fixação de preços

Objetivos de Pricing


Cost-based versus value-based pricingSource: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011)

Preço baseado em custos X baseado em valor

Pricing, Competição e Estrutura de Mercado


How does our pricing strategy fit into this framework? What economic principles apply?

Porter’s Five Forces Model (old)

S u p p lie r P o w er

S u b stitu te s an d Co m p le m e n ts

In te rn a l R iva lry B u ye r P o w er

N e w E n tra n ts


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 competitor’s price cut (depending on the market structure)


Perfect Competition

Conditions necessary:

Large numbers of buyers and sellersHomogeneous productFree entry and exitPerfect information


Perfect Competition Demand curve for any given firm is horizontal.

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.

Pe

S

DDPe


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 Rule1. = (TR1 - TVC1) + (TR2 - TVC2) - FC

2. = (P1*Q1 - AVC1*Q1) + (P2*Q2 - AVC2*Q2) - FC

3. = [(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 degreeSegment markets in some way. Charge

all in the segment the same prices. Treat each segment as a separate

market– then do MR=MC in eachAre 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


Oligopoly Strategies

Use the legal / regulatory systems File patent application Challenge business charter application File regulatory challenge

Pre-emptive entry - Wal-Mart


Oligopoly Strategies Capacity and production

Announce capacity expansionRevise/modify products - more

difficult to copy Advertising

Raise cost of entry for others


Oligopoly and Monopolistic Competition Oligopoly

Few sellers - usually large onesRecognized interdependence in

pricing and output decisionsNeed to consider response of rivals in

pricing decisionsTypically significant barriers to entry


Oligopoly and Monopolistic Competition Monopolistic Competition

Large number of interdependent sellers

Differentiated productGood substitutesEasy entry and exit


Oligopoly and Monopolistic Competition Most industries are one or the other

Oligopoly: many heavy manufacturing Autos, steel, chemicals, pharmaceuticals

Monopolistic Competition Service companies, retail stores, large

corporations (McDonald’s, Wendy’s) The important point is that demand is downward

sloping


Cartels

Illegal in most countries – but encouraged in others

Conditions helpful:Small number of firmsHomogeneous productEntry barriersSimilarity of members


Cartels

Problems with cartels:Cheating on agreementPrice cutting behaviourTend 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.

MR =TRQ

TRQ

TRQ

xx

x

x

y

x

dd

dd

dd

MR =TRQ

TRQ

TRQ

yy

y

y

x

y

dd

dd

dd


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 unit’s gain is the other’s 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?


How does the development of online business affect this analytic tool? How does the Internet change the economic principles that apply?

Porter’s Five Forces Model

S u p p lie r P o w er

S u b stitu te s an d C o m p le m e n ts

In te rn a l R iva lry B u ye r P o w er

N e w E n tra n ts


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

0

1

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3

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0 10 20 30 40 50 60 70 80 90 100

Quantity

Pric

e ($

) D


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


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 factors that explain this

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).

The Law of Demand


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


Figure 1

0

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0 10 20 30 40 50 60 70 80 90 100

Quantity

Pric

e ($

)

D


0

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0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000

Pric

e ($

/lb)

Quantity (lbs of Steak/Day)

D1

D2

D3

D4


Algebraic Representation The preceding figure that follows is given by QD = 100 - 10P Linear relationship we can graph by

choosing two points. 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

0

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0 10 20 30 40 50 60 70 80 90 100

Q

$

S


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)


The Impact of Market Condition Changes on Equilibrium Price and Quantity

Market Change

Impact on Equilibrium

Price

Impact on Equilibrium

Quantity

Examples

Increase in Demand

+ + Increase in Income (normal good); increase in price of substitute; decrease in price of complements; increase in population

Decrease in Demand

- - Opposite of increase in demand

Increase in Supply

- + Technological innovation; increase in suppliers; decreases in costs

Decrease in Supply

+ - Increase in costs or wages; increase in price of alternative product produced by firms


Pricing Strategy How does a company decide what price to

charge for its products and services? What is “the price” anyway? doesn’t 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 competitionprice competition,, a seller regularly offers

products priced as low as possible and accompanied by a minimum of services

In non price competitionnon price competition, a seller has stable prices and stresses other aspects of marketing

With value pricingvalue pricing, firms strive for more benefits at lower costs to consumer

With relationship pricing,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 non

price competitionprice competition by building brand equity and relationships with customers


SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE:

Cost-pluspricing

Price based onboth demandand costs

Price set inrelation tomarket alone

DESIGN APPROPRIATE STRATEGIES:

Price vs. nonprice competitionSkimming vs. penetrationDiscounts and allowances

Freight paymentsOne price vs. flexible pricePsychological pricing

Leader pricingEveryday low vs. high-low pricingResale price maintenance

The Process: An Illustration


Steps for Determining Prices

Establish Pricing Objectives Increase sales

volume? Prestigious image? Increase market

share?


Steps for Determining PricesStudy CostsStudy 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


Steps for Determining PricesDecide 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 PriceMonitor 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 originFOB (free on board) plant or FOB origin:

Price quotation that does not include shipping charges. Buyer pays all freight charges to transport the product from the manufacturer

Freight absorptionFreight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods

Geographic ConsiderationsGeographic Considerations


Uniform-delivered priceUniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses

Zone pricingZone 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 systemBasing-point system: system for handling transportation costs in which the buyer’s 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


Types Types of Productsof Products

StagesStagesof Productsof Products

Product CharacteristicsProduct Characteristics


Other Pricing StrategiesOther Pricing Strategies

Price-BasedPrice-Based

OptimizationOptimization

SkimmingSkimming

PenetrationPenetration


Price Adjustment StrategiesPrice Adjustment Strategies

Discount PricingDiscount Pricing

BundlingBundling

Dynamic PricingDynamic 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 athigh 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


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 PricingOdd numbers convey a bargain

image -- $.79, $9.99, $699

Even numbers convey a quality image -- $10, $50, $100

http://www.kmart.com/home/index.jsp

http://store.nordstrom.com/Default.asp?origin=tab-logo



Prestige Pricing – sets a higher than average price to suggest status



Multiple-Unit Pricing – 3 for $.99Suggests 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

Most government contractsA European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!


Price Discrimination Charging a different price for

the same good/service in different markets

Requires each market to be impenetrable

Requires different price elasticity of demand in each market

Air/rail First class Business class Economy class

Prices for rail travel differ for the same journey at different times of the day


Discounts and AllowancesCash 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-EventBack-to-school specialsDollar daysAnniversary sales

Rebates and Coupons


Discounts and Allowances

Seasonal Discount – offered outside the customary buying season


Discounts and Allowances

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

Typical of oligopoly with collusionMicrosoft – 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

Luiz Afonso dos Santos Senna - PhD114

The Legality and Ethics ofPrice Strategy

Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions

Unfair Trade Practices

Price Fixing


Predatory Pricing


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 Defenses Seller Defenses

Cost MarketConditions Competition


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 doesn’t work Competition decides


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 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


Marginal Cost Pricing 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 = £93.75MC of each passenger = 2000/160 = £12.50If 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% mark-up 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


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


Influence of Elasticity 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


Influence of Elasticity

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


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 product’s 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.


Product Performance

Economic Value

Customer’s Perceived

Value

Marketing Effort*

Pricing Decision

*A key task of marketing is to translate the economic value into high customer perceived value

Economic Value vs. Perceived Value


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


Select the Final Price

Desired/Required Distributor Margins Psychological pricing Influence of other marketing mix elements Company pricing policies Impact of price on others

$2,000,000$ 10,000

$ 375.00


Conjoint AnalysisStated Preference Methods

Trade-off Analysisand

Behavioural models


Behavioural Models -Logit Model-

e= basis of the logarithm neperianoi- alternative being consideredJ= set of alternatives where i is one of themUi= utility function of altarnative iUj= utility function of alternative j


Ui = utility functionα= parameters to be estimatedXi= 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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