professor chip besio cox school of business southern methodist university
TRANSCRIPT
Professor Chip Besio Cox School of BusinessSouthern Methodist University
Pricing Considerations Objectives:
Enhance brand imageProvide customer valueObtain an adequate ROIMaximize profitsMaintain price stability in an industry or
market
Factors Affecting Pricing Internal Factors
CostsProduct, Strategy
Internal FactorsCosts
Product, Strategy
PricingDecisionsPricing
Decisions
External FactorsCompetitorsCustomers
External FactorsCompetitorsCustomers
Pricing Considerations
Factors Effecting Pricing:Demand sets price ceilingCost sets price floorConsumer value perceptionsConsumer price sensitivityGovernment regulations
Pricing Considerations
Factors Effecting Pricing:Product/Service differentiationOrganization’s financial goalsStage of Product Life CycleMarketing Channel margin impactPrices of other products in mix
Pricing Considerations
Price as Indicator of ValueValue = Perceived Benefits/PriceValue may be linked to meeting
expectations of consumerPrice may shape the consumer’s
perceptions of valuePrice may affect consumer’s perception of
prestige
Customer ConsiderationsPRICE SENSITIVITY Product categories are not uniformly
responsive to prices -- some are more sensitive to price levels than others
Customers also may respond differently than one another to price levels
Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price
Pricing ConsiderationsPRICE SENSITIVITY
Pri
ce
Quantity Demanded per Period
A. Inelastic Demand - Demand hardly changes with a small change in price
P2
P1
Q1Q2
Pri
ce
Quantity Demanded per Period
P2P1
Q1Q2
B. Elastic Demand - Demand changes greatly with a small change in price
Product-Based Pricing Approaches
Product Line PricingProduct Line PricingSetting price steps between product line items
i.e. $299, $399
Product Line PricingProduct Line PricingSetting price steps between product line items
i.e. $299, $399
Optional-Product PricingOptional-Product PricingPricing optional or accessory products sold with
the main product *** i.e. car options
Optional-Product PricingOptional-Product PricingPricing optional or accessory products sold with
the main product *** i.e. car options
Captive-Product PricingCaptive-Product PricingPricing products that must be used with the main
Product***i.e. Razor Blades, Film, Software
Captive-Product PricingCaptive-Product PricingPricing products that must be used with the main
Product***i.e. Razor Blades, Film, Software
By-Product PricingBy-Product PricingPricing low-value by-products to get rid of them
***i.e. Lumber Mills, Zoos
By-Product PricingBy-Product PricingPricing low-value by-products to get rid of them
***i.e. Lumber Mills, Zoos
Product-Bundle PricingProduct-Bundle PricingPricing bundles Of products sold together
***i.e. season tickets, computer makers
Product-Bundle PricingProduct-Bundle PricingPricing bundles Of products sold together
***i.e. season tickets, computer makers
Source: Prentice Hall
Cost Considerations
Recall that costs may depend on the production level
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive SalariesRent
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Cost BasedPricing Strategies
Full Cost Strategies Variable Cost Strategies New-Offering Strategies Competitive Bidding
Cost BasedPricing Strategies
Full Cost StrategiesMarkup PricingBreak-even PricingROR Pricing
Cost BasedPricing Strategies
Variable Cost StrategiesStimulate DemandShift Demand
Cost-Based Pricing Approaches
Cost-Plus PricingCost-Plus Pricing - Adds a standard mark up to the cost of the productUseful when there are a great many products or
demand is hard to forecastSimple to implement
Breakeven or Target Profit PricingBreakeven or Target Profit Pricing - Price is set to meet a specific profit targetAlso takes consumer demand into account
Cost-Based PricingCOST-PLUS
Minimizesprice
competition
Minimizesprice
competition
Perceivedfairness forboth buyersand sellers
Perceivedfairness forboth buyersand sellers
Sellers are morecertain aboutcosts than
demand
Sellers are morecertain aboutcosts than
demand
Pricing Strategies
Competitive BiddingDemand is Known & ConstantMarketing Mix Variables UncontrollableSophisticated Mathematical Models
○ Calculate Profit Levels○ Calculate Probability of Winning at
Different Price Levels
Cost BasedPricing Strategies
New-Offering StrategiesSkimmingPenetrationIntermediate
New Product Intro Strategies
Capture “cream” – less price sensitive buyers
High Profit Margin – sacrifice volume
Invite Competitors, Short-term Profits
Sell Whole Market – no “elite” market
High Volume –sacrifice profit margin
Keep Competition Out – B.O.E.
INTENT
FOCUS
RESULT
SKIMMING PENETRATION
New Product Intro Strategies
Skimming StrategyPrice High Initially
Reduce Over Time
Inelastic Demand - Buyers Price Range
Unique Offering
New Product Intro Strategies
Skimming StrategyProduction or Marketing Costs
Unknown
Limited Capacity to Deliver
Realistic Perceived Value
New Product Intro Strategies
Penetration StrategyPrice Low Initially
Elastic Demand
Offering Not Unique
Competition Entering Quickly
New Product Intro Strategies
Penetration StrategyNo Distinct Price Segments
Volume Increases Dramatically Impact Costs
Objective - Large Market Share
New Product Intro Strategies Intermediate Strategy
More PrevalentLess Dramatic
Customer ConsiderationsPRICE AWARENESS Mindless Shopping:
Average time between arriving and departing from product category is 12 seconds
In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size
21% could not offer a price estimate when asked
Only 50% were able to state correct price93% did know relative price (i.e., higher, lower
or the same as other brands in category)
Source: Dickson and Sawyer (1990)
Customer ConsiderationsREFERENCE PRICES Consumers do not evaluate price
absolutely, but rather relative to a convenient quantity for comparison
Context Matters!
Two kinds of reference pricesExternal reference priceExternal reference priceInternal reference priceInternal reference price
Customer ConsiderationsREFERENCE PRICES
External Reference Prices
List prices/sale prices
Other products on the shelf or convenient for comparison
Customer ConsiderationsREFERENCE PRICES Internal Reference Prices
One that is recorded in consumer’s memoryMemory of price may not be accurateIf brand is frequently promoted, consumers
tend to lower their internal reference pointconsumers have a notion of “fair price”
○ acquisition utility - economic benefit of the product○ transaction utility - getting a good deal
Customer ConsiderationsPRICE AS A SIGNAL
Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality
When is price used as a signal?When there is little information about
product quality availablePrimarily for experience or credence goods
Customer ConsiderationsVALUE PRICING
ProductProduct
CostCost
PricePrice
ValueValue
CustomersCustomers
CustomerCustomer
ValueValue
PricePrice
CostCost
ProductProduct
Cost-Based Pricing Value-Based Pricing
General Price Adjustment Strategies
• Adjusting Prices for Psychological Effect.•Price Used as a Signal
•Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events
•Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.
• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Psychological Pricing
Promotional Pricing
Geographical Pricing
International Pricing