NA_PsyCB -­‐ Pricing Strategies
You don’t sell through price. You sell the price! From the last class Behavioral Targe;ng Se<ngs •  h=ps://support.google.com/adsense/
troubleshooter/1631343 Warm-­‐up Exercise •  Name 4 basic pricing strategies? •  What is fair / unfair in pricing? How do people live in financial world 1.Pricing objec;ves Survival Maximum current profit Maximum market share Maximum market skimming Product-­‐
quality leadership Setting Pricing Policy
1.
Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price
Types of Costs
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
The Three C’s Model
for Price Setting
Low Price
No possible
profit at
this price
Costs
Competitors’
prices and
prices of
substitutes
Customers’
assessment
of unique
product
features
High Price
No possible
demand at
this price
Some important pricing defini;ons •  U;lity: The a=ribute that makes it capable of want sa;sfac;on •  Value: The worth in terms of other products •  Price: The monetary medium of exchange. Value Example: Caterpillar Tractor is $100,000 vs. Market $90,000 $90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits -­‐ $10,000 discount! Examples: new-­‐product pricing •  Market-­‐skimming pricing •  Market-­‐penetra;on pricing Market-­‐skimming pricing •  Se<ng a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales. The condi;ons: 1.  A sufficient number of buyers have a high current demand; 2.  The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear; 3.  The high ini;al price does not a=ract more compe;tors to market; 4.  The high price communicates the image of a superior product. Market-­‐penetra;on pricing •  Se<ng a low price for a new product in order to a=ract a large number of buyers and a large market share. The condi;ons: 1.  The market is highly price sensi;ve,and a low price s;mulates market growth; 2.  Produc;on and distribu;on costs fall with accumulated produc;on experience; 3.  A low price discourages actual and poten;al compe;;on. Examples: product mix pricing • 
• 
• 
• 
• 
• 
Product line pricing Op;onal-­‐product pricing Cap;ve-­‐product pricing By-­‐product pricing Cash rebates Low-­‐interest,longer warran;es,free maintenance 2.pricing-­‐adjustment strategies • 
• 
• 
• 
• 
Discount and allowance pricing Segmented pricing Psychological pricing Promo;onal pricing Geographical pricing Discount and allowance pricing • 
• 
• 
• 
• 
Cash discount Quan;ty discount Func;onal discount Seasonal discount allowance Discriminatory Pricing Customer Segment Product-form Location Time Psychological Pricing
A
32 oz.
B
$2.19
$1.99
26 oz.
Assume Equal Quality
l 
Most Attractive?
l 
Better Value?
l 
Psychological reason to
price this way?
Geographical pricing
• 
• 
• 
• 
• 
FOB-­‐origin pricing Uniform-­‐delivered pricing Zone pricing Basing-­‐point pricing Freight-­‐absorp;on pricing Promo;onal Pricing • 
• 
• 
• 
• 
• 
• 
Loss-­‐leader pricing Special-­‐event pricing Cash rebates Low-­‐interest financing Longer payment terms Warran;es & service contracts Psychological discoun;ng 3. Pricing changing •  Ini;a;ng price cuts •  Ini;a;ng price increases Discussion •  Please explain the reasons for price cuts. •  Please explain the reasons for price increases. •  Please describe the advantage and disadvantage of price cuts and increases. The reasons for price cuts •  Excess capacity •  Price compe;;on The reasons for price increases •  Cost infla;on •  overdemand Reac;ons to price changes •  Customers’ reac;ons •  Compe;tor’s reac;ons Responding to compe;tors’ price changes • 
• 
• 
• 
• 
Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-­‐price fighter line Price-Reaction Program for Meeting a
Competitor’s Price Cut
No
Has competitor
cut his price?
Yes
Is the price
likely to
significantly
hurt our sales?
By less than 2%
Include a
cents-off coupon
for the next
purchase
Hold our price
at present level;
continue to watch
competitor’s
price
No
Yes
No
Is it likely to be
a permanent
price cut?
By 2-4%
Drop price by
half of the
competitor’s
price cut
Yes
How much has
his price been
cut?
By more than 4%
Drop price to
competitor’s
price
Pricing Strategies Pricing Strategies Penetra;on Pricing Penetra;on 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 an;cipated 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 compe;;on at some point in the future (e.g. amer a patent runs out) •  Examples include: Playsta;on, jewellery, digital technology, new DVDs, etc. Many are predic;ng a firesale in laptops as supply exceeds demand. Copyright: iStock.com Value Pricing Value Pricing •  Price set in accordance with customer percep;ons about the value of the product/
service •  Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Copyright: iStock.com Loss Leader Loss Leader •  Goods/services deliberately sold below cost to encourage sales elsewhere •  Typical in supermarkets, e.g. at Christmas, selling bo=les of gin at £3 in the hope that people will be a=racted 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 percep;ons •  Classic example -­‐ £9.99 instead of £10.99! •  Links with value pricing – high value goods priced according to what consumers THINK should be the price Going Rate (Price Leadership) Going Rate (Price Leadership) •  In case of price leader, rivals have difficulty in compe;ng 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 share •  Where compe;;on 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 •  Mostly done in secret Price Discrimina;on Price Discrimina;on •  Charging a different price for the same good/service in different markets •  Requires each market to be impenetrable •  Requires different price elas;city of demand in each market Prices for rail travel differ for the same journey at different ;mes of the day Copyright: iStock.com
Destroyer Pricing/Predatory Pricing Destroyer/Predatory Pricing •  Deliberate price cu<ng or offer of ‘free gims/
products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants •  An;-­‐compe;;ve and illegal if it can be proved Absorp;on/Full Cost Pricing Absorp;on/Full Cost Pricing •  Full Cost Pricing – a=emp;ng to set price to cover both fixed and variable costs •  Absorp;on Cost Pricing – Price set to ‘absorb’ some of the fixed costs of produc;on Marginal Cost Pricing Marginal Cost Pricing •  Marginal cost – the cost of producing ONE extra or ONE fewer item of produc;on •  MC pricing – allows flexibility •  Par;cularly relevant in transport where fixed costs may be rela;vely 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 a=ract customers and fill the aircram Marginal Cost Pricing •  Example: Aircram 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, be=er to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are es;mates only Contribu;on Pricing Contribu;on Pricing •  Contribu;on = Selling Price – Variable (direct costs) •  Prices set to ensure coverage of variable costs and a ‘contribu;on’ to the fixed costs •  Similar in principle to marginal cost pricing •  Break-­‐even analysis might be useful in such circumstances Target Pricing Target Pricing •  Se<ng price to ‘target’ a specified profit level •  Es;mates of the cost and poten;al revenue at different prices, and thus the break-­‐even have to be made, to determine the mark-­‐up •  Mark-­‐up = Profit/Cost x 100 Cost-­‐Plus Pricing
Cost-­‐Plus Pricing •  Calcula;on of the average cost (AC) plus a mark up •  AC = Total Cost/Output Influence of Elas;city Influence of Elas;city •  Any pricing decision must be mindful of the impact of price elas;city •  The degree of price elas;city impacts on the level of sales and hence revenue •  Elas;city focuses on propor;onate (percentage) changes •  PED = % Change in Quan;ty demanded/% Change in Price Influence of Elas;city •  Price Inelas;c: •  % 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% reduc;on in price would lead to a rise in sales of something less than 7% •  Revenue would fall Influence of Elas;city •  Price Elas;c: •  % change in quan;ty 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 Price elas;city Thank you •  See you next week