Pricing strategy Chapter 11

Pricing strategy Chapter 11 Group 8 Julia Kosch, Katharina Sitter, Shi Yue, Lukas Weghofer

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Overview 1. Introduction 2. The economist´s approach to price 3. 4. 5. 6. 7. 8.

determination Full cost and direct cost pricing Competitor orientated pricing Marketing-orientated pricing Initiating price changes Reacting to competitors’ price changes Ethical issues in pricing 2

1) Introduction ÆPrice • one of the 4 P´s • return for manufacturing and marketing the product • other 3 P´s are costs • has to cover costs otherwise losses • undercharging (lost margin) and overcharging (lost

•

sales) can have dramatic effects on profitability important part of positioning strategy Æ sends quality cues to customers.

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2)Economists´approach to pricing ÆDemand curves: • relationship between quantity demanded & different price levels

Econweb, Introduction to macroeconomic

• elastic: fall in price Æ large increase in demand • Inelastic: fall in price Æ small increase in demand Sharp et all, economics of social issues, Mc-Graw Hill

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ÆShapiro and Jackson identified 3 methods used by managers to set prices

1. internal orientated pricing is based on

costs 2. competitor orientated pricing focuses on competitor activities 3. marketing orientated pricing acts on value customers place on a product

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3) Full cost and direct cost pricing ÆCost orientated pricing, the 2 forms are: -full cost -direct (marginal) cost pricing 3.1 Full cost pricing • fixed and direct costs • increase in price Æ sales fall • sales estimation made before price is set • internal costs rather than customers´ willingness to pay • indication of minimum price to make a profit 6

3.2 Direct cost pricing

• costs that likely to rise as output rises • doesn´t cover full costs • useful for service marketing e.g seats in an • •

aircraft or rooms in hotels Æ can´t be stored lowest price sensible to take business if alternative is to let the machinery (seats, rooms) unused can´t be used in longterm Æ fixed costs must be covered to make profits

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4.) Competitor-orientated pricing • Going-rate pricing •

- when there is no differentiation between products - for economists it is the principle of perfect competition Competitive bidding buyer selects the supplier that quotes the lowest price Æ important to know competitor`s bids statistic model: expected profit= profit*probability of winning disadvantages of the model: difficult to express the probability to win the model can only be used for long term calculations 8

5.) Marketing-orientated pricing 5.1 Marketing strategy Pricing new products: - positionig strategy (choice of target market and creating a differential advantage - launch strategy Promotion high

low

high

rapid skimming

slow skimming

low

rapid penetration

slow penetration

Price

Jobber, Principles and Practice of Marketing

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5.) Marketing-orientated pricing Characteristics of high price market segments: -High value for customers -High ability to pay -Consumer and bill payer are different -Lack of competition -High pressure to buy

Conditions for charging low prices: - only alternative -Wish to gain market presence - cost reduction trough experience curve - make money later/elsewhere - entry barrier -predatory pricing 10

5.) Marketing-orientated pricing 5.2 Value to customer

buy respond method: customers are asked if they`d buy a product at varying prices

trade off analysis: measures the trade off between price and other features

experimentation: to place a product on sale at different locations with different prices 11

5.) Marketing-orientated pricing

Economic Value to Customer (EVC): -Used in industrial markets -The higher the EVC, the higher the price can be -X could be cheaper than reference product -with an EVC 80 000 the life cycle costs would be the same -every price below 80 000 is an incentive to buy

Life-cycle cost

200 000

200 000

Purchase price

50 000

EVC= 80 000

Start up costs

30 000

20 000 120 000 Post-purchase costs

100 000

Reference product

New product X

Jobber, Principles and Practise of Marketing 12

5.) Marketing-orientated pricing 5.3 Price-quality relationship People often use price as an indicator for quality 5.4 Product line pricing the price needs to fit into the existing product line 5.5 Explicability economic justification of prices 5.6 Competition 3 layers: direct, secondary and tertiary competition

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5.) Marketing-orientated pricing 5.7 Negotiating margins allow prices to fall from list level but still permit profitable transactions 5.8 Effect on distributor/retailer They only include a product into their range if they think it will sell well 5.9 Political factors sometimes governments intervene 5.10Costs can act as an restraint 14

6.) Initiating price changes Circumstances

Tactics

Increases Value greater than price Rising costs Excess demand Harvest objective

Cuts Value less than price Excess supply Build objective Price war unlikely Pre-empt competitive entry

Price jump Staged price increases Escalator clauses Price unbundling Lower discounts

Price fall Staged price reductions Fighter brand Price bundling Higher discounts

Estimating competitor reaction

Stratregic objectives Self-interest Competitive situation Past experience

Jobber, Principles and Practise of Marketing

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7) Reacting to competitors’ price changes When to follow?

Increases:

• Rising costs • Excess of Demand • Price-insensitive • •

customers Price rise is compatible with brand image Harvest or hold objective

Cuts:

• Falling costs • Excess of Supply • Price-sensitive • •

customers Price fall is compatible with brand image Build or hold objective 16

7) Reacting to competitors’ price changes When to ignore? Increases:

Cuts:

• Stable or falling costs • Excess of supply • Price-sensitive

• Rising costs • Excess of demand • Price-insensitive

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•

•

customers Price rise incopatible with brand image Build objective

•

customers Price fall incompatible with brand image Harvest objective 17

7) Reacting to competitors’ price changes ÆTactics

• A quick price reaction: if urgent need to

improve profit margins • A slow reaction: when image of being the customers friend is being sought

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8) Ethical issues in pricing

• Price fixing • Predatory pricing • Deceptive pricing • Penetration pricing and obesity • Price discrimination • Product dumping 19

Sources • Jobber, Principles and practice of Marketing • http://www.mhhe.com/economics/sharp/student/ch13_d •

etails.mhtml http://www.econweb.com/MacroWelcome/sandd/notes.h tml

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