3Pricing objectives Survival Maximum current profit Maximum market shareMaximum market skimmingProduct-quality leadership
4Price - Quality Strategies High Medium LowHighLowProduct QualityMedPremiumValueMediumEconomyHighValueSuperGood-ValueOverchargingRip-OffFalseEconomy
5Setting Pricing Policy 1. Selecting the pricingobjective2. Determining demand3. Estimating costs4. Analyzing competitors’costs, prices, and offers5. Selecting a pricingmethod6. Selecting final price
6Sum of the Fixed and Variable Costs for a Given Types of CostsFixed Costs(Overhead)Costs that don’tvary with sales orproduction levels.Executive SalariesRentVariable CostsCosts that do varydirectly with thelevel of production.Raw materialsTotal CostsSum of the Fixed and Variable Costs for a GivenLevel of Production
7The Three C’s Model for Price Setting Low PriceNo possibleprofit atthis priceHigh PriceNo possibledemand atthis priceCostsCompetitors’prices andprices ofsubstitutesCustomers’assessmentof uniqueproductfeatures
8Some important pricing definitions Utility: The attribute that makes it capable of want satisfactionValue: The worth in terms of other productsPrice: The monetary medium of exchange.Value Example: CaterpillarTractor is $100,000 vs. Market $90,000$90,000 if equal7,000 extra durable6,000 reliability5,000 service2,000 warranty$110,000 in benefits - $10,000 discount!
12Price-Reaction Program for Meeting a Competitor’s Price Cut NoHold our priceat present level;continue to watchcompetitor’spriceHas competitorcut his price?NoNoIs the pricelikely tosignificantlyhurt our sales?YesIs it likely to bea permanentprice cut?YesHow much hashis price beencut?YesBy less than 2%Include acents-off couponfor the nextpurchaseBy 2-4%Drop price byhalf of thecompetitor’sprice cutBy more than 4%Drop price tocompetitor’sprice
13Case discussionCircuit city:selling used cars like stereos
141.Setting Pricing Policy Selecting the pricing objectivesDetermining demandEstimating costsAnalyzing competitors’ cost,prices,and offersSelecting a pricing methodSelecting the final price
16Market-skimming pricing Setting 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.
17The conditions:A sufficient number of buyers have a high current demand;The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;The high initial price does not attract more competitors to market;The high price communicates the image of a superior product.
18Market-penetration pricing Setting a low price for a new product in order to attract a large number of buyers and a large market share.
19The conditions:The market is highly price sensitive,and a low price stimulates market growth;Production and distribution costs fall with accumulated production experience;A low price discourages actual and potential competition.