Presentation is loading. Please wait.

Presentation is loading. Please wait.

Luiz Afonso dos Santos Senna - PhD Pricing Strategies and Tactics Luiz Afonso dos Santos Senna, PhD

Similar presentations


Presentation on theme: "Luiz Afonso dos Santos Senna - PhD Pricing Strategies and Tactics Luiz Afonso dos Santos Senna, PhD"— Presentation transcript:

1 Luiz Afonso dos Santos Senna - PhD Pricing Strategies and Tactics Luiz Afonso dos Santos Senna, PhD

2 Luiz Afonso dos Santos Senna - PhD Fatores na fixação de Preço

3 Luiz Afonso dos Santos Senna - PhD 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

4 Luiz Afonso dos Santos Senna - PhD 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

5 Luiz Afonso dos Santos Senna - PhD 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

6 Luiz Afonso dos Santos Senna - PhD Considerações primárias na fixação de preços Objetivos de Pricing

7 Luiz Afonso dos Santos Senna - PhD Cost-based versus value-based pricing Source: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011) Preço baseado em custos X baseado em valor

8 Pricing, Competição e Estrutura de Mercado

9 Luiz Afonso dos Santos Senna - PhD How does our pricing strategy fit into this framework? What economic principles apply? Porters Five Forces Model (old)

10 Luiz Afonso dos Santos Senna - PhD 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

11 Luiz Afonso dos Santos Senna - PhD Assessing and responding to a competitors price cut (depending on the market structure)

12 Luiz Afonso dos Santos Senna - PhD Perfect Competition Conditions necessary: Large numbers of buyers and sellers Homogeneous product Free entry and exit Perfect information

13 Luiz Afonso dos Santos Senna - PhD Perfect Competition Demand curve for any given firm is horizontal. Price is set by market at P e Firm can sell as much or as little as desired at market price, but nothing if they raise P.

14 Luiz Afonso dos Santos Senna - PhD 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.

15 Luiz Afonso dos Santos Senna - PhD 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)

16 Luiz Afonso dos Santos Senna - PhD Costs at different levels of production Cost per unit at different levels of production

17 Luiz Afonso dos Santos Senna - PhD 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.

18 Luiz Afonso dos Santos Senna - PhD 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).

19 Luiz Afonso dos Santos Senna - PhD 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.

20 Luiz Afonso dos Santos Senna - PhD 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 + VC 1 + VC 2

21 Luiz Afonso dos Santos Senna - PhD The Shut-Down Rule = (TR 1 - TVC 1 ) + (TR 2 - TVC 2 ) - FC = (P 1 *Q 1 - AVC 1 *Q 1 ) + (P 2 *Q 2 - AVC 2 *Q 2 ) - FC = [(P 1 - AVC 1 )*Q 1 ]+ [(P 2 - AVC 2 )*Q 2 ] - FC Results: 1. SR - each product should be produced if P i >AVC i 2. In LR, the firm should continue operating only if expected 0 (Profits are non-negative)

22 Luiz Afonso dos Santos Senna - PhD 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.

23 Luiz Afonso dos Santos Senna - PhD 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.

24 Luiz Afonso dos Santos Senna - PhD Types of Price Discrimination Third degree Segment markets in some way. Charge all in the segment the same prices. Treat each segment as a separate market– then do MR=MC in each Are coupons as a price discrimination mechanism ?

25 Luiz Afonso dos Santos Senna - PhD 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

26 Luiz Afonso dos Santos Senna - PhD Oligopoly Strategies Use the legal / regulatory systems File patent application Challenge business charter application File regulatory challenge Pre-emptive entry - Wal-Mart

27 Luiz Afonso dos Santos Senna - PhD Oligopoly Strategies Capacity and production Announce capacity expansion Revise/modify products - more difficult to copy Advertising Raise cost of entry for others

28 Luiz Afonso dos Santos Senna - PhD Oligopoly and Monopolistic Competition Oligopoly Few sellers - usually large ones Recognized interdependence in pricing and output decisions Need to consider response of rivals in pricing decisions Typically significant barriers to entry

29 Luiz Afonso dos Santos Senna - PhD Oligopoly and Monopolistic Competition Monopolistic Competition Large number of interdependent sellers Differentiated product Good substitutes Easy entry and exit

30 Luiz Afonso dos Santos Senna - PhD 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 (McDonalds, Wendys) The important point is that demand is downward sloping

31 Luiz Afonso dos Santos Senna - PhD Cartels Illegal in most countries – but encouraged in others Conditions helpful: Small number of firms Homogeneous product Entry barriers Similarity of members

32 Luiz Afonso dos Santos Senna - PhD Cartels Problems with cartels: Cheating on agreement Price cutting behaviour Tend to fall apart Note: When might firms in an industry ask for (demand) regulation?

33 Luiz Afonso dos Santos Senna - PhD Pricing Strategies Profit maximizing rule: Set production at level where MR = MC Non - Maximizing pricing rules there are a variety of these

34 Luiz Afonso dos Santos Senna - PhD Pricing for Multi-Product Firm Two products, x and y. TR firm = TR x + TR y If there are any spillovers from x to y, then you may get complications.

35 Luiz Afonso dos Santos Senna - PhD 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 units gain is the others loss.

36 Luiz Afonso dos Santos Senna - PhD Two part pricing Charge P = MC charge a fixed fee to extract some of the consumer surplus Examples: country clubs health clubs electricity providers

37 Luiz Afonso dos Santos Senna - PhD Declining block pricing Charging different prices according to how much is purchased Attempt to extract consumer surplus and transfer value to company

38 Luiz Afonso dos Santos Senna - PhD 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?

39 Luiz Afonso dos Santos Senna - PhD How does the development of online business affect this analytic tool? How does the Internet change the economic principles that apply? Porters Five Forces Model

40 Luiz Afonso dos Santos Senna - PhD 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?

41 Luiz Afonso dos Santos Senna - PhD

42 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?

43 Luiz Afonso dos Santos Senna - PhD 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?

44 Luiz Afonso dos Santos Senna - PhD 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…...

45 Luiz Afonso dos Santos Senna - PhD 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

46 Luiz Afonso dos Santos Senna - PhD Factors that we expect to affect the demand for the good include: Population (n) Price of the good (p i ) Price of other goods (p j ) Income (y) Expectations of future prices Tastes (T)

47 Luiz Afonso dos Santos Senna - PhD 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)

48 Luiz Afonso dos Santos Senna - PhD 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

49 Luiz Afonso dos Santos Senna - PhD 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.

50 Luiz Afonso dos Santos Senna - PhD

51 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

52 Luiz Afonso dos Santos Senna - PhD 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

53 Luiz Afonso dos Santos Senna - PhD 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.

54 Luiz Afonso dos Santos Senna - PhD Demand for steaks D 1 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 D 1 to D 2 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 D 1 to D 3

55 Luiz Afonso dos Santos Senna - PhD

56

57 Algebraic Representation The preceding figure that follows is given by Q D = P Linear relationship we can graph by choosing two points. Easiest points: Q = 0 0 = P or P = 10, Q = 0 P = 0 implying Q = (0) = 100 and therefore P = 0, Q = 100 Slope, dQ/dP = -10

58 Luiz Afonso dos Santos Senna - PhD 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

59 Luiz Afonso dos Santos Senna - PhD 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

60 Luiz Afonso dos Santos Senna - PhD

61 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.

62 Luiz Afonso dos Santos Senna - PhD 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.

63 Luiz Afonso dos Santos Senna - PhD 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

64 Luiz Afonso dos Santos Senna - PhD 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)

65 Luiz Afonso dos Santos Senna - PhD

66 Pricing Strategy How does a company decide what price to charge for its products and services? What is the price anyway? doesnt 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

67 Luiz Afonso dos Santos Senna - PhD 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

68 Luiz Afonso dos Santos Senna - PhD Price vs. Nonprice Competition price competition, In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services non price competition In non price competition, a seller has stable prices and stresses other aspects of marketing value pricing With value pricing, firms strive for more benefits at lower costs to consumer relationship pricing, With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm

69 Luiz Afonso dos Santos Senna - PhD 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 non price competition Many firms would prefer to engage in non price competition by building brand equity and relationships with customers

70 Luiz Afonso dos Santos Senna - PhD SELECT PRICING OBJECTIVE SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances Freight payments One price vs. flexible price Psychological pricing Leader pricing Everyday low vs. high-low pricing Resale price maintenance The Process: An Illustration

71 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Establish Pricing Objectives Increase sales volume? Prestigious image? Increase market share?

72 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Study Costs Study Costs Can you make a profit? Can you reduce costs without affecting quality or image?

73 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Estimate Demand What do customers expect to pay? Prices usually are directly related to demand.

74 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Study Competition

75 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Decide on a Pricing Strategy Price higher than the competition because your product is superior Price lower, then raise it once your product is accepted

76 Luiz Afonso dos Santos Senna - PhD Steps for Determining Prices Set Price Monitor and evaluate its effectiveness as conditions in the market change

77 Luiz Afonso dos Santos Senna - PhD 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

78 Luiz Afonso dos Santos Senna - PhD 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

79 Luiz Afonso dos Santos Senna - PhD Geographic Considerations Geographic Considerations FOB (free on board) plant or FOB origin FOB (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 absorption Freight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods Geographic Considerations

80 Luiz Afonso dos Santos Senna - PhD Uniform-delivered price Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses Zone pricing Zone 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 system Basing-point system: system for handling transportation costs in which the buyers costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers

81 Product and Pricing Strategies

82 Luiz Afonso dos Santos Senna - PhD Types of Products Stages Product Characteristics

83 Luiz Afonso dos Santos Senna - PhD Marketing Strategy Over the Product Life Cycle INTRODUCTIONGROWTH MATURITY DECLINE Marketing strategy Market developmentIncrease market Defend market Maintain efficiency in emphasis share share exploiting product Pricing High price, uniqueLower price Price at or below Set price to remain strategy product / coverover time competition profitable or reduce production costs to liquidate Promotion Mount sales Appeal to Emphasize Reinforce loyal Strategy promotion for mass market brand differences, customers; reduce product awareness benefits & loyalty promotion costs Place strategy Distribute throughBuild intensive Enlarge Be selective in selective outletsnetwork of distribution distribution, trim outlets network unprofitable outlets

84 Luiz Afonso dos Santos Senna - PhD Other Pricing Strategies Price-Based Optimization Skimming Penetration

85 Luiz Afonso dos Santos Senna - PhD Price Adjustment Strategies Discount Pricing Bundling Dynamic Pricing

86 Luiz Afonso dos Santos Senna - PhD Pricing Strategies

87 Luiz Afonso dos Santos Senna - PhD Penetration Pricing

88 Luiz Afonso dos Santos Senna - PhD 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

89 Luiz Afonso dos Santos Senna - PhD Market Skimming

90 Luiz Afonso dos Santos Senna - PhD 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.

91 Luiz Afonso dos Santos Senna - PhD Market Skimming Many are predicting a firesale in laptops as supply exceeds demand Plasma screens: Currently at high prices but for how long? Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery

92 Luiz Afonso dos Santos Senna - PhD Value Pricing

93 Luiz Afonso dos Santos Senna - PhD 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

94 Luiz Afonso dos Santos Senna - PhD Loss Leader

95 Luiz Afonso dos Santos Senna - PhD 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

96 Luiz Afonso dos Santos Senna - PhD Psychological Pricing

97 Luiz Afonso dos Santos Senna - PhD 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

98 Luiz Afonso dos Santos Senna - PhD Psychological Pricing Odd-Even Pricing Odd numbers convey a bargain image -- $.79, $9.99, $699 Even numbers convey a quality image -- $10, $50, $100

99 Luiz Afonso dos Santos Senna - PhD Psychological Pricing Prestige Pricing – sets a higher than average price to suggest status

100 Luiz Afonso dos Santos Senna - PhD Psychological Pricing Multiple-Unit Pricing – 3 for $.99 Suggests a bargain and helps increase sales volume. Better than selling the same items at $.33 each.

101 Luiz Afonso dos Santos Senna - PhD Psychological Pricing Everyday Low Prices (EDLP) – set on a consistent basis

102 Luiz Afonso dos Santos Senna - PhD Going Rate (Price Leadership)

103 Luiz Afonso dos Santos Senna - PhD 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

104 Luiz Afonso dos Santos Senna - PhD Tender Pricing

105 Luiz Afonso dos Santos Senna - PhD 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 contracts A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!

106 Luiz Afonso dos Santos Senna - PhD Price Discrimination

107 Luiz Afonso dos Santos Senna - PhD 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

108 Luiz Afonso dos Santos Senna - PhD Discounts and Allowances Cash 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.

109 Luiz Afonso dos Santos Senna - PhD Promotional Pricing -- Used with sales promotion Loss Leader Pricing – offering very popular items for sale at below-cost prices Special-Event Back-to-school specials Dollar days Anniversary sales Rebates and Coupons

110 Luiz Afonso dos Santos Senna - PhD Discounts and Allowances Seasonal Discount – offered outside the customary buying season

111 Luiz Afonso dos Santos Senna - PhD 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

112 Luiz Afonso dos Santos Senna - PhD Destroyer Pricing/Predatory Pricing

113 Luiz Afonso dos Santos Senna - PhD 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 collusion Microsoft – 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

114 Luiz Afonso dos Santos Senna - PhD 114 The Legality and Ethics of Price StrategyIssues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

115 Luiz Afonso dos Santos Senna - PhD Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost

116 Luiz Afonso dos Santos Senna - PhD Price Fixing An agreement between two or more firms on the price they will charge for a product (usually in oligopolistic markets)

117 Luiz Afonso dos Santos Senna - PhD Price Discrimination 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

118 Luiz Afonso dos Santos Senna - PhD 118 Robinson-Patman Act Defenses Seller Defenses Cost Market Conditions Market Conditions Competition

119 Luiz Afonso dos Santos Senna - PhD 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.

120 Luiz Afonso dos Santos Senna - PhD 120 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 doesnt work Competition decides

121 Luiz Afonso dos Santos Senna - PhD Some other pricing strategies These all involve the use of some numerical understanding….

122 Luiz Afonso dos Santos Senna - PhD Absorption/Full Cost Pricing

123 Luiz Afonso dos Santos Senna - PhD 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

124 Luiz Afonso dos Santos Senna - PhD Marginal Cost Pricing

125 Luiz Afonso dos Santos Senna - PhD 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

126 Luiz Afonso dos Santos Senna - PhD 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 = £93.75 MC of each passenger = 2000/160 = £12.50 If 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

127 Luiz Afonso dos Santos Senna - PhD Contribution Pricing

128 Luiz Afonso dos Santos Senna - PhD 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

129 Luiz Afonso dos Santos Senna - PhD Target Pricing

130 Luiz Afonso dos Santos Senna - PhD 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!

131 Luiz Afonso dos Santos Senna - PhD Cost-Plus Pricing

132 Luiz Afonso dos Santos Senna - PhD Cost-Plus Pricing Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output

133 Luiz Afonso dos Santos Senna - PhD Influence of Elasticity

134 Luiz Afonso dos Santos Senna - PhD 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

135 Luiz Afonso dos Santos Senna - PhD 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

136 Luiz Afonso dos Santos Senna - PhD 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

137 Luiz Afonso dos Santos Senna - PhD 137 Select a Pricing Method Mark-up Pricing - Cost Plus Target Return Pricing Perceived Value Pricing

138 Luiz Afonso dos Santos Senna - PhD 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

139 Luiz Afonso dos Santos Senna - PhD 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 products differences vs. the competitive offering The value of the Whole Product

140 Luiz Afonso dos Santos Senna - PhD 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.

141 Luiz Afonso dos Santos Senna - PhD Product Performance Economic Value Customers 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

142 Luiz Afonso dos Santos Senna - PhD 142 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

143 Luiz Afonso dos Santos Senna - PhD 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 $

144 Luiz Afonso dos Santos Senna - PhD Conjoint Analysis Stated Preference Methods Trade-off Analysis and Behavioural models

145 Luiz Afonso dos Santos Senna - PhD Behavioural Models -Logit Model- e= basis of the logarithm neperiano i- alternative being considered J= set of alternatives where i is one of them Ui= utility function of altarnative i Uj= utility function of alternative j

146 Luiz Afonso dos Santos Senna - PhD Ui = utility function α= parameters to be estimated Xi= attributes

147 Luiz Afonso dos Santos Senna - PhD 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


Download ppt "Luiz Afonso dos Santos Senna - PhD Pricing Strategies and Tactics Luiz Afonso dos Santos Senna, PhD"

Similar presentations


Ads by Google