Presentation on theme: "Pricing Strategies and Tactics"— Presentation transcript:
1Pricing Strategies and Tactics Luiz Afonso dos Santos Senna, PhD
2Fatores na fixação de Preço Q: When you set the price for your products or service, what factors influenced you?Pricing decisions are influenced by various factors: Cost of the product Economic conditions Competition Customer needs and characteristics (age, taste, geography) Company objectivesNEXT SLIDE
3Fatores Externos afetando as decisões de preços Fatores Externos incluem a natureza do mercado e da demanda, competição e outros elementos ambientaisMercado e demandaCustos 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
4Preço em diferentes tipos de mercados Mercados de Competição PuraBens/serviços uniformesNão existe um único vendedor ou comprador com efeito significativo sobre o preço de mercadoMarketing mix possui pouco impacto
5Preço em diferentes tipos de mercados Competição MonopolísticaCompradores e vendedores trocam sobre uma gama de preçosÊnfase em diferenças por meio de diferenciação através de marketing mixCompetição OligopolísticaPoucos vendedores altamente sensíveis aos preços de cada um e de estratégias de marketing
6Objetivos de PricingConsiderações primárias na fixação de preços
7Preço baseado em custos X baseado em valor Cost-based versus value-based pricingSource: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011)
9Porter’s Five Forces Model (old) How does our pricing strategy fit into this framework? What economic principles apply?
10Market 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 structureThere are two extreme cases: perfect competition and monopoly
11Assessing and responding to a competitor’s price cut (depending on the market structure)
12Perfect Competition Large numbers of buyers and sellers Conditions necessary:Large numbers of buyers and sellersHomogeneous productFree entry and exitPerfect information
13Perfect CompetitionDemand curve for any given firm is horizontal. Price is set by market at PeFirm can sell as much or as little as desired at market price, but nothing if they raise P.
14Monopoly Conditions necessary Single seller of productNo close substitutesSignificant barriers to entryThere are few examples of perfect competition and pure monopoly.Most firms have a differentiated product, and there are substitutes.
15Pricing 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)
16Costs at different levels of production Cost per unit at different levels of production
17Pricing in a MonopolyProfit 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.
18The Shut-Down RuleAt 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).
19The Shut-Down Rule cont. Profit = TR – TC; TR=P*Q, TC = VC + FC(TR - VC) - FC = [(P - AVC)Q] – FCSeparate out fixed costs, focus on variable elementsAs long as P>AVC, there is a positive contribution to fixed costs.If firm shuts down (Q = 0), then Profit = - FCIf shut down: Firm has a loss of fixed costs.
20The 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 + VC1 + VC2
21The Shut-Down Rule P = (TR1 - TVC1) + (TR2 - TVC2) - FC P = (P1*Q1 - AVC1*Q1) + (P2*Q2 - AVC2*Q2) - FCP = [(P1 - AVC1)*Q1]+ [(P2 - AVC2)*Q2] - FCResults:SR - each product should be produced if Pi>AVCiIn LR, the firm should continue operating only if expected P>=0 (Profits are non-negative)
22Price DiscriminationSelling the same good to different people at different pricesConditions necessary:Identifiable customer groups with differing price elasticitiesMaintain separation of groups--prevent resale.
23Types of Price Discrimination First degreeIdentify and charge each customer what they are willing to payLimit: D = MR, no consumer surplus.Second degreeQuantity discounts. Volume purchases are given lower prices. Need to measure goods and services bought by consumers.
24Types of Price Discrimination Third degreeSegment markets in some way. Charge all in the segment the same prices.Treat each segment as a separate market– then do MR=MC in eachAre coupons as a price discrimination mechanism?
25Oligopoly Strategies Must have credibility. Common theme - Rivalrous behaviorPricing - 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
26Oligopoly Strategies Use the legal / regulatory systems File patent applicationChallenge business charter applicationFile regulatory challengePre-emptive entry - Wal-Mart
27Oligopoly Strategies Announce capacity expansion Capacity and productionAnnounce capacity expansionRevise/modify products - more difficult to copyAdvertisingRaise cost of entry for others
28Oligopoly and Monopolistic Competition Few sellers - usually large onesRecognized interdependence in pricing and output decisionsNeed to consider response of rivals in pricing decisionsTypically significant barriers to entry
29Oligopoly and Monopolistic Competition Large number of interdependent sellersDifferentiated productGood substitutesEasy entry and exit
30Oligopoly and Monopolistic Competition Most industries are one or the otherOligopoly: many heavy manufacturingAutos, steel, chemicals, pharmaceuticalsMonopolistic CompetitionService companies, retail stores, large corporations (McDonald’s, Wendy’s)The important point is that demand is downward sloping
31Cartels Small number of firms Homogeneous product Entry barriers Illegal in most countries – but encouraged in othersConditions helpful:Small number of firmsHomogeneous productEntry barriersSimilarity of members
32Cartels Cheating on agreement Price cutting behaviour Problems with cartels:Cheating on agreementPrice cutting behaviourTend to fall apartNote: When might firms in an industry ask for (demand) regulation?
33Pricing Strategies Profit maximizing rule: Set production at level where MR = MCNon - Maximizing pricing rulesthere are a variety of these
34Pricing for Multi-Product Firm Two products, x and y. TRfirm = TRx + TRyIf there are any spillovers from x to y, then you may get complications.
35Multi-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 unit’s gain is the other’s loss.
36Two part pricing Charge P = MC charge a fixed fee to extract some of the “consumer surplus”Examples:country clubshealth clubselectricity providers
37Declining block pricing Charging different prices according to how much is purchasedAttempt to extract consumer surplus and transfer value to company
38Auction pricing models Standard auction modelmultiple bidders compete with each otherstart at some low price, then successive bids raise price until someone “wins”Dutch auction modelstart at a high price, lower it until someone bidsex: dutch flower auctionsHow to extract consumer surplus?
39Porter’s Five Forces Model How does the development of online business affect this analytic tool? How does the Internet change the economic principles that apply?
40Market structure and the Internet Traditional industry structure paradigm?Structure, time and place?Firm size, customer access and service?Pricing, and reputation onlineWho is competing with whom?
42Internet 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?
43Pricing 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 baseWill prices be lower online?
44Firm 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…...
45The 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 formWe have some precise definitions related to how income and prices of other goods affect the demand for a good/service
46Price of other goods (pj) Income (y) Expectations of future prices Factors that we expect to affect the demand for the good include:Population (n)Price of the good (pi)Price of other goods (pj)Income (y)Expectations of future pricesTastes (T)
47Substitutes 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)
48Income and DemandA 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
49The Demand CurveThe relationship between the quantity demanded of a good and the price of that good is referred to as the demand curve.
51The demand curve gives the relationship between price and the quantity consumers will desire to purchase at that priceNote the demand curve is drawn given that no other factors affecting the demand for the product, such as income, population, or tastes, changeDemand for the product is based on specific, unchanging values for the other factors that affect demand
52The Law of DemandAs the price of a good decreases (increases), more (less) of it will be purchasedThat is, the demand curve is downward slopingThere 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).
53Changes 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.
54Demand for steaksD1 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 D1 to D2An 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 D1 to D3
57Algebraic Representation The preceding figure that follows is given byQD = PLinear relationship we can graph by choosing two points.Easiest points:Q = 0 0 = P or P = 10, Q = 0P = 0 implying Q = (0) = 100 and therefore P = 0, Q = 100Slope, dQ/dP = -10
58The Determinants of Supply Number of FirmsPrice of ProductCost of inputsWagesCapitalMaterialsPrice of other goodsExpectations of Future PricesTechnology
59The Supply CurveThe relationship between the quantity supplied of a good and the price of that good is referred to as the supply curveThe supply curve gives the relationship between price and the quantity produces will wish to sell at that priceNote the supply curve is drawn given that no other factors affecting the supply for the productSupply of the product is based on specific, unchanging values for the other factors that affect supply
61The Law of SupplyAs 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.
62Changes 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.
63Comparisons What happens to Price & Quantity when: Incomes increase Wages fallPrices of other goods changeMaking predictions of the impact on the market of these types of changes is referred to as Comparative Statics
64ComparisonsThese changes are all changes in demand or changes in supplyShifts in demand or supply curve4 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)
66Pricing StrategyHow does a company decide what price to charge for its products and services?What is “the price” anyway? doesn’t price vary across situations and over time?Some firms have to decide what to charge different customers and in different situationsThey must decide whether discounts are to be offered, to whom, when, and for what reason
67Why is Pricing Important? In a company with average economics*,1% increase in volume = 3.3% increase in profit1% increase in price = 11.1% increase in profitImprovements in price typically have 3-4 times the effect on profit as proportionate increases in volume.*Based on average of 2,463 companies
68Price vs. Nonprice Competition In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of servicesIn non price competition, a seller has stable prices and stresses other aspects of marketingWith value pricing, firms strive for more benefits at lower costs to consumerWith relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm
69Nonprice CompetitionSome firms feel price is the main competitive tool, that customers always want low pricesOther firms are looking for ways to add value, thereby being able to avoid low pricesSometimes prices have to be changed in response to competitive actionsMany firms would prefer to engage in non price competition by building brand equity and relationships with customers
70SELECT PRICING OBJECTIVE The Process: An IllustrationSELECT PRICING OBJECTIVESELECT METHOD OF DETERMINING THE BASE PRICE:Cost-pluspricingPrice based onboth demandand costsPrice set inrelation tomarket aloneDESIGN APPROPRIATE STRATEGIES:Price vs. nonpricecompetitionSkimming vs.penetrationDiscounts and allowancesFreight paymentsOne price vs.flexible pricePsychological pricingLeader pricingEveryday low vs.high-low pricingResale pricemaintenance
75Steps for Determining Prices Decide on a Pricing StrategyPrice higher than the competition because your product is superiorPrice lower, then raise it once your product is accepted
76Steps for Determining Prices Set PriceMonitor and evaluate its effectiveness as conditions in the market change
77Pricing TechnologySmart 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
78Pricing TechnologyRFID 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 itemToll technology
79Geographic Considerations 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 manufacturerFreight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods
80Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expensesZone pricing: system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each regionBasing-point system: system for handling transportation costs in which the buyer’s costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers
81Product and Pricing Strategies This chapter, the second of four on the marketing function, gives you a close look at two elements of the marketing mix: product and price. The exploration of price starts with a rundown of the major types of products, the life cycle that most products progress through from introduction to the point at which they’re removed from the market, and the process companies use to create new products. Following that, you’ll learn about the techniques used to identify products: branding, packaging, and labeling. The final product discussion involves the decisions companies make when managing multiple families of products. The chapter wraps up with a look at pricing strategies.Product and Pricing Strategies
82Product Characteristics Typesof ProductsStagesAs the central element in every company’s exchanges with its customers, products naturally command considerable attention when managers plan new offerings and manage the marketing mixes for their existing offerings. To understand the nature of these decisions, it’s important to recognize the various types of products and the stages that products go through during their “lifetime” in the marketplace.
83Marketing Strategy Over the Product Life Cycle INTRODUCTION GROWTH MATURITY DECLINEMarketing strategy Market development Increase market Defend market Maintain efficiency inemphasis share share exploiting productPricing High price, unique Lower price Price at or below Set price to remainstrategy product / cover over time competition profitable or reduceproduction costs to liquidatePromotion Mount sales Appeal to Emphasize Reinforce loyalStrategy promotion for mass market brand differences, customers; reduceproduct awareness benefits & loyalty promotion costsPlace strategy Distribute through Build intensive Enlarge Be selective inselective outlets network of distribution distribution, trimoutlets network unprofitable outletsFOCUS: pricing strategiesSHOW TITLE ONLY! ELICIT the appropriate PRICING STRATEGIES at each stage of the Product Life Cycle!Ask Ss for an example of one of their products or services. Q: At what stage is it? How are you pricing it? (How much does it cost?) Have you changed the price? Are you planning to change the price? When and why?Q: As a producer, what pricing strategy would you use when you introduce a product?high volume/low price or high price/lower volume must recover R&D investment; penetration or skimmingQ: What would you do regarding the price as the product enters the growth and maturity stage?Lower price Competitive pricingQ: At what stages do you think it is really important to promote the product to ensure its survival? (introduction & maturity) Please remember this for your own product. During which of the 6 weeks would that be? (Weeks 4,5,6)Q: What would you do in terms of amount of promotion to introduce a product?Special sales promotions; displays; flyers to raise awarenessEmphasize uniqueness of product!Q: What would you do in the maturity stage – increase or decrease advertising?Advertising = heaviest; highest cost outlay for the product
84Other Pricing Strategies Price-BasedOptimizationSkimmingPenetrationMost manufacturers design a product, then try to figure out how to make it for a price. But recent thinking holds that cost should be the last item analyzed in the pricing formula, not the first. Companies that use priced-based pricing can maximize their profit by first establishing an optimal price for a product or service. The product's price is based on an analysis of a product's competitive advantages, the users' perception of the item, and the market being targeted. Once the desired price has been established, the firm focuses its energies on keeping costs at a level that will allow a healthy profit.Optimal pricing uses computer software to generate the ideal price for every item, at each individual store, at any given time. Research shows that many retailers routinely underprice or overprice the merchandise of their shelves. They generally set a price by marking up from cost, or by benchmarking against the competition’s prices, or simply by hunch.A product's price seldom remains constant and will vary depending on the product's stage in its life cycle. During the introductory phase, for example, the objective might be to recover product development costs as quickly as possible. To achieve this goal, the manufacturer might charge a high initial price—a practice known as skimming—and then drop the price later, when the product is no longer a novelty and competition heats up.Rather than setting a high initial price to skim off a small but profitable market segment, a company might try to build sales volume by charging a low initial price, a practice known as penetration pricing. This approach has the added advantage of discouraging competition, because the low price (which competitors would be pressured to match) limits the profit potential for everyone.
85Price Adjustment Strategies Discount PricingBundlingDynamic PricingOnce a company has set a products’ price, it may choose to adjust that price from time to time to account for changing market situations or changing customer preferences. Three common price adjustment strategies are price discounts, bundling, and dynamic pricing.When you use discount pricing, you offer various types of temporary price reductions, depending on the type of customer being targeted and the type of item being offered.Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can promote sales of products consumers might not otherwise buy—especially when the combined price is low enough to entice them to purchase the bundle.Dynamic pricing is the opposite of fixed pricing. Using Internet technology, companies continually reprice their products and services to meet supply and demand. Dynamic pricing not only enables companies to move slow selling merchandise instantly but also allows companies to experiment with different pricing levels. Because price changes are immediately posted to electronic catalogs or websites, customers always have the most current price information.
88Penetration Pricing Price set to ‘penetrate the market’ ‘Low’ price to secure high volumesTypical in mass market products – chocolate bars, food stuffs, household goods, etc.Suitable for products with long anticipated life cyclesMay be useful if launching into a new market
90Market Skimming High price, Low volumes Skim the profit from the marketSuitable 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.
91Market SkimmingMany are predicting a firesale in laptops as supply exceeds demandPlasma screens: Currently athigh prices but for how long?Title: Thin-shaped television. Copyright: Getty Images,available from Education Image Gallery
93Value PricingPrice set in accordance with customer perceptions about the value of the product / serviceExamples include status products/exclusive productsCompanies 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
95Loss LeaderGoods/services deliberately sold below cost to encourage sales elsewhereTypical 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 thingsPurchases of other items more than covers ‘loss’ on item solde.g. ‘Free’ mobile phone when taking on contract package
103Going 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 marketMay follow pricing leads of rivals especially where those rivals have a clear dominance of market sharWhere competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
105Tender Pricing Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the workPurchaser then chooses which represents best valueMost government contractsA European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!
107Price DiscriminationCharging a different price for the same good/service in different marketsRequires each market to be impenetrableRequires different price elasticity of demand in each marketAir/railFirst classBusiness classEconomy classPrices for rail travel differ for the same journey at different times of the day
108Discounts and Allowances Cash Discounts – offered to buyers to encourage them to pay their bills quickly.2/10, net 30Quantity Discounts – offered for placing large ordersTrade Discounts – the way manufacturers quote prices to wholesalers and retailers.
109Promotional Pricing -- Used with sales promotion Loss Leader Pricing – offering very popular items for sale at below-cost pricesSpecial-EventBack-to-school specialsDollar daysAnniversary salesRebates and Coupons
110Discounts and Allowances Seasonal Discount – offered outside the customary buying season
111Discounts 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
113Destroyer/Predatory Pricing Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrantsAnti-competitive and illegal if it can be provedTypical of oligopoly with collusionMicrosoft – 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
114The Legality and Ethics of Price Strategy IssuesThat LimitPricingDecisionsUnfair Trade PracticesPrice FixingPrice DiscriminationPredatory Pricing
115Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost
116Price FixingAn agreement between two or more firms on the price they will charge for a product (usually in oligopolistic markets)
117Price 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
119Predatory PricingThe practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
120Discussion: 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 choiceNeed to pay for the researchWhen cheaper options doesn’t workCompetition decides
121Some other pricing strategies These all involve the use of some numerical understanding….
125Marginal Cost PricingMarginal cost – the cost of producing ONE extra or ONE fewer item of productionMC pricing – allows flexibilityParticularly relevant in transport where fixed costs may be relatively highAllows 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
126Marginal 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 = £93.75MC of each passenger = 2000/160 = £12.50If 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
128Contribution PricingContribution = Selling Price – Variable (direct costs)Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costsSimilar in principle to marginal cost pricingBreak-even analysis might be useful in such circumstances
130Target 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-upMark-up = Profit/Cost x 100This 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!
134Influence of Elasticity Price Inelastic:% change in Q < % change in Pe.g. a 5% increase in price would be met by a fall in sales of something less than 5%Revenue would riseA 7% reduction in price would lead to a rise in sales of something less than 7%Revenue would fall
135Influence of Elasticity Any pricing decision must be mindful of the impact of price elasticityThe degree of price elasticity impacts on the level of sales and hence revenueElasticity focuses on proportionate (percentage) changesPED = % Change in Quantity demanded% Change in Price
136Influence of Elasticity Price Elastic:% change in quantity demanded > % change in pricee.g. A 4% rise in price would lead to sales falling by something more than 4%Revenue would fallA 9% fall in price would lead to a rise in sales of something more than 9%Revenue would rise
137Select a Pricing Method Mark-up Pricing - “Cost Plus”Target Return PricingPerceived Value Pricing
138Device Pricing vs. Whole Product Pricing Value of any product to its market is strongly influenced by prices of competitive productsCompetitive “devices” are analyzed, but “products” are pricedProduct “features” have different values:Customer serviceWarrantiesDistribution channels (e.g., convenience)The “sum” of the features makes up the “product”
139Determining 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) productsThe “value” (+/-) of the product’s differences vs. the competitive offeringThe value of the “Whole Product”
140Economic 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.
141Customer’s Perceived Value Economic Value vs. Perceived ValueEconomic ValueProduct PerformanceCustomer’s Perceived ValueMarketing Effort**A key task of marketing is to translate the economic value into high customer perceived valuePricing Decision
143Select the Final Price $ 10,000 $ 375.00 $2,000,000 Desired/Required Distributor MarginsPsychological pricingInfluence of other marketing mix elementsCompany pricing policiesImpact of price on others$ 10,000$$2,000,000
144Conjoint Analysis Stated Preference Methods Trade-off Analysis and Behavioural models
145Behavioural Models -Logit Model- e= basis of the logarithm neperianoi- alternative being consideredJ= set of alternatives where i is one of themUi= utility function of altarnative iUj= utility function of alternative j
146Ui = utility functionα= parameters to be estimatedXi= attributes
147Data Collection Revealed Preference Stated preference Data gained from experienceGood to know about previous experience and existing products/servicesStated preferenceData gainded from hipothetical questions in selected scenariosGood to gain information about new services/products