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Chapter 14 Pricing Strategies and Determination Harcourt, Inc.

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Presentation on theme: "Chapter 14 Pricing Strategies and Determination Harcourt, Inc."— Presentation transcript:

1 chapter 14 Pricing Strategies and Determination Harcourt, Inc.

2 Dr. Rosenbloom Objectives n Explain pricing factors n Compare and contrast cost-based pricing methods n Identify strategic concerns important in pricing decisions

3 Dr. Rosenbloom Objectives n Evaluate reasons why base prices change over time n Understand new technology implications for pricing behavior, especially price customization

4 Dr. Rosenbloom What is Price? n Price is the sacrifice that one party pays another to receive something in exchange n For our case, price is a monetary value charged by an organization for the sales of its products

5 Dr. Rosenbloom Pricing The Martin Agency Fairfield Inns

6 Dr. Rosenbloom Pricing Hal Riney and Partners Alamo Car Rental

7 Dr. Rosenbloom Determining the Base Price n Cost-Plus Pricing n Easiest, Often misleading n A simple allocation of fixed and variable costs n Standard mark-up - a standard profit margin n Target return pricing - a standard amount of profit per item n Ignores demand (price sensitivity) and fails to account for competition

8 Dr. Rosenbloom Determining the Base Price n Demand Pricing n Based on the elasticity of demand Higher prices are favored with inelastic –Price increases offset volume losses Lower prices are favored with elastic –Volume increases offset price reductions Consumers are indifferent with unitary demand n Breakeven analysis n Demand schedules

9 Dr. Rosenbloom Determining the Base Price n Demand Pricing n Profit-Maximization Calculate the profit at each price point on a demand curve and choose the highest In other words, which price produces the highest total contribution Verified by observing marginal revenue and cost figures

10 Dr. Rosenbloom Determining the Base Price n Demand Pricing n Where does demand information come from? Analytic modeling Experiments Customer surveys Managerial judgement

11 Dr. Rosenbloom Determining the Base Price Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus Strategic Pricing Concerns Legal Concerns Ethical Concerns

12 Dr. Rosenbloom Determining the Base Price Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus Strategic Pricing Concerns Legal Concerns Ethical Concerns

13 Dr. Rosenbloom Determining the Base Price Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus Strategic Pricing Concerns Legal Concerns Ethical Concerns

14 Dr. Rosenbloom Determining the Base Price n Objectives n Goal-setting/Objective-setting n Pricing to achieve a target ROI n Pricing to stabilize price and margin n Pricing to reach a target market share n Pricing to meet or prevent competition n Pricing for profit maximization n Pricing for survival Strategic Pricing Concerns Legal Concerns Ethical Concerns

15 Dr. Rosenbloom Skimming Pricing Strategy Determining the Base Price n New product pricing n Skimming Vs. Penetration Penetration Pricing Strategy Introduction Growth Maturity Decline Strategic Pricing Concerns Legal Concerns Ethical Concerns

16 Dr. Rosenbloom Determining the Base Price n High initial price for quick ROI n Inelastic demand n Price insensitivity by the market Skimming Pricing Strategy Introduction Growth Maturity Decline Strategic Pricing Concerns Legal Concerns Ethical Concerns Penetration Pricing Strategy

17 Dr. Rosenbloom Penetration Pricing Strategy Determining the Base Price n Low initial price with elastic demand n Volume for lower production costs n Imminent competition Introduction Growth Maturity Decline Strategic Pricing Concerns Legal Concerns Ethical Concerns Skimming Pricing Strategy

18 Dr. Rosenbloom Determining the Base Price n Price-Quality judgements n Customers uncertain about brand quality prior to purchase look to price n Customers look to price in high risk purchases Strategic Pricing Concerns Legal Concerns Ethical Concerns

19 Dr. Rosenbloom Determining the Base Price n Price Fixing n Violation of Sherman Anti- Trust Act n Conspiring to restrain trade Strategic Pricing Concerns Legal Concerns Ethical Concerns

20 Dr. Rosenbloom Determining the Base Price n Price Discrimination n Violation of Robinson-Patman Act n Illegal only when business to business Exception for cost justification Exception for competitor price matching Exception for no apparent harm to competition Strategic Pricing Concerns Legal Concerns Ethical Concerns

21 Dr. Rosenbloom Determining the Base Price n Resale Price Maintenance n When a manufacturer and retailer agree on a minimum price to be charged to consumers at retail Manufacturers can set suggested prices (MSRP) Legal to stop selling to retailers who ignore MSRP Strategic Pricing Concerns Legal Concerns Ethical Concerns

22 Dr. Rosenbloom Determining the Base Price n Predatory Pricing n Aggressive pricing to drive out newer, smaller rivals n After removal of rival, prices are raised again Strategic Pricing Concerns Legal Concerns Ethical Concerns

23 Dr. Rosenbloom Determining the Base Price n Exaggerated Comparative Price Advertising n Using comparison prices of dubious validity n Product introduced at artificially high prices for a short time then dropped to a new low long-term price Strategic Pricing Concerns Legal Concerns Ethical Concerns

24 Dr. Rosenbloom Determining the Base Price n Price gouging laws n ATM fee practices n Raising prices for necessities in disaster areas Strategic Pricing Concerns Legal Concerns Ethical Concerns

25 Dr. Rosenbloom Adjustments to Base Prices n Reasons base prices change over time: n Variation in objectives over product life cycle Introductory low prices, higher decline prices n Competitive price moves Competitive forces dictate modification of pricing Rubbermaid, the U.S. Steel Industry

26 Dr. Rosenbloom Price Flexing Discounts/Allowances n Reasons base prices change over time: n Price Flexing - Discounts/Allowances To Consumer To Trade Trade-in Allowances Cash Discounts Rebates Functional Or Trade Seasonal Quantity Cash Sales Promotion

27 Dr. Rosenbloom Trade-in Allowances Cash Discounts Rebates n Used to encourage consumers to upgrade to newer or more expensive products To Consumer Price Flexing Discounts/Allowances

28 Dr. Rosenbloom n Seasonal or age- based discounts used to encourage purchases Trade-in Allowances Cash Discounts Rebates To Consumer Price Flexing Discounts/Allowances

29 Dr. Rosenbloom n After the purchase payment made to the consumer by the producer Trade-in Allowances Cash Discounts Rebates To Consumer Price Flexing Discounts/Allowances

30 Dr. Rosenbloom Seasonal Quantity Cash Sales Promotion n Compensate the trade for functions performed: n Buying & Selling n Transportation n Storage n Financing n Risk-taking n Providing Information n Standardizing & Grading Functional Or Trade To Trade Price Flexing Discounts/Allowances

31 Dr. Rosenbloom n Permits seasonal marketers to maintain steady production and to sustain operations in out- of-season lulls To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

32 Dr. Rosenbloom Price WinterSpringSummerFall To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

33 Dr. Rosenbloom n Induce larger- quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

34 Dr. Rosenbloom n Encourage prompt payment from customers. Invoice includes payment terms and period of time that the cash discount is available To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

35 Dr. Rosenbloom n Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days 2/10, Net 30 To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

36 Dr. Rosenbloom n Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

37 Dr. Rosenbloom Off-Invoice Allowances Bill-Back Allowances Stocking Allowances To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

38 Dr. Rosenbloom Other Forms of Price Flexing n Price shading n Salesperson reduces base price because of the need to secure a large/important client n Price customizing n New technology allows for transaction-by- transaction customization

39 Dr. Rosenbloom Other Forms of Price Flexing n Price promotion n Sales, incentive pricing n Retailers began forward- buying or diverting product n Every Day Low Pricing (EDLP) is reducing the use of price promotion n Couponing n Free-standing inserts (in newspapers) n Point of purchase

40 Dr. Rosenbloom Other Forms of Price Flexing n Pricing for different segments n Geographic segments Different prices in different zones n Usage segments Different prices for high volume users n Demographic segments Different prices for students, children, etc. n Time segments On- and off-season rates

41 Dr. Rosenbloom Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing

42 Dr. Rosenbloom Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing n Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the transportation charges

43 Dr. Rosenbloom Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing n Using zone pricing all consumers in the same zone pay the same transportation charge

44 Dr. Rosenbloom Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing n Using basing-point pricing, all freight costs are priced as if they originated from the same basing point

45 Dr. Rosenbloom Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing n Using uniform delivered pricing all consumers pay the same transportation charges (average shipping expense to all customers)

46 Dr. Rosenbloom Prestige Pricing Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing

47 Dr. Rosenbloom Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing n Pricing at relatively high levels so as to convey an image of high quality or exclusivity Prestige Pricing

48 Dr. Rosenbloom Prestige Pricing Odd-Even Pricing Product Line Pricing n Pricing policy which offers products at prices below or near cost to attract consumers from competitors stores Loss-Leader Pricing Pricing Policies

49 Dr. Rosenbloom Prestige Pricing Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing n Price lining is producing or marketing multiple products at different price points n Bundling is marketing two or more products in a single package for a special price

50 Dr. Rosenbloom Prestige Pricing Pricing Policies Loss-Leader Pricing Product Line Pricing n Odd pricing refers to a price ending with an odd number just under a round number n Even pricing is used to convey high quality Odd-Even Pricing


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