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CHAPTER 8 PRICING STRATEGY
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Price Theory and Practice Incremental Pricing Bases for Price Decisions Price Discounts Special Pricing Issues
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PRICE THEORY AND PRACTICE Price Theory (Economics) - Dominance of pricing Pricing in Practice (Business) - Influence of non-price factors
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P Q D D D D 1 1 Shifting the demand curve to the right (non-price)
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USEFUL CONCEPTS FOR PRICING STRATEGY Price Elasticity – Elastic demand – Inelastic demand Cost Concepts – Fixed cost – Variable cost
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INCREMENTAL PRICING Using contribution to profit as the criteria for measuring profitability rather than net profit. Contribution to Profit = Total Revenue – Variable Cost Net Profit = Total Revenue – Total Cost
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CONDITIONS FAVORABLE FOR INCREMENTAL PRICING Heavy Fixed Cost Excess Production Capacity Price-Sensitive Niche Isolate from Core Market
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INCREMENTAL PRICING EXAMPLES Wall Street Journal Hotels Matinee movies Happy hour
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WALL STREET JOURNAL (Yearly Rate) Business Rate $150 Student Rate $50 Library Rate $300
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INCREMENTAL PRICING OF SERVICES BY TIME Hours in the Day Matinee movies Days of the Week Weekend hotels Seasons of the Year Income tax preparation
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BASES FOR PRICE DECISIONS Based on Demand of Buyer Based on Cost of Seller Based on Competitor Prices
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DEMAND-BASED PRICING New product pricing Perceived Value Yield Management
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NEW PRODUCT PRICING New Product Skimming New Product Penetration
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NEW PRODUCT SKIMMING Set high initial price Recover R&D quickly Drop prices over time
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PRODUCT SKIMMING EXAMPLES Intel chips Flat panel TVs Smart Phones
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NEW PRODUCT PENETRATION Set low initial price Gain market share Discourage competition
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PRODUCT PENETRATION EXAMPLES Southwest airlines Two-Buck Chuck wine Samsung
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PERCEIVED VALUE PRICING Rolex Watches 3M Post-It-Notes Business Lunches
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YIELD MANAGEMENT PRICING Airlines Hotels Utility Pricing
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COST-BASED PRICING Cost Plus Billable Hours Add-on Charges Markups
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COST-BASED EXAMPLES Lawyer sets billable cost at $400 per hour Boeing has a cost-plus contract with NASA Star Furniture marks up their furniture 50% above cost
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ADD-ON PRICE EXAMPLES Airlines Credit cards Telephone services
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SPIRIT BAGGAGE FEES Book Over Phone$10 Roller Bag$30 Water$3 Boarding Passes $10 Printed at Airport Booking Over Internet$17
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COMPETITION – BASED PRICING Competitive Price Wars Lower Cost Administered Pricing
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COMPETITION-BASED EXAMPLES HEB Price War Two Buck Chuck Wine Price of Basic Steel
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TWO BUCK CHUCK WINE Sold only in Trader Joe’s gourmet stores Overproduction of California grapes Produce own grapes at very low cost
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PARKER HANNIFIN PRICING STRATEGY “A” Products High-volume commodities “B” Products More specialized niches “C” Products Limited Competition “D” Products No direct competitor
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PRICE DISCOUNTS Cash Discounts – 5% off at Spec’s if you pay by cash Seasonal Discounts – Cheaper prices on December 26 Trade Discounts – Cheaper prices to Wholesalers Promotional Discounts – Weekend specials at Supermarkets
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SPECIAL PRICING ISSUES Pricing Choices Other Pricing Options Psychological Pricing Questionable Pricing Price Stability/Competition
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PRICING CHOICES Fixed Pricing – Price is fixed by the seller at any one period of time Negotiated Pricing – Price is negotiated between a buyer and a seller for each transaction
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FIXED PRICING Paying the monthly telephone bill Buying canned goods at the supermarket Parking at the Reliant Stadium
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NEGOTIATED PRICING Buying an automobile Selling a house Garage sale Showrooming
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OTHER PRICING OPTIONS Freemium Pricing Reference Pricing A La Carte Cable Pricing
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PSYCHOLOGICAL PRICING $199.95 $.99 Buy one, get one free
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QUESTIONABLE PRICING Bait and Switch Price Gouging Price Fixing Pricing of E-Books
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PRICE MODELS FOR E-BOOKS Wholesale model Agency model
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WHOLESALE PRICING MODEL FOR SELLING E-BOOKS Book publisher sets list price at $25 Seller buys at $12.50 and sells for $25 Amazon.com buys at $12.50 and sells for $9.99
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AGENCY PRICING MODEL FOR SELLING E-BOOKS Book publisher sets list price at $25 Apple receives 30% of list price $7.50 sold through iPads All sellers are required to sell book at $25 (including Amazon.com)
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WHO WANTS PRICE COMPETITION? Discount retailers Foreign competitors Firms with low costs Internet Sellers
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WHO WANTS PRICE STABILITY? Oligopolies Small businesses Professional services Traditional brokers and agents
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