MARKETING Pricing Strategies Prof. Bauer-Ramazani

Overview Definition of price Prices in BU113 companies Factors that influence the pricing decision Pricing objectives Three major pricing strategies and their advantages and disadvantages Pricing strategies over the product life cycle Pricing tactics

Price -- Definition the amount of money charged for a product or service the sum of all the values that consumers exchange for the benefits of having or using the product or service Examples of “price?” Tuition, rent, fare, retainer, toll, salary/wage, dues

Prices -- BU113 Companies What objectives did the managers have in mind when they set their prices?

Factors in Setting Price

Volume Sales Maximization Pricing Objectives Volume Sales Maximization Market Share Profit-Maximization Profitability Target Return Goals Meet Business Objectives Other Pricing Objectives Status Quo Image Social & Ethical Considerations

Price Strategies for New Products Penetration Pricing PRICE Low price  establish product in the market Skimming Pricing High price/Prestige pricing  appeal to early adopters; recover high R&D costs PRICE Skimming  Penetration PRICE Lower price over time  Move inventory, stimulate D, extend product life

Marketing Strategy Over the Product Life Cycle INTRODUCTION GROWTH MATURITY DECLINE Marketing strategy Market development Increase market Defend market Maintain efficiency in emphasis share share exploiting product 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 through Build intensive Enlarge Be selective in selective outlets network of distribution distribution, trim outlets network unprofitable outlets Pricing High price/unique Lower price Price at or below Set price to strategy product / cover over time competition remain profitable production costs or reduce to Low price/gain liquidate market share

Cost-Oriented - Variable/Fixed Economic—Supply/Demand Determining Prices Cost-Oriented - Variable/Fixed Break-even Analysis Price-Setting Tools Economic—Supply/Demand

Elasticity of Demand Inelastic Demand Elastic Demand Price Electricity measure of the sensitivity of demand to changes in prices Inelastic Demand Q2 Q1 Quantity P1 P2 Electricity Price Elastic Demand Q2 Quantity P1 P2 Fast food Q1 Price not price sensitive - no real change in demand price sensitive - changes in demand

Market-based Pricing Pricing Existing Products/Services - 3 options Pricing below market prices  price wars EX: airlines, store brand vs. manufacturer’s brand Dumping Pricing above prevailing market prices for similar products EX: Sony  higher price = higher quality? Pricing at or near market prices

Pricing Tactics Price Lining Psychological Pricing Discounting Price points: Setting a limited number of prices for certain categories of products Psychological Pricing Odd-even Discounting Quantity discounts Cash discounts (2/10 net 30) Web programs: free!

Cost-based Pricing (Cost-Plus) Cover costs Material Labor Capital resources Marketing Mark-up Targeted return for shareholders  Costs + mark-up = Sales price $1.00 + $0.50 = $1.50 (50% markup) variable costs fixed costs

Mark-up Calculation – Exercise Price per product Less the cost per product (what you paid the supplier, e.g. total cost paid / # of items purchased)

Breakeven Analysis TC = TR

Breakeven Point Formula (Contribution Margin)

Review 5 Factors that influence prices Pricing objectives Pricing strategies at different stages of the Product Life Cycle (advantages/disadvantages) Methods of Determining Prices Elasticity of demand Mark-up Breakeven Analysis