Prof. Bauer-Ramazani MARKETING Pricing Strategies

Overview  Definition of price  Factors that influence the pricing decision  Pricing objectives  Pricing strategies over the product life cycle  Three major pricing strategies and their advantages and disadvantages  Exercises applying different pricing strategies  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, dues

Factors in Setting Price

Pricing Objectives

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

Meet Business Objectives Profit-Maximization Market Share Other Pricing Objectives  Loss Containment  Survival  Customer Benefit  Social & Ethical Considerations Price-Setting Tools Cost-Oriented - Variable/Fixed Economic Supply/Demand Break-even Analysis Determining Prices

Equilibrium Price: Supply = Demand Number of flash drives/memory sticks demanded Price per flash drive/memory stick

Elasticity of Demand measure of the sensitivity of demand to changes in prices not price sensitive - no real change in demandprice sensitive - changes in demand Inelastic Demand Q 2 Q 1 Quantity P1P1P1P1 P2P2P2P2 Electricity Price Elastic Demand Q2Q2Q2Q2 Quantity P1P1P1P1 P2P2P2P2 Recreational Vehicles Q1Q1 Price

Market-based Pricing nPricing 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

Breakeven Analysis

Breakeven Point Formula Breakeven Quantity Breakeven Quantity = Fixed Costs Price/unit –Variable cost/unit (Contribution Margin)

Cost-based Pricing per-unit cost of production 1.Estimating the per-unit cost of production  Capital  Capital (K): land, building, equipment = fixed cost (FC)  Labor  Labor (L): workers’ wages = variable cost (VC) $1.00 (production cost) EX: $ $0.50 = $1.00 (production cost) mark-up 2.Adding a mark-up  Desired profit per item: $0.50 cost of production mark-up 3.Sales price = cost of production + mark-up  $ $0.50 = $1.50  50% markup

Mark-up Calculation

How costs affect gasoline prices

Price Strategies for New Products  Penetration  Low price  establish product in the market  Elastic demand; Predatory pricing  Skimming  High price; unique product; appeal to early adopters; Prestige pricing  Recovering high R&D costs  Combination  Move inventory; stimulate D; extend product life PRICE Skimming > Penetration Penetration Price Strategy Skimming Price Strategy

Pricing of iPhones

Exercise Select the appropriate pricing strategy. Explain your choice. 1.Wal-Mart launches a new range of own-label soups. 2.Cunard launches two new cruise ships. 3.A cable TV provider moves into a new area and needs to achieve a market share. 4.Holiday Inns try to fill hotels during winter weekends. 5.Burger King introduces a new range of value meals. 6.Nokia launches a new videophone.

Pricing Tactics nPrice Lining Setting a limited number of prices for certain categories of products nPsychological Pricing Pricing to take advantage of the fact that consumers do not always respond rationally to stated prices nDiscounting Price reductions offered as an incentive to purchase High tech Pricing: giving it away!