Pricing Strategy …critical marketing mix variable actually produces revenue shortest term marketing mix variable relates directly to microeconomics supply versus demand analysis breakeven analysis price elasticity
Pricing Strategy How to improve profit performance? $ Q Increase price $ Q Cut Variable Cost rev var. cost fixed cost
Pricing Strategy $ Q $ Q Cut Fixed Cost …profit performance. Increase Volume
Pricing Strategy Supply versus Demand D S P Q D Q inelastic Q elastic D
Pricing Strategy Shift in Supply Curve change in cost change in expectations of cost change in price of other goods sold
Price Strategy Shift in Demand Curve change in income change in price of related goods change in price expectations change in taste Increase in demand versus increase in quantity demanded
Pricing Strategy Set Pricing Objective Estimate Demand Estimate Costs Analyze Competitors’ Prices Select Pricing Policy/Method Set Final Price
Pricing Strategy Pricing Objectives survival cover fixed cost and some variable cost very short-run….(avoid extinction) profit maximization requires accurate knowledge of demand, cost functions
Pricing Strategy Pricing Objectives (cont.) revenue maximization costs hard to determine assume increase in revenue leads to decrease in unit costs (…old BCG model) …both production and distribution costs fall works if market is price sensitive low price may discourage competition …market penetration strategy
Pricing Strategy Pricing Objectives (cont.) market skimming highest price that market will bear benefits are barely worthwhile for some customers to buy …then work down the demand curve works if no cost benefit of increasing volume image is important may or may not discourage competition
Pricing Strategy Estimate Demand (…curve) unique value awareness of substitutes difficult to compare alternatives price relative to income inventory effect Can customer hold inventory?
Pricing Strategy Estimate Costs (supply curve) cost structure at different levels of production …old long run average cost curves experience curves from BCG model …profit is a function of market share. penetration versus skimming …How is supply curve affected?
Pricing Strategy Analyze Competitors’ Prices What is the structure of the market? oligopoly versus pure competition Select Pricing Policy/Method single or multiple prices administered pricing ceiling and floor prices versus the level of competition
Pricing Strategy Cost Based Pricing cost plus, markup pricing easy, costs known, minimizes price competition ignores demand elasticity, not profit maximizing target return of investment use breakeven analysis to find a price to yield a target ROI …use sales volume to derive price…?
Pricing Strategy Demand Based Pricing perceived value requires detailed knowledge of buyer behavior and demand elasticity only true profit maximizing strategy ignores costs and competitors
Pricing Strategy Demand Based Pricing (cont.) demand differential price discrimination yield maximization pricing sell at multiple prices to multiple segments not based on marginal costs of dealing with each daily, weekly, or seasonal pricing geographic, physical, or electronic barriers
Pricing Strategy Competition Based Pricing going rate pricing used when costs difficult to measure competitors lack differential advantage sealed bid forces competitors to lowest price
Pricing Strategies Select Final Price psychological pricing, prestige pricing know demand elasticity start high, work toward costs discounts cash, trade, quantity, or seasonal promotional pricing loss leaders
Pricing Strategy Select Final Price (cont.) price lining odd pricing perception
Pricing Strategy Price cuts excess capacity leads to margin squeezes (aka price wars) build market share not brand loyalty low cost producer will always win
Pricing Strategy Price Increases » BeforeAfter Price % Quantityx 100x 100 Revenue1,0001,010 Total Cost Profit %
Pricing Strategy Intense pressure to “inflate” prices reduce discounts decrease amount of product substitute cheaper materials reduce product features