1 18 & 19. Pricing Considerations & Approaches

2 Topics Pricing constraints Pricing objectives General pricing approaches Price adjustment strategies

3 Pricing Constraints Competition –Relative positions of competitors in industry Market leader, challenger, follower, niche comp. –Competitor strategies –Competitor costs and prices Public policy –Legislation impacts pricing

4 Pricing Constraints Public policy issues: –Horizontal channel issues (e.g., manufacturers in different channels) Price fixing Predatory pricing –Vertical channel issues (e.g., manufacturer to wholesaler(s) in same channel) Price discrimination Resale price maintenance –Deceptive pricing

5 Pricing Constraints Market structure: Is price-based positioning effective? –Pure competition –Monopolistic competition –Oligopoly –Monopoly Demand –Demand curve, supply curve, equilibrium point –Elasticity of demand –Stage in life cycle Costs –Total cost = Fixed Costs + Variable Costs –Experience curve

6 Pricing Objectives Survival Market-share leadership –Sales volume Current profit maximization Product-quality leadership Social responsibility Yield management pricing

7 General Pricing Approaches Demand-based pricing –Introductory stage strategies (new products) Market-skimming pricing –Set high price (e.g., Intel) Market penetration –Set low price (e.g., WalMart) –Strategies for later in product life cycle Prestige pricing Target pricing → Design to price Bundle pricing Odd pricing

8 General Pricing Approaches Cost-based pricing –Break-even pricing: Revenues = Fixed Costs + Total Variable Costs Break-even Quantity = Fixed Cost ÷ (Price – Unit Variable Cost) Breakeven Dollars = Fixed Cost ÷ [1- (Unit Variable Cost/Price)] –Marginal analysis Consider change in total revenue & change in total cost that result from producing & selling one more unit Profit maximized when marginal revenue = marginal cost –In practice, when marginal revenue is only slightly higher than marginal cost So, keep lowering price to sell more until MR = MC –Enables firm to achieve economies of scale in production

9 General Pricing Approaches Cost-based pricing (Cont.) –Standard markup pricing Fixed % of cost is set as markup, which is then added to cost –Cost-plus pricing (esp. business services) Estimate cost, add desired profit to create fixed fee Full-cost pricing –All fixed & variable costs allocated over quantity produced are used to set price Incremental pricing –Only unit variable costs (+small additional amt.) used to set price

10 General Pricing Approaches Profit-based pricing –Target profit pricing Profit = Total Revenue – Total Cost Price = (Desired profit + Fixed Cost + Total Variable Cost) ÷ Quantity Forecast to be Sold –Target return-on-sales pricing Profit expressed as a desired % of sales –Target return-on-investment pricing Profit expressed as a desired % of $ invested in a project Value-based pricing –Everyday low pricing (EDLP) –High-low pricing A kind of promotional pricing Competition-based pricing –Customary pricing –Loss leader pricing –Opening point pricing

11 Price Adjustment Strategies Strategies –Discount & allowance pricing: Price paid (market price) may not equal normal price (list price) Cash discount Quantity discount –Cumulative and noncumulative Functional (trade) discount –Chain of discounts (Table 19.3) Seasonal discount Trade-in allowance Promotional allowance

12 Price Adjustment Strategies More strategies –Segment pricing Customer-segment pricing Location pricing –A form of flexible pricing Product-line pricing Time pricing –Geographical pricing FOB origin pricing Uniform delivery pricing Zone pricing Basing-point pricing Freight-absorption pricing