1. Pricing Strategy

2. The demand curve
Price P1 P2 Q1 Q2
Quantity 7 7 7 7 7

3. Pricing methods
Cost
Pricing methods
Competition
Marketing

4. Cost-oriented Pricing
Full Cost Pricing
Direct (Marginal) Cost Pricing

5. Determining the break even point
Total revenue
Units of Production
Money (£)
Total cost
Break even point
Profits
Total variable costs
Fixed costs
Losses 10 10 10 10 10

6. Full cost pricing Advantages
Gives an indication of minimum price needed to make a profit.
Can be used with other methods – acts as a constraint.
Criticisms
Takes no account of customers’ willingness to pay.
If followed strictly, leads to an increase in price when demand falls.
Is illogical because a sales estimate is made before a price is set.
May be problems in allocating overheads.

7. Direct cost pricing Advantages Criticisms
Avoids problem of allocating overheads.
Avoids ‘price up as demand down’ problem.
Indicates lowest price at which it is sensible to take business.
Criticisms
When business is buoyant, gives no indication of optimum price.
Cannot be used in the long-term.

8. Competitor-oriented Pricing
Going-rate Pricing: With no product differentiation, producers are forced to accept the going rate. In reality there is almost no situation in which no differentiation occurs. Competitive bidding: The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered. Statistical modelling has resulted in the following basis for calculating expected profits. Expected profit = Profit X Probability of winning

9. Competitive bidding using the expected profit criterion
Bid price (£)
Profit
Probability
Expected Profit
2000
0.99
2100
100
0.90 90
2200
200
0.80
160*
2300
300
0.40
120
2400
400
0.20 80
2500
500
0.10 50

10. Marketing-orientated pricing
Marketing strategy
Value to customer
Effect on distributors/ retailers
Negotiating margins
Costs
Political factors
Product line pricing
Competition
Price-quality relationships
Explicability
Marketing-oriented pricing

11. Adoption of innovations by segments: calculators
S1 Engineer/scientists
S2 Commercial
S3 General public
S4 Schoolchildren
Time
Sales

12. New product launch strategy
Promotion
High
Low
Slow
skimming
Rapid
skimming
High
Price
Low
Rapid
penetration
Slow
penetration

13. Travelodge compares the price of its rooms with that of Comfort Inn.

14. Characteristics of high price market segments
Product provides high value
Customers have high ability to pay
Consumer and bill payer are different
Lack of competition
Excess demand
High pressure to buy

15. Conditions for charging low prices
Only feasible alternative
Market presence or domination
Experience curve effect/low costs
Make money later
Make money elsewhere
Barrier to entry
Predation

16. Cutting costs means that consumers can be offered lower prices.
Virgin Trains
Cutting costs means that consumers can be offered lower prices.

17. Pricing existing products
Strategic Objectives
Build objective
Hold objective
Harvest objective
Reposition objective

18. Methods of estimating value
Trade-off analysis
Experimentation
Economic value to the customer analysis

19. Pricing using EVC analysis
50 000
30 000
20 000
80 000
EVC =
Life-cycle cost
Purchase price
Start-up costs
Post-purchase costs
Added value
Reference product
New product X
New product Y

20. Secondary competitors Immediate competitors
Layers of competition
Tertiary competitors
Different products solving or eliminating
the problem in a different way
Different products solving the same
problem in a similar way
Secondary competitors
Immediate competitors
Technically similar products

21. Initiating price changes

22. Reacting to competitors’ price changes

23. Ethical issues in pricing
Price fixing
Predatory pricing
Deceptive pricing
Price discrimination
Penetration pricing and obesity
Product dumping

24. Core Reading
Core reading to support this topic can be found in Chapter 12 of your recommended text