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Prof. Bauer-Ramazani MARKETING Pricing Strategies
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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
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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
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Factors in Setting Price
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Pricing Objectives
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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
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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
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Equilibrium Price: Supply = Demand Number of flash drives/memory sticks demanded Price per flash drive/memory stick
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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
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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
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Breakeven Analysis
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Breakeven Point Formula Breakeven Quantity Breakeven Quantity = Fixed Costs Price/unit –Variable cost/unit (Contribution Margin)
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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 + $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 $1.00 + $0.50 = $1.50 50% markup
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Mark-up Calculation
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How costs affect gasoline prices
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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
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Pricing of iPhones
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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.
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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!
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