Pricing Strategy: Critical Marketing Mix Variable

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?
rev
var. $
$
cost
fixed
cost
Q Q
Increase price Cut Variable Cost

Pricing Strategy
…profit performance.
$ $
Q Q
Increase Volume Cut Fixed Cost

Pricing Strategy
Supply versus Demand
S
inelastic elastic
P
D D D
Q Q Q
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
» Before After
• Price 10.00 10.10 +1%
• Quantity x 100 x 100
• Revenue 1,000 1,010
• Total Cost 970 970
• Profit 30 40 +33%
Pricing Strategy
Intense pressure to “inflate” prices

reduce discounts
decrease amount of product
substitute cheaper materials
reduce product features

Pricing Strategy: Critical Marketing Mix Variable

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Pricing Strategy

…critical marketing mix variable

actually produces revenue

shortest term marketing mix variable

relates directly to microeconomics

How to improve profit performance?

Increase price Cut Variable Cost

Increase Volume Cut Fixed Cost

Supply versus Demand

Shift in Supply Curve

Shift in Demand Curve

Increase in demand versus increase in quantity demanded

Set Pricing Objective

Pricing Objectives (cont.)

Pricing Objectives (cont.)

Estimate Demand (…curve)

Estimate Costs (supply curve)

cost structure at different levels of production

experience curves from BCG model

penetration versus skimming

Analyze Competitors’ Prices

Select Pricing Policy/Method

Cost Based Pricing

cost plus, markup pricing

target return of investment

Demand Based Pricing

Demand Based Pricing (cont.)

Competition Based Pricing

going rate pricing

Select Final Price

psychological pricing, prestige pricing

Select Final Price (cont.)

Intense pressure to “inflate” prices

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