chapter 8 pricing strategy. price theory and practice incremental pricing bases for price decisions...
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CHAPTER 8CHAPTER 8
PRICING STRATEGYPRICING STRATEGY
PRICING STRATEGY
• Price Theory and Practice
• Incremental Pricing
• Bases for Price Decisions
• Price Discounts
• Special Pricing Issues
PRICE THEORY AND PRACTICE
• Price Theory (Economics) - Dominance of pricing
• Pricing in Practice (Business) - Influence of non-price factors
P
Q
D
D D
D1
1
Shifting the demand curve to the right
(non-price)
USEFUL CONCEPTS FOR PRICING STRATEGY
• Price Elasticity– Elastic demand– Inelastic demand
• Cost Concepts– Fixed cost– Variable cost
INCREMENTAL PRICING
Using contribution to profit as the criteria for measuring profitability rather than net profit.
Contribution to Profit = Total Revenue – Variable Cost
Net Profit = Total Revenue – Total Cost
CONDITIONS FAVORABLE FOR INCREMENTAL PRICING
• Heavy Fixed Cost
• Excess Production Capacity
• Price-Sensitive Niche
• Isolate from Core Market
INCREMENTAL PRICING EXAMPLES
• Wall Street Journal
• Hotels
• Matinee movies
• Happy hour
WALL STREET JOURNAL(Yearly Rate)
Business Rate $150
Student Rate $50
Library Rate $300
INCREMENTAL PRICING OF SERVICES BY TIME
Hours in the Day Matinee movies
Days of the Week Weekend hotels
Seasons of the Year Income tax preparation
BASES FOR PRICE DECISIONS
• Based on Demand of Buyer
• Based on Cost of Seller
• Based on Competitor Prices
DEMAND-BASED PRICING
• New product pricing
• Perceived Value
• Yield Management
NEW PRODUCT PRICING
• New Product Skimming
• New Product Penetration
NEW PRODUCT SKIMMING
• Set high initial price
• Recover R&D quickly
• Drop prices over time
PRODUCT SKIMMING EXAMPLES
• Intel chips
• Flat panel TVs
• Smart Phones
NEW PRODUCT PENETRATION
• Set low initial price
• Gain market share
• Discourage competition
PRODUCT PENETRATION EXAMPLES
• Southwest airlines
• Two-Buck Chuck wine
• Samsung
PERCEIVED VALUE PRICING
• Rolex Watches
• 3M Post-It-Notes
• Business Lunches
YIELD MANAGEMENT PRICING
• Airlines
• Hotels
• Utility Pricing
COST-BASED PRICING
• Cost Plus
• Billable Hours
• Add-on Charges
• Markups
COST-BASED EXAMPLES
• Lawyer sets billable cost at $400 per hour
• Boeing has a cost-plus contract with NASA
• Star Furniture marks up their furniture 50% above cost
ADD-ON PRICE EXAMPLES
• Airlines
• Credit cards
• Telephone services
SPIRIT BAGGAGE FEES
Book Over Phone $10
Roller Bag $30
Water $3
Boarding Passes $10Printed at Airport
Booking Over Internet $17
COMPETITION – BASED PRICING
•Competitive Price Wars
•Lower Cost
•Administered Pricing
COMPETITION-BASED EXAMPLES
• HEB Price War
• Two Buck Chuck Wine
• Price of Basic Steel
TWO BUCK CHUCK WINE
• Sold only in Trader Joe’s gourmet stores
• Overproduction of California grapes
• Produce own grapes at very low cost
PARKER HANNIFIN PRICING STRATEGY
“A” Products High-volume commodities
“B” Products More specialized niches
“C” Products Limited Competition
“D” Products No direct competitor
PRICE DISCOUNTS
• Cash Discounts – 5% off at Spec’s if you pay by cash
• Seasonal Discounts – Cheaper prices on December 26
• Trade Discounts – Cheaper prices to Wholesalers
• Promotional Discounts – Weekend specials at Supermarkets
SPECIAL PRICING ISSUES
• Pricing Choices
• Other Pricing Options
• Psychological Pricing
• Questionable Pricing
• Price Stability/Competition
PRICING CHOICES
• Fixed Pricing – Price is fixed by the seller at any one period of time
• Negotiated Pricing – Price is negotiated between a buyer and a seller for each transaction
FIXED PRICING
• Paying the monthly telephone bill
• Buying canned goods at the supermarket
• Parking at the Reliant Stadium
NEGOTIATED PRICING
• Buying an automobile
• Selling a house
• Garage sale
• Showrooming
OTHER PRICING OPTIONS
• Freemium Pricing
• Reference Pricing
• A La Carte Cable Pricing
PSYCHOLOGICAL PRICING
• $199.95
• $.99
• Buy one, get one free
QUESTIONABLE PRICING
• Bait and Switch
• Price Gouging
• Price Fixing
• Pricing of E-Books
PRICE MODELS FOR E-BOOKS
•Wholesale model
•Agency model
WHOLESALE PRICING MODEL FOR SELLING E-BOOKS
•Book publisher sets list price at $25
•Seller buys at $12.50 and sells for $25
•Amazon.com buys at $12.50 and sells for $9.99
AGENCY PRICING MODEL FOR SELLING E-BOOKS
•Book publisher sets list price at $25
•Apple receives 30% of list price $7.50 sold through iPads
•All sellers are required to sell book at $25 (including Amazon.com)
WHO WANTS PRICE COMPETITION?
• Discount retailers
• Foreign competitors
• Firms with low costs
• Internet Sellers
WHO WANTS PRICE STABILITY?
• Oligopolies
• Small businesses
• Professional services
• Traditional brokers and agents
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