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Price Strategy & Management
Chapter 10 & 11
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Price
“The exchange value of a good or service in the marketplace.”
•Value derived from tangible and intangible benefits
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Importance of Price
•Organization must establish fair and competitive prices while generating adequate revenues and profit.
Low prices (perceived value) attracts customers
High prices (perceived value) attracts customers
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Factors Influencing Price
PricePrice
Nature ofMarket
Nature ofMarket
ConsumersConsumers
CostsCosts
Profit Objectives
Profit Objectives Channel
MembersChannelMembers
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Nature of Market
The market and the degree of competition in the market influences pricing strategy.
• Monopoly
• Oligopoly
•Monopolistic Competition
•Pure Competition
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Consumer Demand and Price
Principle:
1. Consumers purchase greater quantity at lower prices.
2. The effect of a price change on demand must be factored into pricing strategy.
Price Elasticity of Demand:
Measures the effect of a change in price on the quantity purchased.
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Elasticity of Demand
ElasticElastic
InelasticInelastic
Small change in price; large change in volume
Change in price does not have significant impact on volume
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Costs Influence Price
Controlling costs delay or minimize the need for price increases. Some alternatives for protecting margins include:
• Improving operational efficiency
• Less expensive materials
• Shrinkage
• Relocation of manufacturing
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Break-Even Analysis
A break-even analysis shows how many units must be sold to exactly break even, given fixed and variable costs, and a price.
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Break-Even
Fixed Costs .(Selling Price – Variable Costs)
= $800,000 .($1.00 – $0.40)
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Channel Members Influence Price
Mfg’rMfg’r WholesalerWholesaler RetailerRetailer ConsumerConsumer
Organizations want distributors to charge prices that agree with their marketing strategy.
1. Adequate Margin2. Fair Treatment3. Special Deals4. Impact of Increases
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Pricing Methods
Demand-Based Pricing
Competition-BasedPricing
Cost-BasedPricing
Total costs plus profit determines price
What consumers will pay determines price
Position relative to competition determines price
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Psychological Pricing Tactics
Appeals to tendencies in consumer behaviour.
1. Prestige Pricing
2. Odd-Even Pricing
3. Price Lining
4. Customary Pricing
5. Unit Pricing
6. EDLP
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Promotional Pricing Tactics
“Strategies to reduce prices temporarily.”
• Loss Leaders
• Multiple-Unit Prices
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New Product Pricing
STRATEGY: Price Skimming
“High” entry price to maximize revenue.
Appropriate if:
1. Product is an innovation
2. Competition is limited
3. Patent protection applies
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New Product Pricing
STRATEGY: Price Penetration
“Low” entry price to gain acceptance quickly.
Appropriate if:
1. Demand is elastic
2. Production costs are kept in check
3. Market is segmented on price
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Managing Price-The Trade Side
Providing incentives to buy more is the name of the game.
1. Quantity Discount
2. Slotting Allowance
3. Performance Allowance
5. Seasonal Discount