Price Strategy & Management

Chapter 10 & 11

Price

“The exchange value of a good or service in the marketplace.”

•Value derived from tangible and intangible benefits

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

Factors Influencing Price

PricePrice

Nature ofMarket

Nature ofMarket

ConsumersConsumers

CostsCosts

Profit Objectives

Profit Objectives Channel

MembersChannelMembers

Nature of Market

The market and the degree of competition in the market influences pricing strategy.

• Monopoly

• Oligopoly

•Monopolistic Competition

•Pure Competition

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.

Elasticity of Demand

ElasticElastic

InelasticInelastic

Small change in price; large change in volume

Change in price does not have significant impact on volume

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

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.

Break-Even

Fixed Costs .(Selling Price – Variable Costs)

= $800,000 .($1.00 – $0.40)

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

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

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

Promotional Pricing Tactics

“Strategies to reduce prices temporarily.”

• Loss Leaders

• Multiple-Unit Prices

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

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

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