pricing strategy …critical marketing mix variable actually produces revenue shortest term...
TRANSCRIPT
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Pricing Strategy
…critical marketing mix variable
actually produces revenue
shortest term marketing mix variable
relates directly to microeconomicssupply versus demand analysis
breakeven analysis
price elasticity
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Pricing Strategy
How to improve profit performance?
$
Q
Increase price
$
Q
Cut Variable Cost
rev
var.costfixedcost
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Pricing Strategy
$
Q
$
Q
Cut Fixed Cost
…profit performance.
Increase Volume
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Pricing Strategy
Supply versus Demand
D
S
P
Q
D
Q
inelastic
Q
elastic
D
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Pricing Strategy
Shift in Supply Curvechange in cost
change in expectations of cost
change in price of other goods sold
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Price Strategy
Shift in Demand Curvechange in income
change in price of related goods
change in price expectations
change in taste
Increase in demand versus increase in quantity demanded
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Pricing Strategy
Set Pricing Objective
Estimate Demand
Estimate Costs
Analyze Competitors’ Prices
Select Pricing Policy/Method
Set Final Price
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Pricing Strategy
Pricing Objectives
survivalcover fixed cost and some variable cost
very short-run….(avoid extinction)
profit maximizationrequires accurate knowledge of demand, cost functions
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Pricing Strategy
Pricing Objectives (cont.)
revenue maximizationcosts 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
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Pricing Strategy
Pricing Objectives (cont.)
market skimminghighest 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
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Pricing Strategy
Estimate Demand (…curve)unique value
awareness of substitutes
difficult to compare alternatives
price relative to income
inventory effectCan customer hold inventory?
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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?
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Pricing Strategy
Analyze Competitors’ PricesWhat is the structure of the market?
oligopoly versus pure competition
Select Pricing Policy/Methodsingle or multiple prices
administered pricingceiling and floor prices versus the level of competition
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Pricing Strategy
Cost Based Pricing
cost plus, markup pricingeasy, costs known, minimizes price competition
ignores demand elasticity, not profit maximizing
target return of investmentuse breakeven analysis to find a price to yield a target ROI
…use sales volume to derive price…?
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Pricing Strategy
Demand Based Pricing
perceived valuerequires detailed knowledge of buyer behavior and demand elasticity
only true profit maximizing strategy
ignores costs and competitors
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Pricing Strategy
Demand Based Pricing (cont.)
demand differential
price discrimination
yield maximization pricingsell 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
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Pricing Strategy
Competition Based Pricing
going rate pricingused when costs difficult to measure
competitors lack differential advantage
sealed bidforces competitors to lowest price
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Pricing Strategies
Select Final Price
psychological pricing, prestige pricingknow demand elasticity
start high, work toward costs
discountscash, trade, quantity, or seasonal
promotional pricingloss leaders
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Pricing Strategy
Select Final Price (cont.)
price lining
odd pricingperception
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Pricing Strategy
Price cutsexcess capacity leads to margin squeezes (aka price wars)
build market share not brand loyalty
low cost producer will always win
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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%
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Pricing Strategy
Intense pressure to “inflate” prices reduce discounts
decrease amount of product
substitute cheaper materials
reduce product features