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