Pricing Decisions

Why Pricing?
• No one will ever pay you what you're worth.

• No one will ever pay you what you're worth.

• They'll only ever pay you what they think you're worth

• and you control their thinking.

✓ Communicate the value
 Changes in pricing environment
• Pricing in Digital World
✓ Challenges and opportunities

• Sharing Economy

• Bartering

• Renting
 How companies set prices?
• Small vs. Large companies
• Small manufacturer vs large airlines

• Price setting requires:

✓ Understanding of consumer pricing psychology
✓ a systematic approach to setting, adapting, and changing
prices
Setting the prices
 Consumer psychology and pricing
• Shift from “price takers” to participant in price setting

• How consumers arrive at their price perceptions?

✓ Reference prices
✓ Price–quality inferences
➢ Expensive gifts
✓ Price endings.
 Setting the Price
• Selecting the Pricing Objective
• Determining Demand
• Estimating Costs
• Analyzing Competitors’ Costs, Prices, and Offers
• Selecting a Pricing Method
• Selecting the Final Price
 Setting the Price: Pricing Objective
• Survival
✓ Keep price low to stay in business
✓ As long as the prices cover variable costs and fixed costs,
the company stays in business
• Maximum current profit
✓ Estimate the demand and costs associated with the
alternate prices and choose the price that offer the
maximum current profit
• Maximum market share
✓ Higher sales volume will lead to lower unit costs and
higher long-run profits
 Setting the Price: Pricing Objective
• Maximum market skimming
✓ Setting high prices to skim the market
✓ The strategy can backfire if the worthy competitor prices
its product low
✓ Early buyers may face cognitive dissonance (Apple)
• Product-quality Leadership
✓ Aim to be the product-quality leader
✓ BMW, Starbucks
 Setting the Price: Determining Demand
• P-Q Curve
• How to estimate Demand?
✓ Price sensitivity
➢ What influences price sensitivity?
• Methods for estimating demand curves
✓ Surveys, price experiments, & statistical analysis
• Price elasticity of demand
✓ Elastic vs inelastic demand
 Setting the Price: Estimating Costs
• Why automobile manufacturers do not increase their
immediate production despite the waiting periods?
 Setting the Price: Estimating Costs
• Target Costing

• How to cut costs?

 Setting the Price: Analyzing Competitors
Analyzing Competitors’ Costs, Prices, and Offers
• What, if the firm’s offer contains features not offered by the
nearest competitor?
• What, if the competitor’s offer contains some features not
offered by the firm?

• Value-priced competitors
✓ combination of low price and high quality
• Should traditional firms be afraid of value priced competitors?
• When to compete with value priced competitors?
 Setting the Price: Pricing Method
• Three major considerations in price setting:
✓ Costs = price floor
✓ Competitors’ prices = orienting point
✓ Customers’ assessment of unique features = price ceiling
• Methods of price-setting:
✓ Markup pricing
✓ Target-return pricing
✓ Perceived value pricing
✓ Value pricing
✓ EDLP
✓ Going-rate pricing
✓ Auction-type pricing
 Setting the Price: Pricing Method
• Methods of price-setting:
✓ Markup pricing
➢ Add a standard markup to the product’s cost

➢ Does the use of standard markups make sense?

✓ Target-return pricing
➢ Price that yields its target rate of return on investment
 Setting the Price: Pricing Method
• Methods of price-setting:
✓ Perceived value pricing
➢ Based on customer perceived value which includes:
❖ Product image, warranty, quality, customer
support, reputation
➢ How to enhance perceived value?
✓ Value pricing
➢ Low price high quality
➢ It’s not setting low costs, but reengineering
✓ EDLP
➢ Constantly low price with little or no price promotion
or special sales.
➢ Why retailers adopt EDLP?
 Setting the Price: Pricing Method
• Methods of price-setting:
✓ Going-rate pricing
➢ Prices are based largely on competitors’ prices.
➢ Reflects industry’s collective wisdom.
 Setting the Price: Pricing Method
• Methods of price-setting:
✓ Auction-type pricing
➢ English auctions (ascending bids)
❖ One seller and many buyers.
❖ The highest bidder gets the item.
❖ eBay, selling antiques, used equipment etc.
✓ Dutch auctions (descending bids)
➢ One seller, many buyers: Seller announces a high price and
slowly decreases price until a bidder accepts.
➢ one buyer, many sellers: buyer puts requirement, and
potential sellers compete to offer the lowest price.
✓ Sealed-bid auctions
➢ Would-be suppliers submit only one bid; they cannot know
the other bids.
➢ Governments
➢ Supplier will not bid below cost but not too high also.
 Setting the Price : Final Price
What are the additional factors before selecting final price?
• Impact of other marketing activities
➢ brand’s quality and advertising relative to the competition
• Company pricing policies
➢ Airlines , banks
• Gain-and-risk-sharing pricing
• Impact of price on other parties
✓ Dealers (online vs offline)
✓ Competitors (possibility of price wars)
Adapting the Price
 Adapting the Price
• Companies usually do not set a single price but rather develop
a pricing structure, which reflects variations in
✓ geographical demand and costs
✓ market-segment requirements
✓ purchase timing
✓ order levels
✓ delivery frequency
✓ Guarantees
✓ Service contracts
 Adapting the Price
• Geographical Pricing
✓ Barter
✓ Compensation deal
✓ Buyback arrangement
✓ Offset
 Adapting the Price
• Discounts and allowances, Why?
✓ Discount
✓ Quantity discount
✓ Functional discount
✓ Seasonal discount
✓ Allowances
 Adapting the Price
• Promotional pricing:
✓ Loss-leader pricing
✓ Special event pricing
✓ Special customer pricing
✓ Cash rebates
✓ Low-interest financing
✓ Longer payment terms
✓ Warranties/service contracts
✓ Psychological discounting
 Adapting the Price
• Price Discrimination:
✓ First-degree price discrimination
✓ Second-degree price discrimination
✓ Third-degree price discrimination
Initiating and Responding to Price
Changes
 Reducing the Price
• Why to cut prices?
• Traps of price cut strategy:
✓ Price concessions
✓ Low-quality
✓ Fragile market share
✓ Shallow pockets
✓ Price war
 Increasing the Price
• Why to increase prices?
• How to increase prices?
✓ Delayed quotation pricing
✓ Escalator clauses
✓ Unbundling
✓ Reduction of discounts
 Competitive responses to price change
• Anticipating competitive responses
• Responding to competitors’ price changes
Questions?
Comments?
Concerns?