Pricing Strategy

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Course Roadmap
Fundamentals Elements of Marketing Strategy Application

Situation Analysis
(Customer, Competitor, Company,
Collaborators, Climate)

- Quantitative Analysis Market Selection Simulation Game

- Consumer Behavior (Segmentation, Targeting, Positioning) PharmaSim

Marketing Mix Formulation

(Product, Distribution, Pricing, Promotion)

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Agenda
— The Importance of Pricing
— Common Pricing Strategies
— Review of Pricing Factors
— Differentiated Pricing

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 The Importance of Pricing

Labour cost = biggest fixed cost

for most companies
Cut cost by reducing headcounts

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Mutually exclusive, can do all of these things

Common Pricing Strategies

n Cost-oriented strategies
n Standard markup / Cost-plus
n Experience curve
n Competition-oriented strategies
n Loss leader
"Me too" strategy
Usually does not work unless you have excellent
supply chain management->Cost very low

n Demand-oriented strategies — Profit-oriented strategies

n Skimming High first, lower later eg. iPad — Target profit
n Penetration Price lower, margin less — Target return on sales
n Prestige Psychological value, emotion — Target return on investment
iPad is skimming not penetration because there was no market before its release.
No market to be penetrated, they are the big dog

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Common Pricing Strategies
— Product mix pricing strategies
— Optional-product pricing
— Pricing optional or accessory products sold with the main product
— Captive-product pricing
— Pricing low on the main product and setting high markups on the supplies
— Product bundle pricing
— Combining several of the products and offer the bundle at a reduced price

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors
— Company objectives
— Context
— Competition
— Cost
— Customers

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Company Objectives
Focus Examples of Specific Objectives
Profit Focus • Maximize long-term profits
• Maximize short-term profits
Demand Focus • Create interest and build traffic
• Signal the image/quality of the product
• Desensitize consumers to price
Market/ • Increase market share
Competition Focus • Stabilize market
• Discourage new entrants

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Context
— Political
— Government policy or restrictions
— Economic situation
— Inflation/deflation
— Social
— Natural disasters
— Corporate social responsibility

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Competition
Characteristics Key Points

Number of • Firms with no competition can set any price

firms in the (subject to law)
industry • Many active firms à fierce competition à limits
pricing discretion
• With few firms (especially undifferentiated
industries), pricing usually set by industry leader
Relative firm • Firms with large market share (typically with lowest
size cost) can initiate price changes without worrying
about competitors
Product • Product differentiation allows small firms with
differentiation many competitors to set prices, but often need
heavy promotions
• Pricing differences limited within a certain range
Ease of entry
MARK
Source:4210 Professor
Strategic Eugene
Marketing
• Low-barrier industries, existing firms have less
R. RaittJain
Asia Edition, Spring 2024Cengage Learning, 2009
& Haley,
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 Pricing Factors: Competition

— What are the pros and cons of competing on price?

+ Allow quick reactions to competition
+ Give flexibility in adjusting demand (for price elastic products)
+ Often effective in increasing sales (for price elastic products)
- Reduce profit and may trigger a price war
- Ignores product differentiation and train customers to be price
sensitive
- May signal you were over-priced
- Does not build brand loyalty

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Competition

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Competition
— An attacker prices below you
— What happens if you match?
- They may go lower … triggers a price war. You lose your margin – may
or may not pick up volume
- Sends the signal to your customers that you were overpriced
— Introduce a low-cost venture
— Further differentiate your product/service

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Cost
— Cost sets the floor price. But most of the time consumers don’t
care about the cost, instead they care about the brand.

— Both these products are OTC and are exactly alike, except one is
generic and cheaper, the other a famous brand and more expensive.

Which one sells more???

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009
MARK 4210 Professor Eugene R. Raitt Spring 2024
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 Pricing Factors: Cost
Parameter Implications for Pricing Strategy
Fixed Cost/Variable • High FC:VC ratio à???
Cost Ratio Volume sensitive à increase sales volume to increase profit
• High VC:FC ratio à ???
Price sensitive à increase price to increase profit
Economies of Scale • If scale economies are substantial, and/or expanded operations
lower costs, prices may be lowered to gain market share

Firm cost structure • Lowest cost producer will earn additional profits by maintaining
compared to competitive prices – earnings reinvested back to aggressive
competitors promotions, increase market share
• Cost-disadvantaged producer cannot effectively lower price as it
can trigger a losing price war

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Pricing Factors: Customer Demand
— Demand curve shows the quantity of a product that
customers will buy in a market during a given time period
at various prices if all other factors remain the same

— Price Elasticity
— Elastic = lowering prices substantially increases demand; higher
price sensitivity
— Inelastic = lowering prices has little effect on demand; lower price
sensitivity eg. 水電煤

MARK 4210 Professor Eugene R. Raitt Spring 2024

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009 16
 Pricing Factors: Value to Customers
— Value to customers sets the ceiling price
— Different customers derive/perceive different values
— Affected by the number and quality of available alternatives
— How to determine value?
— For psychological value and functional value, use market
research to assess both tangible and intangible benefits
— For economic benefits, Economic Value to Customers (EVC)
can be calculated

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009
MARK 4210 Professor Eugene R. Raitt Spring 2024
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 EVC
— Economic value to the customer (EVC) is the differential value
between using the closest substitute and using your product
— Figure out the total cost associated with using the closet competitive product
(Costcompetitor product)
— Figure out the total cost associated with using your product (Costyour product)
— EVC = Costcompetitor product - Costyour product

— EVC sets the maximum price of your product (assuming that

consumers are only considering economic benefits)
— Costcompetitor product = Costyour product

— Different segments may have different EVC

Source: Strategic Marketing Asia Edition, Jain & Haley, Cengage Learning, 2009
MARK 4210 Professor Eugene R. Raitt Spring 2024
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 EVC
— Communicate your EVC
— Do not assume customers know EVC
— Educating customers is important when the product delivers a
stream of benefits over time (TCO) Total Cost of Ownership
— The fact that consumers are not buying your product is not by
itself a reason to cut price. It may be a reason to change your
marketing program to justify the price, explaining why your
product is worth the price. Of course, you need to do this in a
promotional manner, not preaching.

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Differential Pricing Strategy
— Involves charging different prices for similar products/services
based on reasons other than cost

— Utilizes differences in consumers’ price sensitivity to maximize

profit

— More price points attract more customers since customers value

products differently, leading to increased sales and profits

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Differential Pricing Strategy
— Differential pricing tactics
— Consumer characteristics
— Locations, timing, consumer traits, market history
— Selling techniques
— Volume discount/bundling, product form, commitment to buy,
dynamic pricing
— Setting up hurdles
— Rebates, coupons, price match guarantee

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Differential Pricing Strategy
— When is differentiated pricing effective?
— When markets are separate
— When price differences are not transparent
— When price differences are transparent but seem fair

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Differential Pricing Strategy
— PWYW – Pay What You Want
— A new form of differential pricing
— Aims at capturing customer value and penetration

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Key Takeaways
— Pricing decisions have the highest impact on the bottom line
and involve a holistic consideration of many factors (5Cs).
— Pricing decisions should reflect an understanding of the
value you are bringing to each of your segments. But do it with
caution.
— Avoid competing on price unless you’re a sustainably low-
cost producer. It can erode the value of the brand and will
drive profits away.

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 Looking Ahead: Pricing Strategy
— Case Preparation: ODI
1. How would you describe chicken sociology? For chicken
farmers, what is the major problem associated with this chicken
sociology, and how do they currently try to solve this problem?
2. What are the advantages of ODI lenses for chicken farmers
over the current alternative? What are the unappealing points of
ODI lenses?
3. Cost sets the floor price (i.e., the lowest price) a product should
charge. For ease of calculation, let’s consider only the variable
cost for now. What is the variable cost for ODI contact lenses?

MARK 4210 Professor Eugene R. Raitt Spring 2024

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 4. What is the maximum price ODI contact lenses can charge per
pair? To figure this out:
- First, we need to think about all the cost components and calculate
the total cost associated with using the current alternative
- Next, we need to think about all the cost components and calculate
the total cost associated with using the new alternative (i.e., ODI
lenses).
- The maximum price ODI lenses can charge is the price level at
which the cost of using the current alternative and the cost of using
the new alternative (i.e., ODI lenses) are equal. At this price level, a
customer who considers only economic benefits will be indifferent
between buying that product and buying the alternative.
5. Should ODI adopt a skimming or penetration strategy when
rolling out their products? Why?

MARK 4210 Professor Eugene R. Raitt Spring 2024

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