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-Katharine Paine
Pricing is one of the most powerful levers for
improving profitability
Price Analytics
• Analytics can lead the way on pricing and customer profitability Facing growing
complexity.
• A multi-channel business environment, companies need to be able to answer
fundamental business questions— such as “Who is my most profitable
customer?” and “What is my most profitable product or region?”
• Combine pricing with analytics, and one can create a mechanism that functions
as both a catalyst and a metrics engine for managing profitability.
• Pricing analytics can also help executives more clearly understand both the
internal and external factors affecting profitability at a granular level.
Pricing Solutions Applies Analytics to:
• Given a demand curve, the price elasticity for demand is the percentage of
decrease in demand resulting from a 1 percent increase in price.
• When elasticity is larger than 1, demand is price elastic. When demand is
price elastic, a price cut will increase revenue.
• When elasticity is less than 1, demand is price inelastic. When demand is
price inelastic, a price cut will decrease revenue.
Example of Price Elasticity
Following estimates of elasticity are obtained from the studies of economists:
• Salt: 0.1 (Very inelastic)
• Coffee: 0.25 (Inelastic)
• Legal fees: 0.4 (Inelastic)
• TV Sets: 1.2 (Slightly elastic)
• Restaurant meals: 2.3 (Elastic)
• Foreign travel: 4.0 (Very elastic) (1% of decrease in the cost of foreign travel,
can increase the 4% demand for foreign travel.)
Demand
· Income (y)
• Expectations of future prices
· Tastes (T)
Forms of Demand Curves
• The demand curve of the form q=ap^b, a>0, b<0. q is quantity demanded
and p is unit price.
• When the demand curve is power, the price elasticity is equal to –b.
Estimation of price and demand
P P D
e e
D
Third degree
Segment markets in some way. Charge all
in the segment the same prices.
Treat each segment as a separate market–
then do MR=MC in each
Use coupons as a price discrimination
mechanism?
Price Bundling
Companies often bundle products in an attempt to get customers to purchase more products
than they would have without bundling
Examples
• Computer companies often bundle computers with printer, scanners and monitors.
• Automobile companies often bundle popular options such as navigation, satellite radio and
keyless entry.
• Microsoft office has been a highly successful bundling of software products such as Excel,
Word, Access and outlook etc.
Pure Bundling
• If the seller only offers the customer a choice between purchasing all
product or nothing, the situation is called pure bundling.
Example:
Movie rental companies usually give the theatres a choice between renting an
assortment of some blockbuster movies and same not so popular movies, or
renting no movies at all.
Mixed Bundling
• Mixed bundling means the seller offers a different price for each available
combination of products.
• Mixed Bundling is optimal.
Pricing Strategy
• Some firms feel price is the main competitive tool, that customers always
want low prices
• Other firms are looking for ways to add value, thereby being able to avoid
low prices
• Sometimes prices have to be changed in response to competitive actions
• Many firms would prefer to engage in non price competition by building
brand equity and relationships with customers
The Process: An Illustration
SELECT PRICING OBJECTIVE
• Study Costs
• Can you make a
profit?
• Can you reduce costs
without affecting
quality or image?
Steps for Determining Prices
• Estimate Demand
• What do customers expect to pay?
• Prices usually are directly related to
demand.
Steps for Determining Prices
• Decide on a Pricing
Strategy
• Price higher than the
competition because your
product is superior
• Price lower, then raise it once
your product is accepted
Steps for Determining Prices
• Set Price
• Monitor and evaluate its effectiveness as conditions in
the market change
Pricing Strategies
Penetration Pricing
Penetration Pricing
• Typical in mass market products – chocolate bars, food stuffs, household goods, etc.
• Suitable for products that have short life cycles or which will face competition at some point
in the future (e.g. after a patent runs out)
• Odd-Even Pricing
• Odd numbers convey a bargain image -- $.79, $9.99, $699
• In case of price leader, rivals have difficulty in competing on price – too high and they lose
market share, too low and the price leader would match price and force smaller rival out of
market
• May follow pricing leads of rivals especially where those rivals have a clear dominance of
market share
• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol,
supermarkets, electrical goods – find very similar prices in all outlets
Tender Pricing
Tender Pricing
Price
PriceFixing
Fixing
Issues
Issues Price
PriceDiscrimination
Discrimination
That
That Limit
Limit
Pricing
Pricing
Decisions
Decisions Predatory
PredatoryPricing
Pricing
70
Unfair Trade Practice Acts
Market
Market
Cost
Cost Competition
Competition
Conditions
Conditions
74
Predatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business or
out of a market.
Discussion: Impact of Ethics on Pricing
76
Some other pricing strategies
• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of
production
Marginal Cost Pricing
Marginal Cost Pricing
• Marginal cost – the cost of producing ONE extra or ONE fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be relatively high
• Allows variable pricing structure – e.g. on a flight from London to New York – providing the
cost of the extra passenger is covered, the price could be varied a good deal to attract
customers and fill the aircraft
Marginal Cost Pricing
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including
normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at
£12.50 and fill the seat than not fill it at all!
*All figures are estimates only
Contribution Pricing
Contribution Pricing
• This strategy is used by many clothes retailers where they can add upto 60%
mark-up on the basic cost of the clothes. So even with a 50% sales offer they still
make a profit!
Cost-Plus Pricing
Cost-Plus Pricing
• AC = Total Cost/Output