LONG TERM PRICE OPTIMIZATION

DETERMINANTS OF LONG-TERM
OPTIMAL PRICES

Price optimization was centered on one product, one price, and one period.
Long-Term Objective Function
 The dynamic perspective affects all determinants of a price decision:
 1. Objective Function: The objective of a firm is usually to maximize profit, not just in the
short term, but also over the long term. A dynamic perspective allows companies to consider
future impacts of current pricing decisions, such as customer lifetime value and market share.
 2. Price-Response Function: This function describes how demand for a product changes in
response to changes in its price. In a dynamic perspective, this function can change over time
due to factors such as competitive actions, changes in consumer preferences, or changes in the
overall economy. Understanding these dynamics can help a company set prices that maximize
profits both now
The long-term goal is to establish a customer base and increase
market share, often followed by gradual price increases as brand
loyalty builds. Market penetration is typically adopted by new entrants
or for launching new products, aiming to quickly establish a market
presence based on their go-to-market strategy
3. Cost Function: The cost function describes how a company's costs change with its
level of output. In a dynamic perspective, a company may consider how costs might
change in the future due to factors such as economies of scale, changes in input prices,
or technological innovations. This can help the company make more informed pricing
decisions.
- the relationship between input costs and output
-descriptions of how a cost (e.g., material, labor, or overhead) changes with changes
in the level of activity relating to that cost. For example, total variable costs will
change in relation to increased activity, while fixed costs will remain the same.
In essence, a dynamic perspective on price response functions allows a company to
make more informed and strategic pricing decisions by considering how various factors
might change over time.
Long-Term Price-Response Function
• Product Life Cycle – How the market and competitive
conditions of a product change over time.current price of a product
can affect future sales volumes and future prices. Dynamic and
adaptive, goes beyond pricing function requires level of cross-
functional coordination.

• Competitive Dynamics – actions and reactions of companies

operating in a competitive business environment filled with multiple
rivals and stakeholder.

• Price Effects Across Periods

• Carryover Effects
LONG-TERM PRICE DECISIONS AND RELATIONSHIP
MARKETING

In the recent past, marketing has focused intensively on the

customer relationship. Therefore, one also talks about relationship
marketing. While transaction marketing asks the question, “how
do I sell a product?” relationship marketing asks, “how do I
acquire and keep a customer?”. Relationship marketing comes to
the forefront when customers can be identified, and the data on
their transactions can be captured and stored.
Rules of Thumb for Long-Term Price
Decisions

 1. Price Decisions in the Launch and Growth Phase

 For long-term oriented pricing for new products in the launch and growth phases, there are two primary
recommendations: skimming strategy and penetration strategy.

 • Skimming Strategy - the price of the new product will be set at a comparatively high level. That price
will usually not be maintained over time but lowered in successive steps.

 • Penetration Strategy - calls for a conspicuously low price when the product is introduced. The
penetration price should be noticeably below the short-term profit maximizing price for the launch period.


Long-Term Price Decisions and Customer
Acquisition

 Price communication plays a vital role in the acquisition phase. Noncustomers will be
less well informed about a supplier’s prices than existing customers. New customers do
not perceive price differences in the same way that old, loyal customers do. Thus a
company needs to explain the reasons behind price differences, but at the same time, it
is advantageous to make the transactions for new and existing customers different. New
customers will only buy when they perceive a price advantage. Clever price
communication can also trigger the first contact between customers and the company.


Long-Term Price Decisions and Customer
Retention

 Customer loyalty stands out as a factor of long-term profitability. Studies frequently

claim that companies earn above-average profits from loyal, long-term customers. It is
supposed to be significantly less expensive to keep a customer than to acquire a new one.
The price is a vital instrument for customer retention. Price plays a central role in
customer retention, in part because it is easier and faster to change than service,
employee behavior, or product quality. However, this does not imply that a company has
leeway to lower prices sufficiently to retain potential switchers, nor does it mean that
offering such discounts is wise. One should be very careful with such moves to avoid a
detrimental impact on contribution margin and profit.