Pricing Strategies

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Outline

 Introduction  Pricing strategies and process  Reactions to price changes  Impact on discounting  Price wars  Yield management
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Introduction

 We need to set price when we have a
 Need to decide what position you want

new product, or when we enter a new market with an existing product  How?
your product to be in (see quality-price relationship—next slide)

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Price-Quality Strategies

 Philip Kotler identified 9 price-quality
strategies
High Price Low Price

High Quality Premium
Over Charging

High Value
Mid Value

Super Value
Good Value

Low Quality

False Rip-off Economy Economy
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Pricing Process

1. Set Pricing Objectives (see next slide) 2. Analyze demand 3. Draw conclusions from competitive
intelligence 4. Select pricing strategy appropriate to the political, social, legal and economical environment 5. Determine specific prices
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Possible Pricing Objectives

 Profit objectives e.g.

 Volume objectives e.g.

 Targeted profit return

 Other objectives e.g.

 Dollar or unit sales growth  Market share growth  Match competitors’ price  Non-price competition
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Demand Analysis  Measure the impact of price change on
total revenue  Predicts unit sales volume and total revenue for various price levels  Different customers have different price sensitivities and needs

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Impact of Cost on Pricing Strategy

 Fixed and variable costs
rate-of-return pricing  Variable-cost pricing

 Full-Cost Pricing Markup pricing, break-even pricing and

 3 types of relationships

 Ratio of fixed costs to variable costs  Economies of scales  Cost structure

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Discussion: Impact of Ethics on Pricing

 How should you price if your product is
a life-saving drug?  What are the ethical considerations?

 Customers have no choice  Need to pay for the research  When cheaper options doesn’t work  Competition decides

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Information Needed for Price Change

 Customers’ ability & willingness to buy;
customer lifestyle; benefits sought; characteristics of the product e.g.

 When the kopi tiams, local coffee shops in

Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grassroot reaction was stormy  When Starbucks Coffee and Spinelli’s raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit 10

Information Needed for Price Change (cont’d)

 Need to know everything about the
competitors

 How would competitors react to our price
change? (see following slide)  In obtaining competitors’ information, remember the value of the information

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New-Product Pricing Strategies 1. Skimming pricing

 

2. Penetration pricing

Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products in the ASPAC region Charging a low price when entering the market to capture market share Used when competitors are closing in with 12 similar or better products

New-Product Pricing Strategies (cont’d)

3. Intermediate pricing

Pricing somewhere in between the skimming strategy and the penetration strategy

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Pricing Strategies for Established Products
Three strategic alternatives:  Maintain the price if you are the leader e.g.

 In 1999, Shell in Singapore maintained its price when
other petrol companies engaged in a price war until towards the end of the engagement

 Reduce the price e.g.  Increase the price

 SIA regularly reduce its airfare in anticipation of the
developing market situations

 during inflation, or if demand is expected to increase
or if you wish to harvest e.g. in Indonesia
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Price-Flexibility Strategy

 One-price policy—setting one fixed
 Geographic Location,  Time of delivery, or  The complexity of the product

price for all markets  Flexible-price policy—setting different prices in different markets based on:

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How much flexibility in price?

 Depends on the Demand-Cost gap and
the influence of competition, social, legal and ethical considerations  Example: Life-saving drugs

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Product-Line Pricing

 When pricing products in different

lines, must take cross-elasticities of demand across the set of products into consideration  The idea is to maximize the profits of the entire organization rather than that of a single product or a single line
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Leasing Strategy

 Leasing is more common for
industrial goods e.g.

 Singapore Airlines sold many of their

 There is a growing trend toward
leasing consumer goods as well

aircraft and lease them back for their operations

 e.g. Leasing of office equipment

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Reactions to Price Change

 Customers are more sensitive to

price changes if the products cost a lot and/or are bought frequently  Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitor’s likely reaction
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Responding to Competitors’ Price Change  If competitors lower price for
homogenous products

 Try augmenting the product  If it doesn’t work or if it is not likely to

work, then meet the price cut head-on

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Responding to Competitors’ Price Change (cont’d)

 If competitors raise price

 In a homogeneous market, follow if you

think the whole market is likely to follow  In a non-homogeneous market, evaluate The reason for the competitor price change If the price increase is temporary The effect on your market share & profit The likely response(s) from the other competitors 21

When a Market Leader is Being Attacked on Price
Options available:

 Maintain price  Raise perceived quality  Match competitors’ price  Increase price and improve quality
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Impact of Discounting on Brand Equity

 Why discount?  Problems emerging with discounts  The value equation (V=Q/P)

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Price War
Price wars are frequent in industries where  Cost differentiation opportunities exists  Capital is intensive and products are homogeneous Examples: Airfares, ISP, Petrol, & Loans e.g.

 The Home Loan price war in Singapore in

Sept 2000 involving OUB, UOB, DBS among others
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Yield Management

 What is it?  Yield management goals  Industries that benefited from yield
management  Common variables

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