Pricing Strategies Chapter 9 Fall 2024 PDF

PRICING Chapter 9 October 19, 2024 Price Amount of money charged for a product or service Determines a firm’s market share and profitability Produces revenue Pricing Strategies Customer value perceptions, company costs and...

PRICING Chapter 9 October 19, 2024 Price Amount of money charged for a product or service Determines a firm’s market share and profitability Produces revenue Pricing Strategies Customer value perceptions, company costs and competitor strategies are important considerations when setting prices. Pricing Strategies include: ◦ Value-based pricing ◦ Cost-based pricing ◦ Competition-based pricing Value-Based Pricing vs Cost- Based Pricing  Value-Based and Cost-Based Pricing Value-based pricing uses buyers’ perceptions of value as the key to pricing. Cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk. ◦ Fixed Cost: costs that a firm incurs that are stable and don’t change, such as building costs, salary of executives, equipment maintenance. ◦ Variable Cost: costs that vary directly with the number of units produced, such as labor and materials. ◦ Total Cost: fixed + variable costs Competition-Based Pricing ◦ When prices are based on competition rather than cost or demand. ◦ Companies can price goods: above, below or at parity. ◦ Should be done relative to market position and overall retail strategy. Overall Marketing Strategy, Objectives and Mix ◦ Aligning Price with Overall Strategy Pricing decisions align with target market, marketing strategy and positioning (low-cost Spirit Airlines) ◦ Target costing starts with an ideal selling price, then targets costs that ensure the price is met. ◦ Nonprice positions can be created to differentiate the marketing offer.  Pricing in The Demand Curve Different Types of Shows the relationship Markets between the price charged and the resulting demand level Pure competition Each price Monopolistic the company competition might charge will lead to Oligopolistic a different level of demand. competition Pure Usually monopoly the higher the price, the lower the demand. Economy Factors Boom or recession impactin g pricing Inflation strategie Interest rates s Respons Cut prices and offer discounts es to post Develop more affordable items recessio Redefine value propositions n consume rs New Product Pricing Strategies Market-skimming Setting a high price to skim maximum revenues pricing (price from the segments willing to pay the high price Company makes fewer but more profitable sales skimming) Market-penetration Setting a low price to attract a large number of buyers and a large market share. Price starts pricing low and then increases. Head-to-Head pricing Setting prices on par with competitor Promotional & Psychological Pricing ◦ Promotional pricing: Temporarily pricing products below the list price to increase short-run sales ◦ Forms of promotional pricing: ◦ Discounts and special- event pricing ◦ Limited-time offers and Psychological pricing: Considers the psychology of cash rebates prices and not simply the economics. The price says something about the product ($999 vs $1000) ◦ Low-interest financing and longer warranties Reference Prices: Prices that buyers carry in their ◦ Free maintenance minds and refer to when looking at a given product. International Pricing Price decisions of international companies: Set a uniform worldwide price Adjust prices to reflect local market conditions and cost considerations Prices charged depend on many factors: Economic conditions Competitive situations Laws and regulations Nature of the wholesaling/retailing system Consumer perceptions and preferences Company’s marketing objectives Costs of selling in another country Initiating Price Changes Reasons for Reasons for price cuts: price increases: Excess capacity Cost inflation Falling demand Over-demand Attempt to dominate the market Reactions to Price Changes Buyer’s perspective Competitor’s perspective ◦ Price increase: ◦ Price cut: ◦ Product is more exclusive or better ◦ Company is trying to grab a larger made. market share. ◦ Company is being greedy. ◦ Company is doing poorly and trying to boost its sales. ◦ Price cut: ◦ Company wants the whole ◦ Brand wants to get a better deal industry to cut prices to increase total demand. on an exclusive product. ◦ Product’s quality has been reduced. ◦ Company’s image has tarnished. Responding to competitors price changes Public Policy and Pricing Competition Act in Canada Price Fixing Predatory Pricing Price Discrimination Functional Discounts Deceptive Pricing Scanner Fraud and Price Confusion Pricing Strategy Group Work Use your group’s product to work through the following questions: 1. Is pricing a differentiating factor for your product? 2. Does pricing vary a lot among your competition? 3. How is your product or company priced relative to the competition? Same? More? Less? 4. Do you think your company could or should charge a higher price? If yes, then why? 5. Do you think your company could or should charge a lower price and if so, why? 6. Should the price remain the same? Why? 7. Consider micro and macro economic factors when proposing the pricing strategy.