Pricing Strategies

1. Pricing Strategies
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2. Price Determination: An Overview
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3. Demand Curves
P
Q
D
Quantity
Price
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4. Price Elasticity of Demand
% Change in quantity demanded
Price Elasticity of Demand =
% Change in price
• Elastic Demand
• Inelastic Demand
• Cross Elasticity of Demand
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5. Costs, Volume, and Profits
• Fixed Costs (FC)
• Variable Costs (VC)
• Total Costs (TC)
• Marginal Cost MC)
• Marginal Revenue (MR)
• Total Revenue (TR)
TC = (VC X Q) + FC
Total Revenue = Price X Quantity
Profits = TR - TC
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6. Price Determination Methods
• Markup Pricing
Price = Unit Cost + Markup
Price = Unit Cost/(1-k)*
*k = desired % markup
or
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7. Price Determination Methods
Break-Even Analysis
Total Revenue
Total Cost
Fixed Cost
BEP
$
Quantity (units)
Loss
Profit
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8. Price Determination Methods
• Target-Return Pricing
(Desired return X Invested capital)
Price = Unit Cost +
Expected Unit Sales
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9. Price Determination Methods
• Target-Cost Pricing
1. Define market segments for new product.
2. Product is designed based on competitive
advantages and disadvantages.
3. Position product in context of overall company
strategy.
4. Fine-tune product based on customer’s
preferences, perceived value and willingness to
pay.
5. Estimate various price-responsiveness with
simulations.
6. Estimate target costs between optimal price and
desired margin.
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10. Price Determination Methods
• Income-Based Pricing
• Real Estate
• Marketable Securities
• Businesses
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11. Prices and Customer Value
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12. Pricing Strategies
Differential Pricing
Second-market discounting
Periodic discounting
Competitive Pricing
Penetration pricing
Price signaling
Going-rate pricing
Psychological Pricing
Odd-even pricing
Customary pricing
One-sided claims
Product Line Pricing
Bundling
Premium pricing
Partitional pricing
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13. B2B Pricing Strategies
• New Product Pricing
• Price Skimming
• Penetration Pricing
• Experience Curve
Pricing
• Competitive Pricing
• Leader Pricing
• Parity Pricing
• Low-Price Supplier
• Price Line Pricing
• Complementary Product
Pricing
• Price Bundling
• Customer Value Pricing
• Cost-based Pricing
• Cost-plus Pricing
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14. Adapting Prices: Decreases and Increases
• Price Reduction
Traps:
1. Low-quality trap
2. Fragile market
share trap
3. Shallow pockets
trap
• Acceptable Price Range:
• Prices the buyer is willing
to pay.
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15. Adapting Prices: Reacting to
Competitive Price Changes
• Temporary retail price reductions substantially
increase store traffic and sales.
• Large-market-share brands are hurt less by price
changes from smaller competitors.
• Frequent price dealing lowers consumers’
reference prices, which may hurt brand equity.
• Price changes for high-quality brands affect
weaker brands and private-label brands
disproportionately.
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16. Adapting Prices: Price Discounts and
Allowances
• Cash Discounts
• Trade Sales Promotion Allowances
• Quantity Discounts
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17. Adapting Prices: Geographical Pricing
FOB Origin Pricing
Uniform Delivered
Price
Zone Pricing
Freight Absorption
Pricing
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18. Competitive Bidding and Negotiated
Pricing
• Sealed-bid Pricing
• Reverse Auctions
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19. Pricing Services
Price is influenced by the
nature of the service involved.
The larger the market share,
the higher the price that
can be charged.
Managing off-peak demand
makes pricing services difficult.
Bundling services into a single
package and price is a
common strategy.
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