Professional Documents
Culture Documents
Determine demand
Estimate costs
Survival
Maximum current profit
Maximum market share
Maximum market
skimming
Product-quality
leadership
Survival Objective
Belief
A higher sales volume will lead to lower unit costs and higher
long-run profits.
Set the lowest price assuming market is price sensitive (Market
Penetration Strategy)
Conditions favoring a low price:
1. The market is highly price-sensitive, and a low price
stimulates market growth;
2. Production and distribution costs fall with accumulated
production experience; and
3. A low price discourages actual and potential competition.
Maximum Market Skimming Objective
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
Price Sensitivity to Demand
Generally speaking, customers are most price-sensitive to products that cost a
lot or are bought frequently compared to low-cost items or items they buy
infrequently.
They are also less price-sensitive when price is only a small part of the total
cost of obtaining, operating, and servicing the product over its lifetime.
Tom Nagle offers the following list of factors associated with lower price
sensitivity:
The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
The expenditure is a smaller part of the buyer's total income
The expenditure is small compared to the total cost of the end product
Part of the cost is borne by another party
The product is used in conjunction with assets previously bought
The product is assumed to have more quality, prestige, or exclusiveness
Buyers cannot store the product
Companies that are aiming at only price sensitive customers are foregoing
profits.
Estimating Demand Curves
Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
Cost Terms and Production
Disadvantages:
Aggressive pricing might give the product a cheap image.
The strategy also assumes that the competitors are weak.
Finally, the strategy leads the company into building more plants
to meet demand while a competitor innovates a lower-cost
technology and obtains lower costs than the market-leader
company, which is now stuck with the old technology.
Most experience curve pricing focuses on manufacturing costs,
while all costs can be improved.
Differentiated Marketing Offers
Companies selling a differentiated market offerings need to
resort to Activity Based Costing (ABC) instead of standard
accounting.
ABC accounting tries to identify the real costs associated with
serving each customer.
Both variable and overhead costs must be tagged back to each
customer.
Target Costing
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing, and
Group pricing
Mark Up Pricing
= 16/ 1-.2 = 20
Target Return Pricing
In target-return pricing, the firm determines the price that would
yield its target rate of return on investment (ROI).
Target pricing is used by General Motors, which prices its
automobiles to achieve a 15 to 20 percent ROI.
This method is also used by public utilities, which need to
make a fair return on their investment.
Suppose the toaster manufacturer has invested 1 million in the
business and wants to set a price to earn a 20 percent ROI,
specifically 200,000.
The target-return price is given by the following formula:
Target Return Price =
Unit cost + Desired Return x Invested capital
Unit sales
16 + .2 x 10,00,000/ 50,000 = 20
Break even volume
= 3,00,000
20-10
= 30,000 Units
Break-Even Chart
Value Pricing