Chapter 8

Pricing Strategy and

Management

Conceptual Orientation to Pricing

Demand factors

(Value to buyers)
(price ceiling)

Competitive factors
Final pricing
discretion
Corporate objectives
and regulatory
constraints

Initial
pricing
discretion

Direct variable costs

(price floor)

Price as an Indicator of Value

Perceived benefits
Value =
Price

for a given price, value decreases as perceived benefits

decrease and vice versa

price also affects consumer perceptions of prestige; as

price increases, demand may also increase

Price Elasticity of Demand

E =

Percentage change in quantity demanded

Percentage change in price

where E is the coefficient of elasticity

if the % change in quantity demanded is greater than the %

change in price, demand is said to be elastic E is greater
than 1.

if the % change in quantity demanded is less than the %

change in price, demand is said to be inelastic E is less
than 1.

Factors that Influence Price Elasticity of

Demand

the more substitutes a product or service has, the greater its

price elasticity

the more uses a product or service has, the greater its price
elasticity

the higher the ratio of the price of the product or service to

the income of the buyer, the greater the price elasticity

Product-Line Pricing
Product-Line Pricing involves determining:

1)

the lowest-priced product and price

2)

the highest-priced product and price, and

3)

price differentials for all other products in the line

Pricing Strategies

full-cost price strategies consider both variable and

fixed costs

variable-cost price strategies consider only variable

costs, not total costs

Full-Cost Pricing

markup pricing : fixed amount added to the total cost

of the product

break-even pricing : per-unit fixed costs + per-unit

variable costs

rate-of-return pricing : set to obtain a desired ROI

Variable-Cost Pricing
Variable-cost pricing is demand-oriented pricing.
Two purposes:

stimulate demand

shift demand

Assumption is that variable-cost pricing will stimulate demand

and increase revenues.

New-Offering Pricing Strategies

skimming pricing strategy

penetration pricing strategy

intermediate pricing strategy

10

Use Skimming Pricing Strategy

when:

demand likely to be price inelastic

different price-market segments, appealing to buyers with a

higher acceptable price

offering is unique enough to be protected from competition

production or marketing costs are unknown

capacity constraint exists

organization wants to generate funds quickly

realistic perceived value of the product exists

11

Use Penetration Pricing Strategy

when:

demand likely to be price elastic

offering is not unique enough to be protected from

competition

competitors expected to enter market quickly

no distinct price-market segments

possibility of cost savings with large volume of sales

organizations major objective is to obtain a large

market share

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Intermediate Pricing Strategy

falls between skimming and penetration

most prevalent in practice

more likely to be used in majority of pricing decisions

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Pricing and Competitive Interaction

the action and reaction of rival companies in setting and

changing prices for their offerings

managers should focus more on long-term look forward

and reason backwards

Competitors goals and objectives ?

Assumptions competitor made about itself ?

Strengths and weaknesses of competitor ?

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Industry Characteristics and Risk of Price

Wars
Characteristics

High Risk

Low Risk

Product/Service Type

undifferentiated

differentiated

Market Growth Rate

stable/decreasing

increasing

Price Visibility to Competitors

high

low

Consumer Price Sensitivity

high

low

Overall Industry Cost Trend

declining

stable

Industry Capacity Utilization

low

high

Number of Competitors

many

few15