Pricing Strategy

Session

9-11

Pricing: A Different P

Revenue generator

Easily adjustable

Most Tangible

Immediate Influencer

Pricing A Number on Tag?

Rebates
Dealer incentives
Loyalty Cards
Freemium Pricing
Free to Fee Pricing
Rent
Fares
Fees
Tolls
Retainers
Wages
Commissions
FREE

Consumer Psychology

Reference Pricing: Observed vs Reference

Fair Price
Typical Price
Last Price Paid
Upper-Bound Price
Lower-Bound Price
Historical Competitor Price
Expected Future Price
Usual Discounted Price

Price Quality Inferences

Price Endings

Price Setting

Selecting the Objective

Determining Demand

Estimating Costs

Analyzing Competition

Selecting a Pricing Method

Selecting the Final Price

Selecting the Objective

Step
1
Survival
Overcapacity, Intense Competition, Changing
Consumers

Maximum Current Profit

Sacrifice long-term Profit

Maximum Market Share

Price sensitive, Dip in Production Cost, Discourages
Competition

Maximum Market Skimming

High current demand, Less competition, Superior
image, Unit Costs Low

Product-Quality Leadership
Other Objectives

Determining Demand Step 2

Price Sensitivity

More Distinctive
Less aware about substitutes
Difficult to compare with substitutes
Small part of buyers total income
Small part of the total cost of end product - TCO
Cost borne by another party
Used in conjunction with other assets
Better Quality
Cannot Store
Infrequent purchase
Slow to change buying habits

Determining Demand
Step 2

Price Elasticity

Magnitude
Direction
Price Indifference
Long-term vs Short-term
Ceteris Peribus

Estimating Demand Curves

Surveys
Price Experiments
Statistical Analysis: Longitudinal or Crossfunctional

Estimating Costs Step 3

Types of Costs
Variable Cost
Fixed Cost
Average Cost per Unit
Short-term
Long-term

Accumulated Production
Risks associated:
Cheap image
Weak follower
Focus on Manufacturing

Target Costing

Analyzing Competition
Step 4

Competition Offering
Add or Subtract Value
Competition Response
Homogenous Product
Few players
Highly informed buyers

Anticipating Competition Response

Market share
Profit maximization
Standardized vs Fresh challenge

Selecting a Pricing Method Step 5

Mark-up Pricing

Target Return Costing: Break-even volume

Perceived Value Pricing

Value Pricing
Every Day Low Pricing
High-Low Pricing

Going-Rate Pricing

Auctions: English, Dutch, Sealed-bid

Selecting the Final Price Step 6

Impact of Other Marketing Activities

Quality and Advertising

Company Policies

Gain-And-Risk-Sharing Pricing

Impact on Other Parties

Price Adaptation Geographical

Pricing

Higher or Lower

Barter

Compensation

Buyback Arrangement

Offset

Price Adaptation Discounts and

Allowances

Early Pay Discount: 2/10, net 30

Quantity Discount

Functional Discount

Seasonal Discount

Allowances
Trade-in
Promotional

Price Adaptation Promotional

Pricing
Loss-leader pricing
Special Event pricing
Special Customer pricing
Cash Rebates
Low-interest Financing
Longer payment Terms
Warranties and Service Contracts
Psychological Discounting

Price Adaptation Differentiated

Pricing

First degree Discrimination

Second degree Discrimination
Third degree Discrimination

Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing

How to make it Work

No bond
Bundling the Offer
Use it as Reward

Price Adaptation Differentiated

Pricing

When does it Work

Differentiated Segments
Re-selling disallowed
No under-selling by competition
Cost must not exceed revenue
No customer resentment
Should be Legal

Initiating Price Changes

Initiating Cuts
Excess Capacity
Market share
Concerns:

Low-quality
Fragile market share
Shallow pockets
Price war

Initiating Increase
Cost Inflation
Over-demand
Quality perception

Initiating Price Changes

Managing Price Increase

Delayed Quotation Pricing

Escalator Clauses
Unbundling
Reduction of Discounts
Gradual Increase
Giving advance notice
Move low-visibility prices first
Increase minimum order size
Product amount reduction
Substituting ingredients
Reducing features, services
Packaging changes
Reducing low profit items
Creating new economy Brands

Responding to Competitor

Products Stage in Life Cycle

Importance in Portfolio
Competitors intentions and resources

Why has competitor changed

Permanent or Temporary
What if No change
Response from the industry

Price-Quality Equation
Cost-Volume Equation
Alternate Opportunities
Further differentiate
Introduce a low cost venture
Reinvent as a low cost player

Homogenous vs Non-homogenous

Pricing Mistakes

Cost + Industry Margin

No revisions

Independent of Marketing Programs

Not varying across items, segments,

channels and purchase occasions

Thank You