Chapter 10 Pricing Understanding and capturing customer value Price amount of money charged for a product service historically major factor affecting buyer s choice Customer value based pricing setting prices based on buyer s perceptions of value rather than on sellers cost Major pricing strategies 1 Assess customer needs 2 Set price to match value 3 Determine costs 4 Design product Good value pricing offering just right combo of quality and good service at fair price became more popular during great recession Everyday low pricing EDLP charging constant everyday low price with few or no temporary discounts High low pricing charging higher prices on everyday basis but running frequent promotions to lower prices temporarily kohl s and macy s do this Value added pricing attaching value added features and services to differentiate company s offers and changing higher prices Cost based pricing setting prices based on costs of producing distributing and selling product plus fair rate of return for effort risk Types of costs Fixed costs overhead costs that don t vary with production sales level Ex bill for rent Variable costs vary directly with level of production Total costs sum of fixed and variable costs for any level of production 1 Experience curve learning curve related to cost drop in average per unit production cost that comes with accumulated production experience Cost plus pricing markup pricing simplest pricing method adding standard markup to cost of product Construction companies submit job bids by estimating total project cost and add markups Break even pricing target return pricing break even on cost of making marketing product OR setting price to make a target return Competitive based pricing setting prices based on competitor s strategies prices costs and market offerings Graph of break even point Other internal and external considerations affecting price decisions Potential pricing roles Attract new customers rtain exisiting ones 2 Low prices prevent competition from entering market Keep loyalty support of resellers Create excitement Target costing starts with ideal selling price then targets costs that will ensure that price is met Non price position differentiate market offer to make product worth a higher price Ex B O sells entertainment systems for a significant amount more compared to competitors because of their perceived quality and value received from customer Organizational considerations Small companies prices set by top management Large companies pricing handled by divisional or product managers Pricing in different types of markets Pure competition many buyers sellers trading in uniform commodity wheat copper financial securities No buyer has much influence market research plays little role Monopolistic competition many buyers and sellers who trade over range of prices Large range of prices because sellers can differentiate offers to buyers firms less affected by others pricing sellers price freely and target different consumers Oligopolistic competition only few large sellers ex wireless service industry AT T Verizon t mobile sprint control 80 sellers alert ad responsive to competitors pricings pure monopoly one seller gov monopoly postal service private unregulated De Beers and diamonds Analyzing price demand relationship Demand curve the relationshu0p between price charged and the resulting demand level shown shows number of units the market will buy in a given period at different prices usually inversely related Price elasticity of demand Price elasticity measure of sensitivity of demand to changes in price given by formula Price elasticity of demand change in q demand change in price 3 Chapter 11 pricing strategies additional considerations New Product pricing strategies Market skimming pricing setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price makes fewer but more profitable sales initial price iphone 599 one year later 399 another year later 199 market penetration pricing setting a low price for a new product in order to attract a large number of buyers and a large market share conditions for this to work o market must be highly sensitive o production and distribution costs must decrease as sales voume increases o low price must help keep out competition and pricer must maintain low price position Product mix pricing strategies Product line pricing price steps differences between different products in a product line o ski s can range from 150 for children to 1100 to adults o must take into account customer perceptions of products Optional product pricing pricing of optional accessory products along with main product o navigation system that comes with a car o refrigerator that comes with ice dispenser Captive product pricing products that must be used along with main product o razor blades for razors o video games for console By product pricing setting price for by product in order to make main product price more competitive 4 o selling waste metals in factory selling poo from animals for manure Product bundle pricing combining several products and offering bundle at reduced price o fast food bundles burgers fries soda Price adjustment strategies how companies adjust prices for different customers situations Discount and allowance pricing reducing prices to reward customer responses such as volume purchases paying early or promoting product o discount reduction in price for specific time period or larger quantity o allowance paid by manufacturers to retailers for agreement to feature manufacture s product in some way trade in allowance price reduction when trade in old item when buy new one bring in old iPhone and get cheaper price for new one promotional allowance payment price reduction that reward dealer for participating in advertising and sales support programs Segmented pricing adjusting prices to allow for differences in customers products or locations o customer segmented pricing different customers pay different prices children have o product form pricing different versions of products priced differently cheaper to fly cheaper tickets at movies coach than first class o location based pricing different prices in different locations cheaper tuition for in state college students than out of state o time based pricing different pricing based on time of day month year cheaper movie tickets during day resorts give weekend seasonal discounts Psychological pricing
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