MKT 034: PRICING STRATEGY

Pricing strategy- policy a firm adopts to determine what it will charge for its products and services.

* determines revenues achieved, profits earned, amounts reinvested, in the firms growth

MARK-UP PRICING- most common strategy involves adding a markup on product costs

TARGET RETURN ON INVESTMENT PRICING- safeguard to recuperate costs of setting up complex

infrastructure
Formula: Target return = unit cost + desired return x investment
Unit sales

PERCEIVED VALUE PRICING- base their pricing as identified by the buyer

COMPETITION BASED PRICING-decided relevant to those of competitors

PENETRATION PRICING- temporarily setting prices below market price or lower than cost price

SKIMMING PRICING- maximize profits by maintaining highest price possible of new products that face
a high demand from specific markets segments

FACTORS IMPACTING PRICE STRATEGIES:

The choice of pricing strategy adopted by firm will depend on overall corporate strategy, buyer
expectations and behavior, competitor strategies, industry changes, and regulatory boundaries.

CORPORATE IMAGE- external image of corporation affects its ability to adopt a specific pricing
Strategy

GEOGRAPHY- many companies charge diff.prices of goods based geographic location

DISCOUNTS- offer discounts based on demand and value

PRICE DISCRIMINATION- differentiate between customers, product or service, form

- common practice where demand varies according to circumstances

PRICE SENSITIVITY

Future directions for Pricing Strategy

RETAIL CONSOLIDATION- large scale retailers have centralized their purchasing function to reduce the
cost of handling intermediaries.

Manufacturers selling costs and trade allowances- the cost of selling reduced when they deal with
larger chain stores and fewer incident retailers

PRICE OPTIMIZATION MODELING- more companies are adopting this technique through statistical
modeling and data mining

INTERNET PRICING DISPARITY- the highest price becomes the default price for all vendor’s channels

FORMULAS:

Unit Cost/ Production Cost- Variable cost + Fixed Cost

Selling Price- Unit cost + Profit

MODULE 2

The Cost Plus Method- sometimes called “ Gross Margin Pricing” most widely used by marketers to
set price.

* they do not have to forecast general business conditions or customer demand

*may view this method as fair
* major disadvantage is its pricing inflexibility

Gross Margin- difference between how much the goods cost and the actual price which it sells
- designated by a percent net of sales

MARK-UP- difference between the average cost and price of merchandise in stock

CUMULATIVE MARK-UP- difference between total dollars delivered cost of all merchandise and the
total dollar price of goods

MAINTAINED MARK-UP- essential figure in estimating operating profits

GROSS COST OF GOODS- difference between actual price for which merchandise is sold and total
monetary amount delivered cost

BREAK EVEN PRICE- the price that will produce enough revenue to cover all costs at a given level of
production.

TOTAL COST- it can be divided into fixed and variable

* Total cost= fixed cost + variable cost

*No cost is fixed in the long run, short run many expenses cannot realistically be changed.
* Variable costs are constant

DEMAND ORIENTED PRICING

- focuses on the nature of demand curve for the product/ service being priced.

TYPES OF DEMAND ORIENTED:

Psychological
Bait
Loader
Value-in-Use
Reference
Odd-Even
Prestige
Price Lining
Demand Backward

INCREMENTAL COST- cost of producing each additional unit

AVOIDABLE COST- unnecessary or can be passed onto some other institution

* Cost Based Pricing focuses on perspective of the company

*Demand Based focused on the customer, as a predictor of sales
* Value Based- determinant of total price / value package

MODULE 3: VALUE BASED PRICING

- known as value added pricing or perceived value pricing

- the method of setting a price by which company calculates and tries to earn differentiated worth of
its products particular customer segment

COST BASED PRICING VALUE BASED PRICING

Most straightforward pricing method More nuanced- significance

Easy to implement Uses the economic principles of demand and
Consider the costs per product, then add a considers internal info as well as external factors
desired margin on top of that

Advantages of Value Based Disadvantages of Value Based

Considers internal and external variable Complex
Better understanding of playing field Time consuming
More insights
Higher profits

HOW TO SETUP VALUE BASED

1. Research your target audience

2. Research your competitors
3. Determine value of differentiation
4. Craft marketing and pricing that meet target markets needs

TWO BASIC VALUE BASED PRICNG:

1. Good Value Pricing

- focuses on features not value
- goal is to make consumers believe they are getting a good product at a fair price

2. Value Added Pricing

- attaching value added features and services
-focuses on what makes product different and unique
MODULE 5: PRICE STRUCTURE

* Help you determine the right proposed price for your products and services
* determining your price for products / services for their product life cycle
*Analyzing the pricing situation is necessary to develop pricing strategy

PRICE ANALYSIS COST ANALYSIS

Level of Analysis simpler detailed
Competition adequate inadequate
Method Price comparison Cost breakdown

Pricing Analysis is important in…

* Evaluating new product/ideas

*test marketing
Selecting an introduction strategy
*positioning strategy

Analyzing pricing situation includes…

*establishing product markets responsiveness to price

*determining product cost
*analyzing competition
*assessing legal and ethical constraints

Product market analysis with respect of price should answer the following questions:

*How large is the buying potential of product market?

*What segments exist in the product market and what marke strategy to be used?

*Pricing elasticity is the percentage change in quantity demanded when price changes, divided by the
percentage change in price.
* Elasticity is measured for changes in price from some specific price level and is necessarily constant

FACTORS THAT AFFECT PRICE ELASTICITY:

*necessity or luxury
*consumer income
*habits
*availability or substitutes
*brand loyalty
*frequency of purchase

The price of product facing competition can be separated into two components:

1) The commodity price that fluctuates w/ ebbs and flows of supply and demand
2) The premium price differential that one or more companies may achieve

*Forecast of sales is needed for range of prices that management is considering.

COST ANALYSIS

First, analyze the structure of direct and indirect costs of producing and distributing the product

The important consideration is placing key competitors into relative product categories.

DIRECT COSTS INDIRECT COSTS

Direct labor Rent
Direct materials Utilities
Manufacturing supplies General office expenses

*Why is it vital to explore cost price analysis in determining the right proposed price?

Help you determine the right proposed price for your products and services.
MODULE 6: PRICE DISCRIMINATION

* present when the same commodity is sold at different prices to different consumers
*two or more similar goods are sold at prices that are in different ratios to marginal costs

3 Conditions that are necessary in order for price to be viable solution toa firm’s pricing:

1. Firms must have some market power

2. Firms must have ability to sort consumers
3. Firm must be able to prevent resale

TYPES OF PRICE DISCRIMANTION:

FIRST DEGREE

-seller charging a different price for each unit of the good in such way that the price charged for each
is equal to maximum willingness to pay for that unit.
- commonly used for car or truck sales / automobiles

SECOND DEGREE PRICE

-occurs when prices differ depending on number of units of good bought, but not across consumers
-this type of price can be seen in warehouse retailers and in companies that offer loyalty or rewards

THIRD DEGREE PRICE

-different purchases are charged at diff. prices, but each purchaser pays constant amount for each
unit of good bought
-often seen in movie theater ticket sales, admission prices, amusment parks

MODULE 7: PRICE LEVEL

*when determining where to set price levels is the relationship between changes in price and volume.
*economic theory indicates that profit maximizing prices are found at the point on the demand curve
where marginal revenue is equal to marginal cost.

INCREMENTAL BREAK-EVEN ANALYSIS- focuses on the change in volume required for price change to
improve profitability
* the break even % sales change demonstrates the degree to which volume is required to make price
change profitable.

*One of the benefits of the break even sales change approach is practicality
*Most managers must make decisions w/ less quantitative information than that. Incremental
analysis enables managers to deal w/ judgments they must make despite that uncertainty

The fastest and most effective way for company to realize its maximum profit is to get its pricing right.
The right price can boost profit faster than increasing volume will; the shrink it just as quickly.
Getting the price right is one of the most fundamental and important management functions; it
should be one of a manager’s first responsibilities, anuts and bolts kind of job determines the dollar
and cents performance of the company.

3 LEVELS OF PRICE MANAGEMENT:

1. INDUSTRY SUPPLY AND DEMAND

- highest level of price management, the basic laws of economics come into play.
-managers examining pricing in this context should understand the pricing “ tone” of their markets.
-allows managers not only to predict and exploit broad price trends but also foresee likely impact of
their actions on industry price levels.

2. PRODUCT MARKET STRATEGY

- how customers perceive the benefits products and related services across available suppliers. If a
product delivers more benefit to customers , then the company can usually charge a higher price vs its
competition.
- market research tools like conjoint analysis and focus groups can help managers understand
customer perception of benefits. It helps guide both the prodct’s price positioning and the fine tuning
of product and service offerings.

3. TRANSACTIONS
- the critical issue is how to manage the exact price charged for each transaction.

*Why is there a need to determine the relationship between changes in price and volume?

There is need to set price levels and monitor them.

MODULE 10: PRICING OF PLATFORMS AND PLATFORM BASED PRODUCTS

Product Platforms- component and subsystem assets shared across a product-family enable a firm to
better leverage investments in product design and development

*results indicate that platforms are not appropriate for extreme levels of market diversity
*a platform increases the separation amongproducts and offers multitude of product introduction

PLATFORM= set of platform elements enable a set of planned product offerings

*Architectural rules/standards govern how technologies and subsystems can be

ELEMENTS= building blocks of platform

*Products featuring integral product architecture might be more desirable in terms of functional
performance and safety/reliability in certain industries.
)The lack of innovation leverage and product life cycle flexibility will result in far fewer improved
products being introduced in growth stage.

HOW MUCH INVESTMENT IN PLATFORM FLEXIBILITY IS DESIRABLE?

It states that benefits of platforms to leverage high development costs over multiple products,
emphasize these benefits also impose certain costs

ADVANTAGES OF PLATFORMS:

*reduction of inventory
*more standard parts
*shorter product design lead times
*easier coverage of market niches
*reduced design risk and cost
*faster response to changing market needs
*standard manufacturing processed and touching

DIGITAL INRASTRUCTURE AS PLATFORM

Companies can develop differentiated products efficiently, increase the flexibility and responsiveness
of their manufacturing processes, and take market share away from competitors that develop only
one product at a time.

*A product platform can increase the speed of product development, reduce development costs and
contribute to increasing product variety, therefore a product platform plays the role of a lever to raise
the competitive advantage.

*Platforms are considered to be merely used in products to address market specific needs such as
cost reduction or rapid creation of variety.

MODULE 11: DYNAMIC PRICING

- concept of selling the same product at different prices to different groups of people.

Dynamic pricing in two forms:

1. Dynamic Pricing based on groups:

- companies are using machine learning algorithms or just statistical splicing to offer diff. Prices to diff.
Groups.

2. Dynamic Pricing based on time

-In a highly sophisticated method, individuals will use something to make these decisions on the fly
maximize revenue for events and meet diff. Levels of demand
PROS
Firms can increase revenue and enable to run a
wider range of services
Consumers who travel at unpopular times can
benefit from lower prices
Varying the price can enable the firm to pay
employees a higher wage to work during peak
times
It is a way to avoid queues and excess supply.
Is dynamic pricing fair?
CONS
Consumers who pay high price may feel ripped
off
Surge pricing can lead to bad headliners
Consumers may feel they cannot trust a company
who is constantly changing prices.
Consumers encouraged to spend time finding
ways around the dynamic pricing
Cost to firm of monitoring and evaluating data

Consumers ultimately have the decision of whether we are going to purchase the product or not. If
you are not willing to pay for the product, you will leave and maybe come back when there is a sale or
cheaper version. If you are willing to pay, your utility is met and you are none the wiser about your
friend getting a cheaper price. Its perfect pricing and harmony in the free market.

HOW TO IMPLEMENT DYNAMIC PRICING?

1. Price Differentiation- Two prices are better than one

- quantify your customer personas and align your packaging and pricing to those personas.

2. Ensure you are using proper value metric

- Hand in hand w/ price differentiation is pricing along a value metric- how much value a user gets
from a product/service

3. Utilize time in an auction type of model

-you can make sure your price goes up and down
- Airline and travel booking do this all the time

4. Couponing and Discounts

-they can be used effectively in discretely providing a dynamic price to a subset of prospects or
customers.

MODULE 12: PRICING UNDER COMPETITION

Perfect Competition- where there are large number of buyers and sellers dealing in homogenous
products. No legal, social, or psychological barriers on the entry or exit of organizations. Sellers and
buyers are fully aware about the current market price of a product.

*The market price of product is determined by the industry

*The market price of product is determined by taking into account two market forces,

MARKET DEMAND- sum of the quantity demanded

MARKET SUPPLY- sum of quantity supplied
)In perfect competition, price of a product is determined at point which demand and supply curve
intersect. This point is known as equilibrium point. As well as the price known as equilibrium price.

EQUILIBRIUM QUANTITY- quantity demanded and supplied

DEMAND- quantity of a product that consumers willing to purchase
*A consumer demands more quantity at lower price and less quantity at higher price.
SUPPLY- quantity of a product that producers willling to supply at particular price.
* the supply increases at high price and decreases at low price.

A perfectly competitive market has the ff. Characteristics:

1. There are large number of independently, relatively small sellers and buyers. None of them is
capable of influencing the market price.
2. The products sold by diff. Sellers are homogenous and identical. From the POV of buyers, products
of competing sellers are completely substitutable.
3. No restriction on entry of new firms into industry and existing firms are free to leave the industry
4. Both buyers and sellers in the market have perfect knowledge
5. The distance between locations of competing sellers is not significant

Number and size distribution of sellers Many small sellers

Number and size distribution of buyers
Product Differentitation
Conditions of entry and exit
No individual seller is able to exercise a
significant influence over price
Many small buyers
No buyer is able to exert significant influence
over price
No product diff
Decisions to buy are made on basis of price
Easy entry and exit
Resources are easily transferable

*READ COMPARISON BETWEEN MONOPOLY AND PER COMP

MODULE 14: LEGAL CONSIDERATIONS IN PRICING

*Unfair business practices include oppressive unconscionable acts by companies against consumers
and others. Such practices are prohibited under the law.

FRAUD- intentional deception made for company’s gain

Misrepresentation- false statement of fact made by one party to another party.

ILLEGAL PRICE ADVERTISING

- uses misleading or outright false statements by companies in their advertising and promotional
material.

TYPES OF ILLEGAL PRICE ADVERTISING:

1. HIDDEN FEWS AND SURCHARGES

- fees that are not stated in advertised price.
- common for services such as cell phone activation, broadband, gym memberships, air travel
2. GOING OUT OF BUSINESS SALES
-company increases the price and discounts it.
-sale items are often “ final sale”, returns are not accepted.
3. MANIPULATION OF MEASUREMENT UNITS AND STANDARDS
- mean something different than their widely understood meaning
4. FILLERS AND OVERSIZED PACKAGING
- increases the legal weight of product
- Food is an example of this
5. MANIPULATION OF TERMS
-many terms do not have same meaning, specific extent is not only legally defined, leading totheir
abuse.
- Light food is n even more common manipulation
6. INCOMPLETE/INCONSISTENT COMPARISON
- “better” means one item is superiror to another in some way, while “ best” means it is superior to all
others.
-common w/ price comparing internet websites
7. BAIT AND SWITCH
-advertise item that is unavailable when consumer arrives at the store and then sold a similar product
at higher price.
8. LEGAL REGULATIONS
-to prohibit unfair snd deceptive acts or practices in commerce

* Predatory Pricing- practice of selling product or service at a very low price, intending to drive
competitors out of market.
- anti competitive and illegal

PRICE DISCRIMINATION
- sale of identical goods or services at diff. Prices from same provider
-occurs when same price is charged for goods w/ different supply costs