10

Pricing Decisions

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Three Possible Relations among Perceived
Value, Price, and Variable Cost
Perceived value > price > variable cost

Price > perceived value > variable cost

Price > variable cost > perceived value

10-2
The Price Band in Ice Cream

10-3
An Illustration of the Gap between
Customer Value and Cost

$
Customer Value
Price (A)

Price (B)
Cost
0

10-4
Methods for Estimating Customer Value

1. Industrial engineering methods

2. Overall estimates of customer value
3. Decomposition approaches
4. Compositional approach
5. Importance ratings

10-5
 Internal Reference Prices
• The “fair price, or what the product ought to cost
the customer
• The price frequently charged
• The last price paid
• The upper amount someone would pay
• The lower threshold or lowest amount a customer
would pay
• The price of the brand usually bought
• The average price charged for similar products
• The expected future price
• The typical discounted price

10-6
 Pricing Objectives
• Penetration Pricing
• Return on Sales/Investment Pricing
• Pricing for Stability
• Skimming
• Competitive Pricing

10-7
Influences on the Product Manager’s
Pricing Decisions
Psychological aspects
• Reference prices
• Price/Perceived quality

Pricing objectives:
• Penetration Stage of the
• Skimming product
• Customer value cost life cycle
• Return-on-investment
• Stability

Industry conditions
• Threat of new entrants
• Power of buyers/suppliers
• Rivalry
• Substitutes
• Capacity situation

10-8
Other Factors Affecting Price
• Stage of the product life cycle
• Category conditions
• Threat of new entrants
• Power of buyers/sellers
• Rivalry
• Pressure from substitutes
• Unused capacity

10-9
DuPont Pricing Over the Product Life Cycle
Competitive Focus of Attention Pricing Method
Cycle Stage
Sole supplier Customers Value-in-use
Perceived value
Competitive Customers Reaction analysis
penetration Competitors

Shared stability Competition and Profitability analysis

costs
Commodity
competition
Withdrawal
10-10
 Pricing Environment Analysis
• Threat of New Entrants
• Power of Buyers/Suppliers
• Rivalry
• Pressure from Substitutes
• Unused Capacity

10-11
 Some Specific Price Tactics
• Product line pricing
• Price bundling
• Line pricing
• Complementary pricing
• Value pricing
• Everyday low pricing

10-12
Some Specific Price Tactics cont.
• Differential pricing
• Direct price discrimination
• Second-market discounting
• Periodic discounting
• Competing against private labels

10-13