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Ch 16
- 1. 16-1Copyright © 2003 Prentice-Hall, Inc.
Chapter 16Chapter 16
Developing Price StrategiesDeveloping Price Strategies
and Programsand Programs
byby
PowerPoint byPowerPoint by
Milton M. PressleyMilton M. Pressley
University of New OrleansUniversity of New Orleans
- 2. 16-2Copyright © 2003 Prentice-Hall, Inc.
Sell value,Sell value,
not price.not price.
Kotler on
Marketing
- 3. 16-3Copyright © 2003 Prentice-Hall, Inc.
Chapter Objectives
In this chapter, we focus on threeIn this chapter, we focus on three
questions:questions:
How should a price be set on a product orHow should a price be set on a product or
service for the first time?service for the first time?
How should the price be adapted to meetHow should the price be adapted to meet
varying circumstances and opportunities?varying circumstances and opportunities?
When should the company initiate a priceWhen should the company initiate a price
change, and how should it respond to achange, and how should it respond to a
competitor’s price change?competitor’s price change?
- 5. 16-5Copyright © 2003 Prentice-Hall, Inc.
Setting the Price
Step 1: Selecting the pricing objectiveStep 1: Selecting the pricing objective
SurvivalSurvival
Maximize current profitsMaximize current profits
Maximize market shareMaximize market share
Market-penetration pricingMarket-penetration pricing
Best when:Best when:
Market is highly price-sensitive, and a low priceMarket is highly price-sensitive, and a low price
stimulates market growth,stimulates market growth,
Production and distribution costs fall withinProduction and distribution costs fall within
accumulated production experience, andaccumulated production experience, and
Low price discourages actual and potentialLow price discourages actual and potential
competitioncompetition
- 6. 16-6Copyright © 2003 Prentice-Hall, Inc.
Many companies engage in “marketMany companies engage in “market
skimming,” offering new products atskimming,” offering new products at
whatever price the market will bear, thenwhatever price the market will bear, then
over time decreasing the price in order toover time decreasing the price in order to
gain the maximum profit from eachgain the maximum profit from each
market segment. Can you think of anymarket segment. Can you think of any
products that wouldn’t fitproducts that wouldn’t fit
this pricing model?this pricing model?
Why not?Why not?
- 7. 16-7Copyright © 2003 Prentice-Hall, Inc.
Step 2: Determining DemandStep 2: Determining Demand
Price sensitivityPrice sensitivity
Total Cost of Ownership (TCO)Total Cost of Ownership (TCO)
Estimating Demand CurvesEstimating Demand Curves
Price Elasticity of DemandPrice Elasticity of Demand
InelasticInelastic
ElasticElastic
Price indifference bandPrice indifference band
- 8. 16-8Copyright © 2003 Prentice-Hall, Inc.
Step 3: Estimating CostStep 3: Estimating Cost
Types of Cost and Levels of ProductionTypes of Cost and Levels of Production
Fixed costs (overhead)Fixed costs (overhead)
Variable costVariable cost
Total costTotal cost
Average costAverage cost
Accumulated ProductionAccumulated Production
Experience curve (Learning curve)Experience curve (Learning curve)
Differentiated Marketing OffersDifferentiated Marketing Offers
Activity-based cost (ABC) accountingActivity-based cost (ABC) accounting
Target costingTarget costing
- 9. 16-9Copyright © 2003 Prentice-Hall, Inc.
Step 4: Analyzing Competitors’ Cost,Step 4: Analyzing Competitors’ Cost,
Prices, and OffersPrices, and Offers
Step 5: Selecting a Pricing MethodStep 5: Selecting a Pricing Method
Markup PricingMarkup Pricing
Unit Cost = variable cost + (fixed cost/unit sales)Unit Cost = variable cost + (fixed cost/unit sales)
Markup priceMarkup price
Markup price= unit cost/ (1 – desired return on sales)Markup price= unit cost/ (1 – desired return on sales)
Target-Return PricingTarget-Return Pricing
Target-return price =Target-return price =
unit cost + (desired return X investment capital)/unit salesunit cost + (desired return X investment capital)/unit sales
- 10. 16-10Copyright © 2003 Prentice-Hall, Inc.
Break-even volumeBreak-even volume
Break-even volume = fixed cost / (price – variable cost)Break-even volume = fixed cost / (price – variable cost)
Perceived-Value PricingPerceived-Value Pricing
Perceived valuePerceived value
Price buyersPrice buyers
Value buyersValue buyers
Loyal buyersLoyal buyers
Value-in-use priceValue-in-use price
Figure 16.8: Break-Even Chart for
Determining Target-Return Price and
Break-Even Volume
- 11. 16-11Copyright © 2003 Prentice-Hall, Inc.
Value PricingValue Pricing
Everyday low pricing (EDLP)Everyday low pricing (EDLP)
High-low pricingHigh-low pricing
Going-Rate PricingGoing-Rate Pricing
Auction-Type PricingAuction-Type Pricing
English auctions (ascending bids)English auctions (ascending bids)
Dutch auctions (descending bids)Dutch auctions (descending bids)
Sealed-bid auctionsSealed-bid auctions
Group PricingGroup Pricing
- 12. 16-12Copyright © 2003 Prentice-Hall, Inc.
Step 6: Selecting the Final PriceStep 6: Selecting the Final Price
Psychological PricingPsychological Pricing
Reference priceReference price
Gain-and-Risk-Sharing PricingGain-and-Risk-Sharing Pricing
Influence of the Other Marketing ElementsInfluence of the Other Marketing Elements
Brands with average relative quality but high relativeBrands with average relative quality but high relative
advertising budgets charged premium pricesadvertising budgets charged premium prices
Brands with high relative quality and high relativeBrands with high relative quality and high relative
advertising budgets obtained the highest pricesadvertising budgets obtained the highest prices
The positive relationship between high advertisingThe positive relationship between high advertising
budgets and high prices held most strongly in the laterbudgets and high prices held most strongly in the later
stages of the product life cycle for market leadersstages of the product life cycle for market leaders
- 13. 16-13Copyright © 2003 Prentice-Hall, Inc.
Brands with average relative quality but high relativeBrands with average relative quality but high relative
advertising budgets charged premium pricesadvertising budgets charged premium prices
Brands with high relative quality and high relativeBrands with high relative quality and high relative
advertising budgets obtained the highest pricesadvertising budgets obtained the highest prices
The positive relationship between high advertisingThe positive relationship between high advertising
budgets and high prices held most strongly in the laterbudgets and high prices held most strongly in the later
stages of the product life cycle for market leadersstages of the product life cycle for market leaders
Company Pricing PoliciesCompany Pricing Policies
Impact of Price on Other PartiesImpact of Price on Other Parties
- 14. 16-14Copyright © 2003 Prentice-Hall, Inc.
Adapting the Price
Geographical Pricing (Cash,Geographical Pricing (Cash,
Countertrade, Barter)Countertrade, Barter)
CountertradeCountertrade
BarterBarter
Compensation dealCompensation deal
Buyback arrangementBuyback arrangement
OffsetOffset
Price Discounts and AllowancesPrice Discounts and Allowances
- 15. 16-15Copyright © 2003 Prentice-Hall, Inc.
Adapting the Price
Promotional PricingPromotional Pricing
Loss-leader pricingLoss-leader pricing
Special-event pricingSpecial-event pricing
Cash rebatesCash rebates
Low-interest financingLow-interest financing
Longer payment termsLonger payment terms
Warranties and service contractsWarranties and service contracts
Psychological discountingPsychological discounting
- 16. 16-16Copyright © 2003 Prentice-Hall, Inc.
Adapting the Price
Discriminatory PricingDiscriminatory Pricing
Customer segment pricingCustomer segment pricing
Product-form pricingProduct-form pricing
Image pricingImage pricing
Channel pricingChannel pricing
Location pricingLocation pricing
Time pricingTime pricing
Yield pricingYield pricing