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successful pricing strategies
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1. Company objectives
2. Customers
3. Costs
4. Competition
5. Channel members
2. Customers
3. Costs
4. Competition
5. Channel members
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company objectives
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different firms embrace very different goals.
-these goals should spill down to the pricing strategy, such that the pricing of a company's products and services should support and allow the firm to reach its overall goals.
(a firm with a primary goal of very high sales growth will likely have a different pricing strategy than will a firm with the goal of being a quality leader).
-these goals should spill down to the pricing strategy, such that the pricing of a company's products and services should support and allow the firm to reach its overall goals.
(a firm with a primary goal of very high sales growth will likely have a different pricing strategy than will a firm with the goal of being a quality leader).
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profit-oriented
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firm focusing on target profit pricing, maximizing profits, or target return pricing.
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target profit pricing
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A pricing strategy when firms have a particular profit goal as their overriding concern. To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit.
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maximizing profits
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A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.
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target return pricing
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A pricing strategy when firms are less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments.
-these firms use this strategy designed to produce a specific return on their investment, usually expressed as a percentage of sales.
-these firms use this strategy designed to produce a specific return on their investment, usually expressed as a percentage of sales.
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Sales orientated
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a company objective based on the belief that increasing sales will help the firm more than will increasing profits.
- a firm may set low prices to discourage new firms from entering the market, encourage current firms to leave the market, and/or take market share away from competitors- all to gain overall market share.
- a firm may set low prices to discourage new firms from entering the market, encourage current firms to leave the market, and/or take market share away from competitors- all to gain overall market share.
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premium pricing
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a competitor-based pricing method by which the firm deliberately prices a product about the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter
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competitor oriented
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a company objective based on the premise that the firm should measure itself primarily against its competition.
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competitive parity
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a firm's strategy of setting prices that are similar to those of major competitors
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status quo pricing
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a competitor-oriented strategy in which a firm changes prices only to meet those of the competition
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customer oriented
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a company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers' needs.
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Customers
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when firms have developed their company objectives, they turn to understanding consumers' reactions to different prices.
-Customers want value, price is half of the value equation.
-Customers want value, price is half of the value equation.
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demand curve
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shows how many units of a product/ service consumers will demand during a specific period of time at different prices.
-as prices increase, quantity demanded for a product will decrease.
-consumers will buy more as the price decreases.
i.e. the retailer will generate a total of $10,000,000 in sales at the $10 price ($10 x 1,000,000 units) and %7,500,000 in sales at the $15 price ($15 x 500,000 units). In this case, given only the two choices of &10 or $15, the $ price is preferable as long as the firm wants to maximize its sales in terms of dollars and units.
-as prices increase, quantity demanded for a product will decrease.
-consumers will buy more as the price decreases.
i.e. the retailer will generate a total of $10,000,000 in sales at the $10 price ($10 x 1,000,000 units) and %7,500,000 in sales at the $15 price ($15 x 500,000 units). In this case, given only the two choices of &10 or $15, the $ price is preferable as long as the firm wants to maximize its sales in terms of dollars and units.
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prestige products or services
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those that consumers purchase for status rather than functionality. The higher the price, the greater the status associated with it and the greater the exclusivity, b/c fewer people can afford to purchase it.
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price elasticity of demand
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measures how changes in a price affect the quantity of the product demanded. Specifically, it is the ratio of the percentage change in quantity demanded to the percentage change in price.
formula: % change in quantity demanded/ & change in price
formula: % change in quantity demanded/ & change in price
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inelastic
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Describes demand that is not very sensitive to a change in price.
-if a firm must raise prices, it is helpful to do so with inelastic products, b/c in such a market, fewer customers will stop buying or will reduce their purchases.
-However, if the products are inelastic, lowering prices will not appreciably increase demand; customers just don't notice or care about the lower price.
-consumers are generally more sensitive to price increases than to price decreases.
-if a firm must raise prices, it is helpful to do so with inelastic products, b/c in such a market, fewer customers will stop buying or will reduce their purchases.
-However, if the products are inelastic, lowering prices will not appreciably increase demand; customers just don't notice or care about the lower price.
-consumers are generally more sensitive to price increases than to price decreases.
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elastic
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describes demand that is very sensitive to a change in price.
-relatively small changes in price will generate fairly large changes in the quantity demanded, so if a firm is trying to increase its sales, it can do so by lowering prices.
-However, raising prices can be problematic b/c doing so will lower sales.
-relatively small changes in price will generate fairly large changes in the quantity demanded, so if a firm is trying to increase its sales, it can do so by lowering prices.
-However, raising prices can be problematic b/c doing so will lower sales.
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factors influencing the price elasticity of demand
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1. income effect
2. substitution effect
3. cross-price elasticity
2. substitution effect
3. cross-price elasticity
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income effect
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the change in the quantity of a product demanded by consumers due to changes in their incomes.
-generally, as people's incomes increase, their spending behavior changes: they tend to shift their demand from lower-priced products to higher-priced alternatives.
-generally, as people's incomes increase, their spending behavior changes: they tend to shift their demand from lower-priced products to higher-priced alternatives.
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substitution effect
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consumer's ability to substitute other products for the focal brand. The greater the availability of substitute products, the higher the price elasticity of demand for any given product will be.
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cross-price elasticity
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the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. If Product A's price increases, Product B's price could either increase or decrease, depending on the situation and whether the products are complementary or substitutes.
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variable costs
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those costs, primarily labor and materials, that vary with production volume
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fixed costs
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those costs that remain essentially at the same level, regardless of any changes in the volume of production.
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total cost
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the sum of the variable and fixed costs.
i.e. in one year, our hypothetical hotel incurred $100,000 in fixed costs. We also know that b/c the hotel booked 10,000 room nights, its total variable cost is $100,000 (10,000 room nights x $10 per room). Thus, its total cost is $200,000.
i.e. in one year, our hypothetical hotel incurred $100,000 in fixed costs. We also know that b/c the hotel booked 10,000 room nights, its total variable cost is $100,000 (10,000 room nights x $10 per room). Thus, its total cost is $200,000.
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break-even analysis
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technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even point.
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break-even point
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point at which the number of units sold generates just enough revenue to equal the total costs.
-total variable costs= variable cost per unit x quantity
-total costs= fixed costs + total variable costs
-total revenue= price x quantity
*contribution per unit= $50-$10= $40
therefore the break-even points becomes:
Break-even point (units)= fixed costs/ contributions per unit
->
Break-even point (units)= $100,000/$40 = 2,500 room nights.
-when the hotel has crossed the break-even point of 2,500 rooms, it will start earning profit at the same rate of the contribution per unity.
-total variable costs= variable cost per unit x quantity
-total costs= fixed costs + total variable costs
-total revenue= price x quantity
*contribution per unit= $50-$10= $40
therefore the break-even points becomes:
Break-even point (units)= fixed costs/ contributions per unit
->
Break-even point (units)= $100,000/$40 = 2,500 room nights.
-when the hotel has crossed the break-even point of 2,500 rooms, it will start earning profit at the same rate of the contribution per unity.
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Competition
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has a profound impact on pricing strategies- four levels of competition- monopoly, oligopolistic competition, monopolistic competition, and pure competition.
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monopoly
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one firm provides the product/service in a particular industry, which results in less price competition.
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oligopolistic competition
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competition that occurs when only a few firms dominate a market.
-firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment.
-sometimes reactions to prices in oligopolistic markets can result in a price war.
-price war may results in predatory pricing.
-firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment.
-sometimes reactions to prices in oligopolistic markets can result in a price war.
-price war may results in predatory pricing.
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price war
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which occurs when two or more firms compete primarily by lowering their prices.
-occurs in oligopolistic markets
-occurs in oligopolistic markets
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predatory pricing
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which occurs when a firm sets a very low price for one or more of its products with the intent of driving its competition out of business.
-illegal in the US under both the Sharman Antitrust Act & Federal Trade Commission Act.
-illegal in the US under both the Sharman Antitrust Act & Federal Trade Commission Act.
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monopolistic competition
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occurs when there are many firms competing for customers in a given market but their products are differentiated.
-when so many firms compete, product differentiation rather than strict price competition tends to appeal to consumers.
-when so many firms compete, product differentiation rather than strict price competition tends to appeal to consumers.
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pure competition
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competition that occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand
(grains, meat, spices, or minerals)
(grains, meat, spices, or minerals)
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everyday low pricing (EDLP)
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A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, non-sale price and the deep-discount sale prices their competitors may offer.
-by reducing consumers' search costs, EDLP adds value; consumers can spend less of their valuable time comparing prices, including sale prices, at different stores.
-by reducing consumers' search costs, EDLP adds value; consumers can spend less of their valuable time comparing prices, including sale prices, at different stores.
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high/low pricing
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a pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.
-appealing b/c it attracts two distinct market segments: those who are not price sensitive and willing to pay the "high" price and more price-sensitive customers who wait for the "low" sale price.
-High/low sellers can also create excitement and attract customers through the "get them while they last" atmosphere that occurs during the sale.
-appealing b/c it attracts two distinct market segments: those who are not price sensitive and willing to pay the "high" price and more price-sensitive customers who wait for the "low" sale price.
-High/low sellers can also create excitement and attract customers through the "get them while they last" atmosphere that occurs during the sale.
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penetration pricing strategy
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pricing strategy a firm uses to set the initial price low for the introduction for the new product/service. Their objective is to build sales, market share, and profits quickly and deter competition from entering the market.
-the low penetration price is an incentive to purchase the product immediately.
-the low penetration price is an incentive to purchase the product immediately.
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price skimming
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a pricing strategy of selling a new product at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment.
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deceptive reference prices
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-if the reference price is real, the advertisement is informative.
-if the reference price has been inflated or is just plan fictitious, however, the advertisement is deceptive and may cause harm to consumers. But it is not easy to determine whether a reference price is legit.
-if the reference price has been inflated or is just plan fictitious, however, the advertisement is deceptive and may cause harm to consumers. But it is not easy to determine whether a reference price is legit.
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loss-leader pricing
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takes the tactic of leader pricing one step further by lowering the price below the store's cost.
leader pricing is a legitimate tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just about the store's cost.
-illegal.
leader pricing is a legitimate tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just about the store's cost.
-illegal.
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bait-and-switch
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a deceptive practice of luring customers w/ a very low price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher-priced model.
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price discrimination
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when firms sell the same product to different resellers (wholesalers, distributors, or retailers) at different prices.
-usually larger firms receive lower prices.
-usually larger firms receive lower prices.
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price fixing
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the practice of colluding with other firms to control prices.
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horizontal price fixing
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occurs when competitors who produce and sell competing products or services work together, to control prices, effectively taking price out of the decision process for consumers.
-this practice clearly reduces competition and is illegal.
-this practice clearly reduces competition and is illegal.
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vertical price fixing
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occurs when parties at different levels of the same marketing channel (manufacturers & retailers) agree to control the prices passed on to consumers.
-not yet illegal.
-not yet illegal.
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