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The critical role of pricing
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1) price is the only revenue-generating element of the marketing mix
2) an important strategic weapon that can be used to build market share, and/or improve profits
3) pricing decisions determine the customers and competitors a firm attracts
4) pricing error ca nullify other marketing mix activities
5) Affects profitability
2) an important strategic weapon that can be used to build market share, and/or improve profits
3) pricing decisions determine the customers and competitors a firm attracts
4) pricing error ca nullify other marketing mix activities
5) Affects profitability
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Initial pricing discretion is determined by:
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1) consumer demand - sets price ceiling
2) costs - determine price floor
2) costs - determine price floor
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price ceiling
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consumers value perceptions determines maximum price charged
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price floor
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Variable costs determine the absolute minimum price that can be charged if the firm is to survive
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Final pricing discretion is determined by:
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1) corporate objectives
2) competitive factors
3) government regulations
4) product life-cycle stage
5) Margin requirements
6) prices of other products
7) elasticity of demand
2) competitive factors
3) government regulations
4) product life-cycle stage
5) Margin requirements
6) prices of other products
7) elasticity of demand
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Three broad pricing strategies arising from three main factors affecting pricing decisions
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1) cost-based strategies
2) demand-based strategies
3) competition-based strategies
2) demand-based strategies
3) competition-based strategies
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Cost-based pricing strategy
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pricing strategies that use the cost of a product as the starting point for determining price
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Two broad cost-based pricing strategies
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1) full-cost
2) variable-cost
2) variable-cost
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Full-cost pricing strategy
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consider both variable and fixed costs
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Variable-cost pricing strategy
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take into account only direct variable costs associated with an offering
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Full-cost take one of four forms
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1) Cost-plus pricing
2) mark-up pricing
3) break-even pricing
4) rate-of-return pricing
2) mark-up pricing
3) break-even pricing
4) rate-of-return pricing
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Cost-plus pricing
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determining price by adding a a specified dollar amount to the production cost of a product
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Mark-up pricing
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determining price by adding a specified dollar amount to the acquisition cost of a product
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Rate-of-return pricing (target profit pricing)
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setting price that will generate sufficient production volume and sale revenues to breakeven and make a certain target profit or return on investment
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variable-cost pricing strategies
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pricing strategy in which price is set to recover only variable costs
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Assumptions on Variable-Cost pricing strategies
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1) in the short-run, variable costs are the relevant costs, not total costs
2) variable unit cost becomes minimum selling price
3) any price above this minimum contributes to fixed costs and profits
2) variable unit cost becomes minimum selling price
3) any price above this minimum contributes to fixed costs and profits
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Demand-based pricing strategies
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using expected demand or buyers' perceptions of value rather than seller's cost to set price
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demand-based pricing strategies include:
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1) good-value pricing
2) value-added pricing
3) peak-load pricing
2) value-added pricing
3) peak-load pricing
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good-value pricing
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offering just the right combination of quality and good service at a fair price
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value-added pricing
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attaching value-added services to differentiate a company's offer, justify higher prices and support margins
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peak-load pricing
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setting price high when demand is strong and lower when demand is weak
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competition-based pricing strategies
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setting prices based on competitors' strategies costs, prices, and market offerings
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competition-based pricing strategies include:
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1) going-rate pricing
2) auction-type
2) auction-type
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Product line pricing strategies include:
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1) the lowest-priced product price
2) the highest-priced product & price
3) Price differentials for all other products in the line
2) the highest-priced product & price
3) Price differentials for all other products in the line
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Three conceptual new-product pricing strategies:
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1) skimming pricing
2) penetration pricing
3) intermediate pricing
2) penetration pricing
3) intermediate pricing
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Skimming pricing strategy
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initial price of new products is set very high with intention of reducing it over time
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penetration pricing strategy
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initial price of new product is set low to stimulate demand, with intention of increasing over time
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intermediate pricing strategy
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initial price is set between the two extremes and is used in the vast majority of initial pricing decisions
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conditions favoring skimming pricing
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1) demand is likely to be price inelastic
2) there are different price-market segments, of which one will pay a higher price for it
3) product can be protected by patent or copyright
4) production of marketing costs are unknown
5) production capacity is constrained
6) goal is to quickly recoup investment or fund other projects
7) there is a realistic perceived value in the product
2) there are different price-market segments, of which one will pay a higher price for it
3) product can be protected by patent or copyright
4) production of marketing costs are unknown
5) production capacity is constrained
6) goal is to quickly recoup investment or fund other projects
7) there is a realistic perceived value in the product
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conditions favoring penetration pricing
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1) demand is likely to be price elastic
2) large market share is a major objective
3) substantial economies of scale characterize production or marketing process
4) product is neither unique nor protected by patent or copyright
5) competitors are expected to quickly enter the market
6) there are no distinct and separate price-market segments
2) large market share is a major objective
3) substantial economies of scale characterize production or marketing process
4) product is neither unique nor protected by patent or copyright
5) competitors are expected to quickly enter the market
6) there are no distinct and separate price-market segments
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competitive interaction
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the sequential action and reaction of rival companies in setting and changing prices and in assessing likely outcomes such as impact on sales and profits
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price wars
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successive price cutting by competitors to increase or maintain their unit sales or market share
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