Chap 15 pricing strategies

Chapter 15 Pricing Strategies A Review of Pricing Factors Pricing Objectives (TM 15-1) Cost (TM 15-2) Competition • Competitive Information Needed for Pricing Strategy (TM 15-3) Demand (TM 15-4) B Pricing Strategies for New Products Skimming Pricing (TM 15-5) Penetration Pricing (TM 15-6) C Pricing Strategies for Established Products (TM 15-7) Maintaining the Price Reducing the Price Increasing the Price D Price-Flexibility Strategy (TM 15-8) One-Price Strategy Flexible Pricing E Product-Line Pricing Strategy (TM 15-9) F Leasing Strategy (TM 15-10) G Bundling-Pricing Strategy (TM 15-11) H Price Leadership (TM 15-12) I Pricing Strategy to Build Market Share (TM 15-13) 92 93 CHAPTER 15: Pricing Strategies 15-1 PRICING OBJECTIVES Potential pricing objectives: • Maximum long-run profits • Maximum short-run profits • Growth • Stabilize market • Desensitize customers to price • Maintain price-leadership arrangement • Discourage entrants • Speed exit of marginal firms • Avoid government investigation and control • Maintain loyalty of middlemen and get their sales support • Avoid demands for “more” from suppliers—labor in particular • Enhance image of firm and its offerings • Be regarded as “fair” by customers (ultimate) • Create interest and excitement about the item • Be considered trustworthy and reliable by rivals • Help in the sale of weak items in the line • Discourage others from cutting prices • Make a product “visible.” • “Spoil market” to obtain high price for sale of business • Build traffic CHAPTER 15: Pricing Strategies 94 15-2 COST Fixed and variable costs are the major concerns of a pricer In addition, the pricer may sometimes have to consider other types of costs, such as outof-pocket costs, incremental costs, opportunity costs, controllable costs, and replacement costs 95 CHAPTER 15: Pricing Strategies 15-3 COMPETITIVE INFORMATION NEEDED FOR PRICING STRATEGY • Published competitive price lists and advertising • Competitive reaction to price moves in the past • Timing of competitors’ price changes and initiating factors • Information on competitors’ special campaigns • Competitive product-line comparison • Assumptions on competitors’ pricing/marketing objectives • Competitors’ reported financial performance • Estimates of competitors’ costs—fixed and variable • Expected pricing retaliation • Analysis of competitors’ capacity to retaliate • Financial viability of engaging in price war • Strategic posture of competitors • Overall competitive aggressiveness CHAPTER 15: Pricing Strategies 96 15-4 DEMAND Demand analysis involves predicting the relationship between price level and demand while considering the effects of other variables on demand The relationship between price and demand is called elasticity of demand or sensitivity of price It refers to the number of units of a product that would be demanded at different prices Price sensitivity should be considered at two different levels: total industry price sensitivity and price sensitivity for a particular firm 97 CHAPTER 15: Pricing Strategies 15-5 SKIMMING PRICING Skimming pricing is the strategy of establishing a high initial price for a product with a view to “skimming the cream off the market” at the upper end of the demand curve CHAPTER 15: Pricing Strategies 98 15-6 PENETRATION PRICING Penetration pricing is the strategy of entering the market with a low initial price so that a greater share of the market can be captured A penetration strategy may use: • Restrained prices • Elimination prices • Promotional prices • Keep-out prices 99 CHAPTER 15: Pricing Strategies 15-7 PRICING STRATEGIES FOR ESTABLISHED PRODUCTS Changes in the marketing environment may require a review of prices of products already on the market For example, an announcement by a large firm that it is going to lower its prices will make it necessary for other firms in the industry to examine their prices A review of pricing strategy may also become necessary because of shifts in demand CHAPTER 15: Pricing Strategies 100 15-8 PRICE-FLEXIBILITY STRATEGY Price-flexibility strategy usually consists of two alternatives: a one-price policy and a flexiblepricing policy Influenced by a variety of changes in the environment, such as saturation of markets, slow growth, Japanese competition, and the consu-mer movement, more and more companies have been adhering in recent years to flexibility in pricing in different forms The flexibility may consist of setting different prices in different markets based on geographic location, varying prices depending on the time of delivery, or customizing prices based on the complexity of the product desired 101 CHAPTER 15: Pricing Strategies 15-9 PRODUCT-LINE PRICING STRATEGY A modern business enterprise manufactures and markets a number of product items in a line with differences in quality, design, size, and style Products in a line may be complementary to or competitive with one another This influences the cross elasticities of demand between competing products and the package-deal buying of products complementary to one another In such cases, the pricing strategy should be developed to maximize the profits of the entire organization rather than the profits of a single product CHAPTER 15: Pricing Strategies 102 15-10 LEASING STRATEGY The major emphasis of a pricing strategy is on buying a product outright rather than leasing it Except in housing, leasing is more common in the marketing of industrial goods than in consumer goods, though in recent years there has been a growing trend toward the leasing of consumer goods 103 CHAPTER 15: Pricing Strategies 15-11 BUNDLING-PRICING STRATEGY Bundling, also called iceberg pricing, refers to the inclusion of an extra margin (for support services) in the price over and above the price of the product as such This type of strategy has been popular with companies that lease rather than sell their products CHAPTER 15: Pricing Strategies 104 15-12 PRICE LEADERSHIP Successful price leaders are characterized by: • Large share of the industry’s production capacity • Large market share • Commitment to a particular product class or grade • New, cost-efficient plants • Strong distribution system, perhaps including captive wholesale outlets • Good customer relations such as technical assistance for industrial buyers, programs directed at end users, and special attention to important customers during shortage periods • An effective market information system that provides analysis of the realities of supply and demand • Sensitivity to the price and profit needs of the rest of the industry • A sense of timing to know when price changes should be made • Sound management organization for pricing • Effective product-line financial controls, which are needed to make sound price leadership decisions • Attention to legal issues 105 CHAPTER 15: Pricing Strategies 15-13 PRICING STRATEGY TO BUILD MARKET SHARE Time and again it has been noted that higher market share or experience leads to lower costs Thus, the new product should be priced to gain experience and market share This will give the company such a cost advantage that it cannot ever profitably be overcome by any competitor of normal performance Competitors will be prevented from entering the market and will have to learn to live in a subordinate position [...]...CHAPTER 15: Pricing Strategies 102 15- 10 LEASING STRATEGY The major emphasis of a pricing strategy is on buying a product outright rather than leasing it Except in housing, leasing is more common in the marketing of industrial goods than in consumer goods, though in recent years there has been a growing trend toward the leasing of consumer goods 103 CHAPTER 15: Pricing Strategies 15- 11 BUNDLING -PRICING. .. the industry • A sense of timing to know when price changes should be made • Sound management organization for pricing • Effective product-line financial controls, which are needed to make sound price leadership decisions • Attention to legal issues 105 CHAPTER 15: Pricing Strategies 15- 13 PRICING STRATEGY TO BUILD MARKET SHARE Time and again it has been noted that higher market share or experience... Strategies 15- 11 BUNDLING -PRICING STRATEGY Bundling, also called iceberg pricing, refers to the inclusion of an extra margin (for support services) in the price over and above the price of the product as such This type of strategy has been popular with companies that lease rather than sell their products CHAPTER 15: Pricing Strategies 104 15- 12 PRICE LEADERSHIP Successful price leaders are characterized ...93 CHAPTER 15: Pricing Strategies 15- 1 PRICING OBJECTIVES Potential pricing objectives: • Maximum long-run profits • Maximum short-run... price sensitivity and price sensitivity for a particular firm 97 CHAPTER 15: Pricing Strategies 15- 5 SKIMMING PRICING Skimming pricing is the strategy of establishing a high initial price for... cream off the market” at the upper end of the demand curve CHAPTER 15: Pricing Strategies 98 15- 6 PENETRATION PRICING Penetration pricing is the strategy of entering the market with a low initial