Chapter 8 - Pricing Strategy............ppt
- 2. PRICING STRATEGY • Price Theory and Practice • Incremental Pricing • Bases for Price Decisions • Price Discounts • Special Pricing Issues
- 3. PRICE THEORY AND PRACTICE • Price Theory (Economics) - Dominance of pricing • Pricing in Practice (Business) - Influence of non-price factors
- 4. P Q D D D D 1 1 Shifting the demand curve to the right (non-price)
- 5. USEFUL CONCEPTS FOR PRICING STRATEGY • Price Elasticity – Elastic demand – Inelastic demand • Cost Concepts – Fixed cost – Variable cost
- 6. INCREMENTAL PRICING Using contribution to profit as the criteria for measuring profitability rather than net profit. Contribution to Profit = Total Revenue – Variable Cost Net Profit = Total Revenue – Total Cost
- 7. CONDITIONS FAVORABLE FOR INCREMENTAL PRICING • Heavy Fixed Cost • Excess Production Capacity • Price-Sensitive Niche • Isolate from Core Market
- 8. INCREMENTAL PRICING EXAMPLES • Wall Street Journal • Hotels • Matinee movies • Happy hour
- 9. WALL STREET JOURNAL (Yearly Rate) Business Rate $150 Student Rate $50 Library Rate $300
- 10. INCREMENTAL PRICING OF SERVICES BY TIME Hours in the Day Matinee movies Days of the Week Weekend hotels Seasons of the Year Income tax preparation
- 11. BASES FOR PRICE DECISIONS • Based on Demand of Buyer • Based on Cost of Seller • Based on Competitor Prices
- 12. DEMAND-BASED PRICING • New product pricing • Perceived Value • Yield Management
- 13. NEW PRODUCT PRICING • New Product Skimming • New Product Penetration
- 14. NEW PRODUCT SKIMMING • Set high initial price • Recover R&D quickly • Drop prices over time
- 15. PRODUCT SKIMMING EXAMPLES • Intel chips • Flat panel TVs • Smart Phones
- 16. NEW PRODUCT PENETRATION • Set low initial price • Gain market share • Discourage competition
- 17. PRODUCT PENETRATION EXAMPLES • Southwest airlines • Two-Buck Chuck wine • Samsung
- 18. PERCEIVED VALUE PRICING • Rolex Watches • 3M Post-It-Notes • Business Lunches
- 19. YIELD MANAGEMENT PRICING • Airlines • Hotels • Utility Pricing
- 20. COST-BASED PRICING • Cost Plus • Billable Hours • Add-on Charges • Markups
- 21. COST-BASED EXAMPLES • Lawyer sets billable cost at $400 per hour • Boeing has a cost-plus contract with NASA • Star Furniture marks up their furniture 50% above cost
- 22. ADD-ON PRICE EXAMPLES • Airlines • Credit cards • Telephone services
- 23. SPIRIT BAGGAGE FEES Book Over Phone $10 Roller Bag $30 Water $3 Boarding Passes $10 Printed at Airport Booking Over Internet $17
- 24. COMPETITION – BASED PRICING •Competitive Price Wars •Lower Cost •Administered Pricing
- 25. COMPETITION-BASED EXAMPLES • HEB Price War • Two Buck Chuck Wine • Price of Basic Steel
- 26. TWO BUCK CHUCK WINE • Sold only in Trader Joe’s gourmet stores • Overproduction of California grapes • Produce own grapes at very low cost
- 27. PARKER HANNIFIN PRICING STRATEGY “A” Products High-volume commodities “B” Products More specialized niches “C” Products Limited Competition “D” Products No direct competitor
- 28. PRICE DISCOUNTS • Cash Discounts – 5% off at Spec’s if you pay by cash • Seasonal Discounts – Cheaper prices on December 26 • Trade Discounts – Cheaper prices to Wholesalers • Promotional Discounts – Weekend specials at Supermarkets
- 29. SPECIAL PRICING ISSUES • Pricing Choices • Other Pricing Options • Psychological Pricing • Questionable Pricing • Price Stability/Competition
- 30. PRICING CHOICES • Fixed Pricing – Price is fixed by the seller at any one period of time • Negotiated Pricing – Price is negotiated between a buyer and a seller for each transaction
- 31. FIXED PRICING • Paying the monthly telephone bill • Buying canned goods at the supermarket • Parking at the Reliant Stadium
- 32. NEGOTIATED PRICING • Buying an automobile • Selling a house • Garage sale • Showrooming
- 33. OTHER PRICING OPTIONS • Freemium Pricing • Reference Pricing • A La Carte Cable Pricing
- 34. PSYCHOLOGICAL PRICING • $199.95 • $.99 • Buy one, get one free
- 35. QUESTIONABLE PRICING • Bait and Switch • Price Gouging • Price Fixing • Pricing of E-Books
- 36. PRICE MODELS FOR E-BOOKS •Wholesale model •Agency model
- 37. WHOLESALE PRICING MODEL FOR SELLING E-BOOKS •Book publisher sets list price at $25 •Seller buys at $12.50 and sells for $25 •Amazon.com buys at $12.50 and sells for $9.99
- 38. AGENCY PRICING MODEL FOR SELLING E-BOOKS •Book publisher sets list price at $25 •Apple receives 30% of list price $7.50 sold through iPads •All sellers are required to sell book at $25 (including Amazon.com)
- 39. WHO WANTS PRICE COMPETITION? • Discount retailers • Foreign competitors • Firms with low costs • Internet Sellers
- 40. WHO WANTS PRICE STABILITY? • Oligopolies • Small businesses • Professional services • Traditional brokers and agents