PDF | Pricing strategy is the policy a firm adopts to determine what it will charge for its products and services. Strategic approaches fall broadly. PRICING STRATEGY. Introduction to Chapter. Price is a significant element in the marketing mix. 'Marketing mix' is referred to as the controllable marketing. BREAK EVEN ANALYSIS. - Is a comparison of alternative cost and revenue estimates in order to determine acceptability of each price. - Break even point is the.
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Pricing Strategy. Learning Objectives. 1) Identify pricing strategies that are appropriate for new and existing products. 2) Understand the stages of the product life. Markup pricing * has resellers adding a dollar amount (markup) to their cost to arrive at a price. It is used primarily by wholesalers and retailers. In cost-plus. Pricing Strategies. Pricing has traditionally been considered a me-too variable in marketing strategy. The stable economic conditions that prevailed during the.
A McKinsey pricing study estimated that the price indifference band can range as large as 17 percent for mouthwash, 13 percent for batteries, 9 percent for small appliances, and 2 percent for certificates of deposit. Finally, long-run price elasticity may differ from short-run elasticity. downloaders may continue to download from a current supplier after a price increase, but they may eventually switch suppliers. Here demand is more elastic in the long run than in the short run, or the reverse may happen: downloaders may drop a supplier after being notified of a price increase but return later.
The distinction between short-run and long-run elasticity means that sellers will not know the total effect of a price change until time passes. Step 3: Estimating Costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet, when companies price products to cover full costs, the net result is not always profitability.
Fixed costs also known as overhead are costs that do not vary with production or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output. Variable costs vary directly with the level of production. For example, each hand calculator produced by Texas Instruments involves the cost of plastic, microprocessor chips, packaging, and the like.
These costs tend to be constant per unit produced. They are called variable because their total varies with the number of units produced. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it is equal to total costs divided by production.
Management wants to charge a price that will at least cover the total production costs at a given level of production. To price intelligently, management needs to know how its costs vary with different levels of production.
Take the case in which a company such as TI has built a fixed-size plant to produce 1, hand calculators a day. The cost per unit is high if few units are produced per day. As production approaches 1, units per day, the average cost falls because the fixed costs are spread over more units. Short-run average cost increases after 1, units, because the plant becomes inefficient: Workers have to line up for machines, machines break down more often, and workers get in each others' way.
As TI gains experience producing hand calculators, its methods improve. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result, as Figure This decline in the average cost with accumulated production experience is called the experience curve or learning curve. This will drive B out of the market, and even A may consider leaving.
TI will pick up the business that would have gone to B and possibly A. Furthermore, price-sensitive customers will enter the market at the lower price.
TI has used this aggressive pricing strategy repeatedly to gain market share and drive others out of the industry. Experience-curve pricing, nevertheless, carries major risks. Aggressive pricing might give the product a cheap image. The strategy also assumes that competitors are weak followers.
It leads the company into building more plants to meet demand, while a competitor innovates a lower-cost technology. The market leader is now stuck with the old technology. Most experience-curve pricing has focused on manufacturing costs, but all costs can be improved on, including marketing costs. If three firms are each investing a large sum of money in telemarketing, the firm that has used it the longest might achieve the lowest costs.
This firm can charge a little less for its product and still earn the same return, all other costs being equal. A manufacturer, for example, will negotiate different terms with different retail chains. One retailer may want daily delivery to keep inventory lower while another may accept twice-a-week delivery in order to get a lower price.
The manufacturer's costs will differ with each chain, and so will its profits. To estimate the real profitability of dealing with different retailers, the manufacturer needs to use activity-based cost ABC accounting instead of standard cost accounting. ABC accounting tries to identify the real costs associated with serving each customer.
It allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in some proportion to direct costs. Both variable and overhead costs are tagged back to each customer. Companies that fail to measure their costs correctly are not measuring their profit correctly and are likely to misallocate their marketing effort. The key to effectively employing ABC is to define and judge "activities" properly.
One proposed time- based solution calculates the cost of one minute of overhead and then decides how much of this cost each activity uses. They can also change as a result of a concentrated effort by designers, engineers, and downloading agents to reduce them through target costing.
Market research is used to establish a new product's desired functions and the price at which the product will sell, given its appeal and competitors' prices. Deducting the desired profit margin from this price leaves the target cost that must be achieved.
Each cost element—design, engineering, manufacturing, sales—must be examined, and different ways to bring down costs must be considered. The objective is to bring the final cost projections into the target cost range.
If this is not possible, it may be necessary to stop developing the product because it could not sell for the target price and make the target profit. Even with lower prices, profits for the brand doubled. The firm should first consider the nearest competitor's price.
If the firm's offer contains features not offered by the nearest competitor, their worth to the customer should be evaluated and added to the competitor's price.
If the competitor's offer contains some features not offered by the firm, their worth to the customer should be evaluated and subtracted from the firm's price. Now the firm can decide whether it can charge more, the same, or less than the competitor. But competitors can also change their prices in reaction to the price set by the firm. Step 5: Selecting a Pricing Method Given the three Cs—the customers' demand schedule, the cost function, and competitors' prices—the company is now ready to select a price.
The three major considerations in price setting : Costs set a floor to the price.
Competitors' prices and the price of substitutes provide an orienting point. Customers' assessment of unique features establishes the price ceiling. Companies select a pricing method that includes one or more of these three considerations. We will examine six price-setting methods: markup pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and auction-type pricing.
Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs. Target pricing is used by General Motors, which prices its automobiles to achieve a 15 to 20 percent ROI.
Still, selectively tailoring discounts to your most loyal customers can be a great way to guarantee their patronage for years to come.
Designed to help businesses maximize sales on new products and services, price skimming involves setting rates high during the introductory phase. The company then lowers prices gradually as competitor goods appear on the market. One of the benefits of price skimming is that it allows businesses to maximize profits on early adopters before dropping prices to attract more price-sensitive consumers. Not only does price skimming help a small business recoup its development costs, but it also creates an illusion of quality and exclusivity when your item is first introduced to the marketplace.
With the economy still limping back to full health, price remains a major concern for American consumers. Psychology pricing refers to techniques that marketers use to encourage customers to respond on emotional levels rather than logical ones. One explanation for this trend is that consumers tend to put more attention on the first number on a price tag than the last.
The goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer. With bundle pricing, small businesses sell multiple products for a lower rate than consumers would face if they downloadd each item individually. Bundle pricing is more effective for companies that sell complimentary products.
Small businesses should keep in mind that the profits they earn on the higher-value items must make up for the losses they take on the lower-value product. This article currently has ratings with an average of 4. QuickBooks Resource Center.
Join them. Home Articles Guides Tools Videos. Answer In terms of the marketing mix some would say that pricing is the least attractive element. Marketing companies should really focus on generating as high a margin as possible.
The argument is that the marketer should change product , place or promotion in some way before resorting to pricing reductions. However price is a versatile element of the mix as we will see. The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. These companies need to land grab large numbers of consumers to make it worth their while, so they offer free telephones or satellite dishes at discounted rates in order to get people to sign up for their services.
Once there is a large number of subscribers prices gradually creep up. Economy Pricing. This is a no frills low price. The costs of marketing and promoting a product are kept to a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Budget airlines are famous for keeping their overheads as low as possible and then giving the consumer a relatively lower price to fill an aircraft. The first few seats are sold at a very cheap price almost a promotional price and the middle majority are economy seats, with the highest price being paid for the last few seats on a flight which would be a premium pricing strategy.
During times of recession economy pricing sees more sales. However it is not the same as a value pricing approach which we come to shortly. Price Skimming. Price skimming sees a company charge a higher price because it has a substantial competitive advantage.
However, the advantage tends not to be sustainable. The high price attracts new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented. New products were developed and the market for watches gained a reputation for innovation.
They form the bases for the exercise. However there are other important approaches to pricing, and we cover them throughout the entirety of this lesson. Psychological Pricing. This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis.