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- It has always been easy to change
- Internet has made it even easier
- Real pricing decisions must be made on the best possible current
information and can be quite complex.
Pricing Objectives
Major objectives
- Survival
- Short run (current) profit maximization
- Make a target profit (satisficing)
- Maximize market share
- Assume a product quality position
Minor objectives
- Discourage competition
- Stabilize parket prices
- Keep channel members happy
- Self regulate to avoid government
regulation
Limits of prices
- Floor price level is determined by costs
- Ceiling price level is determined by demand
Psychological aspects of price
- Positioning and Price -- Price aspect of market position must match desired psychological position.
- Perceived value
- Perceived price
- Price and Quality --- sss
- Price as a signal for quality
- Price as a surrogate for quality
- Price as a symbol of prestige
- Bundled vs unbundled price of a good. eg computers
- What is regular price?
Pricing Tactics
- Odd pricing
- Customary pricing
- Price lining (distinct price segments)
- Loss leaders
- Flagship products
- Opening Price -- one really low price in an area of a store
Price of freight
- FOB pricing (Free on board)
customer absorbs all shipping
- Uniform delivered -- same price to all customers
- Zone pricing -- cost of shipping to zones like UPS or USPS
- Base point pricing -- charged as if it came from some base
- Freight absorbtion (may be illusory) -- no "freight charges"
Competition based pricing
- Going rate
- follow the leader
- Sealed bid
Price changes
- in response to environment
- in response to competition
- Changes in costs/supply
- Buyer reactions
- Competititor reactions cf airlines and WSJ
Cost based pricing
- Most common
- Easiest to implement
- considered "Fair" to all parties
- if used throughout an industry, similar prices result (why?)
- probably not Optimal
- Remember your break even analysis from Accounting!
Mark-up -- Conventions
- Gross margin: The difference between net sales and the cost of
goods sold. (All overhead must come out of this, including promotional costs.)
- Margin is not the same as markup
- Markup dollars vs markup %
- Markup has two forms
- Markup on cost -- intuitive
- Markup on selling price -- retail
- To keep these straight,
remember that if a is on b, then the fraction is a/b.
- Why do retailers use markup on selling price?
Demand Based Pricing
- The true Marketing aproach to pricing is always demand based.
The marketer attempts to set the price to the customer at the level where profits are maximized.
(What did we learn in Economics?) This is always based on the perceived value of the
offering to the customer. The elasticity of demand to price will determine
whether that price is a high price with a low volume of sales or a low price
with a high volumen of sales. Many factors affect whether the price that
customers are willing to pay is the same as what a company would like to
charge.
- Designer Jeans Demand
- Price Discrimination
- By Customer
- By Product attribute (elasticity) (house brand vs own brand)
- By Time of purchase (cf. perishibility management of services)
- By Place of purchase -- urban,suburban,rural,resort, etc.
- By Type of outlet convience, supermarket, department store, etc.
- Airlines are pros at yield management, but competition makes it hard to
maintain price levels.
New Product Pricing
Which to use depends on a company's objectives.
It also depends on the elasticity of demand to price and on the presence or
absence of an experience curve effect for manufacturing.
Note that the ability to rapidly change prices on the internet does not mean
that it is always a good idea. Customers might become alienated.
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