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Chap 15 pricing strategies

Chapter 15
Pricing Strategies

A. Review of Pricing Factors
1. Pricing Objectives (TM 15-1)
2. Cost (TM 15-2)
3. Competition
• Competitive Information Needed for Pricing Strategy (TM 15-3)
4. Demand (TM 15-4)
B. Pricing Strategies for New Products
1. Skimming Pricing (TM 15-5)
2. Penetration Pricing (TM 15-6)
C. Pricing Strategies for Established Products (TM 15-7)
1. Maintaining the Price
2. Reducing the Price
3. Increasing the Price
D. Price-Flexibility Strategy (TM 15-8)
1. One-Price Strategy
2. 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)

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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.



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