PRI€E
S E S S I O N S E 7 E N
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slides by MOSTAFA PURMEHDI
Product Price
O B J E C T I V E S
A S o c i a l E x p e r i m e n t o n P r i c e
Everything has
A PRI€E.
b u t h o w d o w e s e t t h o s e p r i c e s ?
W h a t c o n s t i t u t e s p r i c e ?
+
+
What Constitutes Price?
money time energy
OBJECTIVES (GOALS)
STRATEGIES (ROAD MAPS)
METHODS (ACTIONS)
K
C
A
B
D
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E
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PRICING
T H E P R O C E S S o f
Pricing Objectives
O B J E C T I V E S
PER$PECTIVES
Profit-oriented
Competition-oriented
Sales-oriented
Customer-oriented
Intermediary- oriented
PRICING
Profit-oriented Pricing
OBJECTIVE. to recover production costs + earn a profit
OCD Condition. profit maximization.
Normal Condition. aim for acceptable and satisfying profit.
Condition Cure. define a target return (on investment) expressed as a percentage of the invested capital.
Competition-oriented
OBJECTIVE. to maintain or increase company's market share
Logic. large market share brings economy of scale.
Risks. Do you know everything about your market's dynamics, competitors' resources and strategies?
Implicit Objective. maintaining a balance between production capacity, sales volume and profitability.
Sales-oriented Pricing
OBJECTIVE. easy, in-reach, short-term higher profits.
Problem. it's like choosing a car only based on how fast it goes. It has little ties with general objectives or cost structure.
Natural habitat. companies with overcapacity or considerable inventories to liquidate, situations like economic recession
Customer perception-related Pricing
OBJECTIVE. to use price as a positioning tool to project the desired image of the product
Logic. price signals a product's positioning to customers
Exclusivity: HIGH price + never reduce prices or offer rebates
Accessibility: Affordable price
Distribution intermediary-
related Pricing
OBJECTIVE. if a retailer or distributor represents a large portion of your company's sales, you must retain or recruit their support.
Danger. in long-term, you will lose control over pricing policies and product positioning
Example. Walmart can pressure manufacturers and impose their desired price!!
what do you think is the objective of this pricing?
$299
SELLING PRICE
$151
PRODUCTION COST
[2007]
Pricing Strategies
O B J E C T I V E S
AN OBJECTIVE
STRATEGY #1
STRATEGY #3
STRATEGY #2
An objective can be translated into many strategies.
OVERVIEW OF STRATEGIES
Feel Strong Competitive Pressure?
Price Leadership
Competitive Parity
Low-cost Pricing
used by dominant players e.g., Apple
"I set a price and the rest
of you losers follow me!"
setting the same price as the market average or the leader
the danger is that the leader
is always in the position of power
systematically offer the lowest price in the market
used if you have a competitive advantage in production or if
you have unused production capacity
Wanna Serve Your Best Customers?
Quality Signalling Pricing
Prestige Pricing
Have you ever paid $480 for two melons? or $4 for one strawberry?
Well, the Japanese do.
How much are you willing to pay for a high-end stereo system?
Want a Simple Cost-based Pricing Solution?
Cost-plus
get a pre-determined profit margin
by adding it to production cost
problem is it ignores information from consumers and competitors
justified when company has little
information about demand
Wanna Sell All Your Product Line At the Same Time?
Complementary Product
Price Bundling
Customer Value
complementary products, accessories, spare parts or services are sold at higher price than the main product
e.g. HP printers
a bundle of product sold at a lower price than the sum of each product at their regular price
e.g. McFlurry from McDonalds
pricing a product
very competitively while stripping it off to fewer options
e.g. Toyota Yaris
Wanna Sell it As Long As You Can Through Product Life Cycle?
Skimming
Penetration
setting initial high price (to establish an image of quality) to target innovators and early adopters and then lowering it to widen the market
setting an initial low price (that perhaps doesn't cover the costs of production)
to quickly capture a large market share and keep the competition at a distance.
Price and Product Life Cycle
what is this pricing strategy?
$399
SELLING PRICE
$470
PRODUCTION COST
[2005]
what is this pricing strategy?
$599
SELLING PRICE
$840
PRODUCTION COST
[2006]
Crazy things to do
with price Bundles
Pricing Methods
O B J E C T I V E S
Cost-based Method
fixed costs + variable costs + semi-variable costs = total costs
Where is the breakeven point?
Breakeven Curve
Environmental Influences on Pricing
O B J E C T I V E S
INTERNAL Environment
company costs
existing product line
product life cycle
PRI€E
EXTERNAL Environment
competition
consumers
distribution intermediaries
economic environment
governments
legal environment
and while marketers are sweating to set the right price, how do the ordinary customers perceive price?
THANK YOU
FOR YOUR ATTENTION
S E E Y O U N E X T W E E K