Developing Pricing Strategies and Programs What is a

Developing Pricing Strategies and Programs

What is a Price? l l Narrowly: price is the amount of money charged for a product or service. Broadly: price is the sum of all the values that the consumers exchange for the benefit of having or using the product or service.

Pricing Mechanism l l l Throughout most of history, prices were set by negotiation between buyers and sellers. At the end of 19 th century, the development of large-scale retailing → fixed price policies, i. e. setting one price for all buyers. At the end of 20 th century, the Internet → dynamic pricing, i. e. charging different prices depending on individual customers and situations.

Case: Priceline l l l Its customer base has grown to almost 17 million users, and as many as 9 million people visit the Priceline site monthly (64% are repeat customers). Working mechanism Attractive to the “time sensitivity” product such as travel-related products (e. g. plane tickets, hotel rooms, rental cars, cruises, and vacation packages).

Dynamic Pricing on the Web l Sellers can l l l charge lower prices, reap higher margins, e. g. Dell’s “made-to-order”. monitor customer behavior and tailor offers to individuals, e. g. Amazon. charge prices on the fly according to changes in demand or costs, e. g. online catalog retailers.

Dynamic Pricing on the Web l Buyers can l l l get instant price comparisons from thousands of vendors, e. g. Compare. Net, Price. Scan. com, and 手機王. find and negotiate lower prices. Both sellers and buyers can negotiate prices in online auctions and exchanges. l E. g. Free. Markets, 阿里巴巴.

Setting Pricing Policy 1. 2. 3. 4. 5. 6. Selecting the pricing objectives Determining demand Estimating costs Analyzing competitors’ costs, prices, and offers Selecting a pricing method Selecting the final price

Selecting the Pricing Objectives l Survival l Reasons: overcapacity, intense competition, or changing consumer wants. Prices cover variable costs and some fixed costs Maximum current profit l l Maximize current profit, cash flow or ROI Does a leveraged firm more care about the current profit than a non-leveraged firm?

Selecting the Pricing Objectives l Maximum market share l l Examples of Chinese computer companies: 大長 城→$600 (captured 1/3 of total PC sales); Start→$480 (trade in, minus monitor); 海星→$580 (aimed at schoolchildren). Conditions: (1) price sensitivity; (2) experience curve; (3) deter entry.

Selecting the Pricing Objectives l Maximum market skimming l l Example: Sony’s HDTV: $43, 000 (1990) → $6000 (1993, 28 -inch) → $2000 (2000, 40 -inch) Conditions: (1) initial demand; (2) economics of scale; (3) potential competitors; (4) product image. Product-quality leadership, e. g. Benz. Non-profit organization’s objectives

Determining Demand l l Demand curve and its slopes, e. g. Wall Street Pub in Malaysia. When does the demand curve slope upward? Price sensitivity of demand → price elasticity Conditions for less elastic demand l l There are few or no substitutes or competitors. Buyers do not readily notice the higher price. Buyers are slow to change their buying habits. Buyers think the higher prices are justified.

Figure: Inelastic and Elastic Demand

Determining Demand l l When the profits are maximized, is the price elasticity equal to 1? Tellis’s survey → 1. 76 on average l l l Non-durable good: 1. 5~5 Durable good: 1. 5~3 Sethuraman and Tellis → 平均而言，價格彈 性約為廣告彈性的20倍.

The Dorfman-Steiner Condition l l l The firm is a monopoly. Demand function: Q = Q(P, A), where P is the price and A is the advertising expenditure. Profit function: π = (P – C)Q(P, A) – A, where C is the marginal production cost. εP: the price elasticity of demand; εA: the advertising elasticity of demand. In the equilibrium, A/Sales = εA/εP.

Determining Demand l Influence of the Internet on price sensitivity l l The Internet has increased customers’ price sensitivity, e. g. mysimon. com, 手機王. Mckinsey’s study found that there is less pricecomparison shopping taking place on the Internet than is possible: 89% (book), 84% (toy) and 81% (music).

Determining Demand l l l Asian consumers generally tend to be highly price sensitive and are pragmatic shoppers. One study in south California found that Chinese consumers engaged in more information search on products and prices than U. S. consumers. Price indifference band: 17% (mouthwash), 13% (batteries), 9% (small appliance), and 2% (certificates of deposit).

Determining Demand l Estimating demand curve l l Experts’ judgments Ask buyers – direct or indirect Conduct price experiment, e. g. Amazon. Analyze the sales data: longitudinal or crosssectional

Case: Kodak

Case: Kodak

Case: Lion

Case: Lion

Case: Lion

Case: Lion

Estimating Costs l l Types of costs: fixed costs, variable costs, total costs and average costs. Accumulated production and experience curve (learning curve) Aggressive pricing Target costing l l Pricing that stars with an ideal selling price, then targets costs that will ensure that the price is met. E. g. P&G’s Crest Spin. Brush, Honda’s Today.

Analyzing Competitors’ Costs, Prices, and Offers - Jollibee l l l Jollibee’s outlets sport the clean and well-lighted look of Mc. Donald’s and operate with efficiency of Singapore Airlines. Similar to Disney, it spends 4% of its gross sales on advertising. Jollibee responed by holding price increases at 8. 5% to Mc. Donald’s 10% when the country’s inflation was 9. 7%. Jollibee’s Yumburger Market share: Jollibee (over 50%) > Mc. Donald’s (20%)

Selecting a Pricing Method l Markup pricing l l Target-return pricing l l Add a standard markup to the product’s cost. Reasons: (1) sellers are more certain about costs than about demand; (2) price competition can be minimized; (3) fairer to both buyers and sellers. Make sense? The price yields the firm’s target rate of ROI. Perceived-value pricing, e. g. Du. Pont, Caterpillar, and Benz.

Caterpillar’s Perceived-Value Pricing $90, 000 is the tractor’s price if it is only equivalent to the competitors tractor $7000 is the price premium for Caterpillar’s superior durability $6000 is the price premium for Caterpillar’s superior reliability $5000 is the price premium for Caterpillar’s superior service $2000 is the price premium for Caterpillar’s longer warranty on parts $110000 is the normal price to cover Caterpillar’s superior value $10000 discount $100, 000 final price

Selecting a Pricing Method l Value pricing l l Charge a fairly low price for a high-quality, e. g. Arvind Mills’s Ruf & Tuf. EDLP, e. g. Wal-Mart. Going-rate pricing Auction-type pricing l l l English auctions (ascending bids) Dutch auction (descending bids) Sealed-bid auction

Product Mix Pricing Strategies l l l Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing

Product Line Pricing l l Setting the price steps between various products in a product line. Based on: cost differences between the products in the line, customer evaluations of their different features, cannibalization between the products in the line, and competitors’ prices.

Optional-Product Pricing l l The pricing of optional or accessory products along with a main product. Additive option framing (+OF) vs. subtractive option framing (-OF) l l Consumers tend to choose more options with a higher total option price when they use –OF versus +OF. This effect holds across different option price levels and product category of vary prices. -OF appears to demotivate category purchase when product commitment is low.

Captive-Product Pricing l l Setting a price for products that must be used along with a main product. Producers of the main products often price them low and set high markups on the supplies. Ex. Gillette: razor + razor blades; HP: printer＋ printer cartridges. In the case of services, this strategy is called twopart pricing (fixed fee plus variable usage rate).

By-Product Pricing l l l Setting a price for by-products in order to make the main product’s price more competitive. Zoo-Doo’s case Ford → Ford Charcoal; Wilco → I Am Trying to Break Your Heart; Fried & Hansson → “Getting Real” & “Rework”.

Product-Bundling Pricing l l Combing several products and offering the bundle at a reduced price Pure component pricing vs. Pure bundle pricing vs. Mixed bundle pricing

Product-Bundling Pricing l l l Pure component: profit=$33. Pure bundle: profit=$42. (+27%) Mixed bundle: profit=$44. (+33%) Reservation Price Customer A B A+B 1 9. 0 1. 5 10. 5 2 8. 0 5. 0 13. 0 3 4. 5 8. 5 13. 0 4 2. 5 9. 0 11. 5

Product-Bundling Pricing l l Why can product-bundling pricing increase the profit? When is it appropriate to use the productbundling pricing?

Case: 鑽探設備之生產和維修組 合銷售 定價策略 最適價 銷售量 利潤 指數 機器 維修 聯賣 Pure 1390 Component 870 － 66 77 － 86, 240 100 － 2090 － － 77 82, 390 96 Mixed Bundle 1450 1030 2310 23 22 55 103, 970 121 邊際成本 550 Pure Bundle － 470 1020

Price-Adjustment Strategies l l l Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing International pricing

Discounts and Allowances Pricing l l Cash discount: a price reduction to buyers who pay their bills promptly. Quantity discount: a price reduction to buyers who buy large volumes (one type of product line design). Functional discount (trade discount): offered by the seller to trade-channel members who perform certain functions, such as selling, storing, and record keeping. Seasonal discount: allow the seller to keep production steady during an entire year.

Discounts and Allowances Pricing l l Trade-in allowance: a price reduction given for turning in an old item when buying a new one. Promotional allowance: payments or price reductions to reward dealers for participating in advertising and sales support programs.

Segmented Pricing l l Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types of segmented pricing: customer-segment pricing, product-form pricing, location pricing, time pricing, image pricing, and channel pricing. Airlines, hotels, and restaurants call it yield management or revenue management. Should a company offer lower rates on unsold inventory just before it expires?

Segmented Pricing l l Q: If there exists a dominant segment, does a company still need the discriminatory pricing? Example 1: A theater has only 4 seats. 4 non-students’ valuations 20, 18, 16, 14 4 students’ valuations 10, 8, 6, 4

Segmented Pricing l Example 2 l l P = a – b Q, variable cost = c. An airline company: a=3900, b=10, c=100. 單一艙等 兩種艙等 三種艙等 價格 $2, 000 頭等艙=$2, 633 經濟艙=$1, 367 頭等艙=2, 950 商務艙=2, 000 經濟艙=1, 050 銷售量 190 頭等艙顧客=127 經濟艙顧客=127 共 254 (+34%) 頭等艙顧客=95 商務艙顧客=95 經濟艙顧客=95 共 285 (+50%) 利潤 $361, 000 $482, 600 (+34%) $541, 500 (+50%)

Segmented Pricing

Conditions for Successful Segmented Pricing l l l The market must be segmentable, and the segments must show different degrees of demand. Cost of price discrimination The segmented pricing must be legal. Customers’ feeling Reselling is impossible. Competitors’ underselling in the higher-price segment

Psychological Pricing l l l A pricing approach that consider the psychology of prices and not simply the economics; the price is used to say something about the product. Consumers usually perceive higher-priced products as having higher quality, e. g. Heublein’s Smirnoff, 旺 旺. Reference prices Odd pricing Symbolic and visual qualities, e. g. “ 8” vs. “ 7”.

Promotional Pricing l l Temporarily pricing products below the list price. Loss-leader pricing l l Special-event pricing l l l Tradeoff between store traffic and brand damage E. g. Christmas, Mother’s Day, Father’s Day, Valentine’s Day. Cash rebates, e. g. automobiles, durable goods, and small appliances. Low-interest financing (分期付款)

Promotional Pricing l l Longer payment terms l Consumers often worry less about the cost of a loan and more about whether they can afford the monthly payment. l E. g. 分期零利率（全國電子、信用卡、手機、 百貨公司等）. Warranties and service contract

Adverse Effects of Promotional pricing l l l Competitors’ copy Create “deal-prone” customers Erode a brand’s value Downright addicting to both the company and the customer Lead to industry price war, e. g. Kmart.

Geographical Pricing l l l FOB (free on board)-origin pricing (起運點定 價) Uniform delivered pricing (統一交運定價) Zone pricing (分區定價) Basing-point pricing (基點定價) Freight-absorption pricing (運費自行吸收之定 價)

International Pricing l l In some cases, a company can set a uniform worldwide price, e. g. Boeing. Factors that influence the international pricing l l Cost, e. g. Campbell found that distribution in the United Kingdom cost 30% more than in the United States. Marketing objectives, e. g. penetration vs. skimming. Consumer perceptions and preferences Economic conditions, competitive situations, laws, and regulations, and development of the wholesaling and retailing system

International Pricing – Price Discrimination vs. Price Consistency

International Pricing – Exchange Rate 匯率變動與價格調整實例（1986年 1月至 1987年 1月） 產品 匯率變動 價格變動 精 錶 -24% +13. 5% Sony隨身聽 -24% +20. 0% Canon相機 -24% +14. 6% BMW 528 -25% +7. 8% Benz 190 E -25% +11. 5%

Price Changes l Initiating price changes l l l Initiating price cuts Initiation price increases Buyer reaction to price changes, e. g. Kellogg. Competitor reactions to price changes, e. g. , 美國 香菸市場 (Philip Morris vs. R. J. Reynold), 美國拍 立得相機市場 (Kodak vs. Polaroid), and 紐約郵報 vs. 每日新聞. Responding to price changes