Pricing Making Profitable Decisions Third Edition Kent B

Pricing Making Profitable Decisions Third Edition • Kent B. Monroe • University of Illinois at Urbana Champaign • Champaign, Illinois, U. S. A.

Chapter 1 Effective Pricing Management Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Russian Proverb • There are two fools in any market: – One does not charge enough. – The other charges too much. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

The Role of Prices determine what products and services should be produced and in what amounts. n Prices determine how these products and services should be produced. n Prices determine for whom the products and services should be produced. n Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

The Definition of Price • quantity of money or goods and services Price = received by the seller • quantity of goods and services • paid by the buyer

Pricing Terms Rate Admission Fees User fees Premiums Minimum required balances Rent Interest charges Tuition Tariffs Fares Duties Tolls Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Ways to Change Price Change the quantity of money or goods and services to be paid by the buyer n Change the quantity of goods and services to be provided by the seller n Change the quality of goods and services provided n Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

More Ways to Change Price Change the premiums or discounts to be applied for quantity reasons. n Change the time and place of transfer of ownership. n n Change the place and time of payment. n Change the acceptable form of payment. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Faster Technological Progress Has… • Reduced the gap between invention and innovation • Reduced the average of products • Intensified competition from alternative uses of income Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Proliferation of New Products n “Population explosion” of new products Product lines have widened n. Blurred market segments n Small price differentials may produce relatively large shifts in demand n Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Increased Demand for Services • Increase in demand for services has led to an increase in prices, which have led to public concern and governmental activity • There is also an increase in demand for services built into products Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Increased Global Competition • Increased foreign trade around the world has increased the amount of price competition faced by domestic producers Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

The Changing Legal Environment • Deregulation and privatization of companies have resulted in more complex, more difficult, and more important pricing decisions Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Economic Uncertainty • Slowed or stopped inflation rates in other countries’ economies has led to the need for new approaches to developing pricing strategies Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Five Factors to Consider • • • Demand Costs Competitive factors Corporate profit and market objectives Regulatory constraints Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Demand Implications • • Market versus product elasticity Derived demand for buyer’s output Likelihood of competitive entry Demand consequences of a product line Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Cost Implications • Cost-plus pricing • Maximizing margins • Pricing with scarce resources Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Marketing and Distribution Strategy Implications • The product life cycle • Sales force management Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

How To Become a Proactive Pricer • 1. Understand how pricing works • 2. Understand how customers perceive prices and price changes Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

The Three Levels of Pricing Management • 1. Understanding the economic and competitive environment – Factors that influence supply and demand • 2. Developing product and market pricing strategy – Benefits, costs, and prices • 3. Administering the pricing process – Tactical pricing decisions Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Level One • 1. Traditional Economic • How will current and future supply and demand dynamics affect overall market price levels? – Economic/market environment – Changes in competition, supply, capacity – Shifts in demand – New product developments Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Level Two • 2. Product and Market Strategy • Within each market segment, what is the correct list or target price for each product? – Customers’ perceptions of price and value – Price research – Profitability analysis – Pricing strategy Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Concept Of Benefits • A product or service must promise to: – Perform identified functions, – Solve identified problems, or – Provide specified pleasure. • Thus, a product or service is bought for what it does, not what it is made of. Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Customer’s Perceptions Are Important! • The relative benefits customers perceive the product or service provides; • The relative total costs of acquiring, installing, and using the product or service over its lifetime; • The tradeoff that customers perceive between receiving the perceived benefits compared to the total costs - perceived value Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Model Of Price-value Relationship Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Level Three • 3. Price Structure Management • How to determine the actual price to receive from each transaction? – Organizing for price administration – Transaction management: setting discounts, allowances, rebates… – Establishing pricing tactics – Maintaining feedback and control – Legal and ethical issues Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Tactical Pricing Decisions • Tactical pricing decisions concern day-to-day management of the pricing function, including: – – – Timing of price changes Amount of price changes Direction of price changes Administering price changes Communicating price changes to • sales force • customers Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Topics Covered in Following Sections! • Section 1: Economic and competitive issues • Section 2 -3: Techniques to acquire and analyze relevant information • Section 4: How to develop prices for product life cycles and multiple products/services • Section 5: How to increase pricing flexibility • Section 6: Techniques for pricing in a competitive bidding situation • Section 7: Guidelines for developing and implementing a proactive approach to pricing Mc. Graw-Hill/Irwin © 2003 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.