By Mark Liangco | BUS 343
Chapter 9 (Week 11) – Pricing Strategies
Ford, GM and Chrysler and employee pricing. They got massive sales but their competitors also had a
spike in sales. Why?
- It got people shopping. It convinced people those who were uncertain about buying a car to buy one.
However, they were looking around and not just go to those who were pricing it competitively. Consumers
thought that since ford etc gave massive discounts, now is the time to buy a car.
Fact is, dependability wise, the US cars are far better than the European counterpart. Why are they losing money
then? Ultimately, only customer perception matters.
Perceived Product quality = Product Quality, History, Price, Promotion, Place
Price can be changed quickly and easily, but the effects can be long-lasting and far- reaching
• Price discounts = “buying market share”
• Many customers simply bought earlier (those who were supposed to buy in the future (in the higher
price) just bought it earlier at the discounter price.
• “Firesale message” erodes Brand Equity further, especially when coupled with advertising cuts
• Some non-U.S. brands with good brand equity actually benefited during the promotion (Why?)
• Pricing strategy taken out of the hands of dealers, who are closest to customers. Plus commissions lower,
resulting in unhappy dealers
- The value that customers give up, or exchange, to obtain a desired product or service.
Numbers are more convincing than words! Numbers = facts.
Analysis for pricing
Cost Structure, fixed and variable costs, Break even analysis.
- Must be done in specified time because fixed cost can change over time
Break Even analysis
Simple break even analysis done
Demand Analysis, customer value and sales as F (Price)
WTP - willingness to pay
Assuming $30 cost and $40 consumer WTP
So you want to price the product somewhere between consumer's WTP and company cost. But you have many
customers, so where should we price? (Assuming WTP of 2 others is 60 and 80) By Mark Liangco | BUS 343
Price. Sales. Profit.
81. 0. 0
79. 1. 49
59. 2. 58. (cheaper is better? Not exactly!)
39. 3. 27
You gain more customers by lowering the price, but the profit earned by each customer will get lower.
Customer Value: Determines the maximum WTP
- Can you manipulate that value? For some products and some customers, yes! For example…
1) Price-quality relation:
- Value to customer may increase as price increases
2) Market Mix Tactics:
- Set price high, Support perception of superior quality
3) Prestige Product:
- At some point price gets too low, and the “prestige” value is lost
4) Experience Product
- e.g. Golf Course Fees at a Destination Resort
Influences on customer value and WTP
Reference Price – Consumers may have some idea of what is a reasonable price like..
- Past Price
- Prices paid by other consumers
- Close substitute prices
- Cost Structure (If customers know it)
- Context or purchase environment
o I am willing to pay high for popcorn in movie theaters. But I won't pay to something even close to
that outside of the movie theatre
Customer value can be strongly affected by comparing the paid price to the reference price
- for salespeople empowered to set prices,
- and for price promotions, which can affect the reference price
Competitor Analysis, Behavior and Strategies
- The more similar competitor’s products, the more important it is to think strategically and…
o Monitor their prices.
o anticipate their responses to your price changes
GM should have anticipated that when they lowered their prices that their competitors
will lower their prices as well.
- Competitor analysis involves keeping a history of competitor behavior
o Are they aggressive in pricing?
o Or do they play nice?
o Are they price leaders or followers?
Price is the easiest and quickest element of the market mix to change
- Compared to Product, Place, and Promotion, Price is easy, and tempting to do it.
- Easy to do BUT there are some very interesting consequences... By Mark Liangco | BUS 343
Pricing strategies to achieve Profit Objectives
1) Cost based pricing strategies
- Typically associated with a target profit or return objectives.
- Used because it is easy to calculate and are relatively sage in that they ensure that the price will cover the
costs the company insures in producing and marketing the product.