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74-231 (12)
Chapter 17

74-231 Chapter 17 notes.pdf

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University of Windsor
Alex Wellington

Chapter 17 april 8 2013-02-11 8:07 AM 1) LO1: Describe the procedure for setting the right price • Pricing always changes • Some places give pricing guarantees • See figure: how to set a price on a product or service o Establish pricing goals: § Profit maximization à profit oriented § Sales maximization à sales oriented § Status quo o Estimate demand, costs and profits § Demand depends on price § We always assume costs are gonna go up, but WalMart operates on a different approach (i.e. falling prices) § With these costs, what kind of protiftabliity do we need o Choose a price strategy § Pretty critical o Fine tune with pricing tactics: § As consumers, we see this the most often § People respond to prices at different times of the year with respect to price sensitivity and interest in products o = Results lead to the right price • 1) Establish pricing goals o Profit oriented § In the long run, you probably have to be profit oriented o Sales oriented o Status quo § Sometimes youre stuck in the status quo due to competition § For example, gas is a commodity • 2) Choose a price strategy o Price strategy: a basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle o Labatt’s blue has been around for a long time, but there are also other brands who don’t have longetivity o 3 basic strategies: § Price skimming: a firm charges a high introductory price, often coupled with heavy promotion ú Make the price higher than slowly decrease it ú Getting more per unit, not in volume ú High profit margin § Penetration pricing: a firm charges a relatively low prices for a product initially as a way to reach the mass market ú Make the price very low and get the product into as many people’s hands as possible very fast and profit from a volume sales ú Smaller percentage, larger units sold ú Low profit margin § Status quo pricing: charging a price identical to or very close to the competition’s price ú Coming into a new marketplace, uncertain ú Being in the middle is a dangerous position because you may be leaving products on the table that you could’ve skimmed or penetrated o Price skimming: situations when skimming is successful § Inelastic demand § Unique advantages/superior § Legal protection of product § Technological breakthrough § Blocked entry to competitors – this one is key because if you can’t keep competitors away from accessing your technology or product, it will be very difficult for you to monopolize. Without blocked entry, you’re vulnerable. This is where penetration pricing comes in. o Penetration pricing: § An example is RCA VHS which was cheap. Its initial competitors was Sony Beta technology which used price skimming and thus lost. § Advantages: ú Discourages or blocks competition from market entry ú Boosts sales and provides large profit increases ú Can justify production expansion § Disadvantages: ú Requires gear up for mass production ú Selling large volumes at low prices ú Strategy to gain market share may fail o Status Quo pricing: § Advantages: ú Simplicity ú Safest route to long term survival for small firms § Disadvantages: ú Strategy may ignore demand and/or cost § Not good for
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