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One major purpose is to dispose of excess inventories orused goods.
Auction type pricing
companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business.
survival
Many companies try to set a price that will maximize current
profits.They estimate the demand and costs associated with alternative prices and choose the
price that produces maximum current profit, cash flow, or rate of return on investment.
Maximum current profit
Companies unveiling a new technology favor setting high prices to maximize market skimming, prices start high and slowly drop over time.
Market skimming
some companies believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive.
Maximum Market share/ Market penetration pricing
A company might aim to be the product-quality leader in the
market. Product or services characterized by high levels of perceived quality, taste, and status
are priced just high enough not to be out of consumers' reach.
Product -quality leadership
Nonprofit and public organizations may have other pricing objectives such as partial cost recovery knowing that it must rely on private gifts and public grants to cover its remaining costs.
Partial Cost Recovery
2. Determine demand
• Understand factors that affect price sensitivity
• Estimate demand curves:
✓Statistical Analysis
✓Price Experiments
✓Surveys
•Understand price elasticity of demand:
✓Elasticity
✓Inelasticity
costs that don't vary with production or sales revenue
Fixed cost/ overhead
sum of fixed and variable costs at a given level of production
total cost
vary with the level of production.
variable cost
cost per unit at a given level of
production = total cost/quantity of production
Average cost
Firms must analyze the competition with respect to:
Cost
price
possible price reaction
influenced by quality of offering relative to competition
pricing decision
begins with the three "C's"
price setting
3 c's
Cost
competitors
customer
Companies base their price on the customer's perceived value
Perceived Value pricing
is to deliver more value than the competitor and to demonstrate this to perspective buyers
Perceived Value pricing
Win loyal customer by charging a fairly low price for a high-quality offering
Value Pricing
the firm bases its price largely on competitors' prices. It is quite popular where costs are difficult to measure or competitive response is uncertain.
Going rate pricing
The final price must take into account the brand's quality and advertising relative to the competition.
Impact of other Market Activities
Price must be consistent with company pricing policies in order to ensure that sakes people quote prices that are reasonable to customers and profitable to the company
Company Pricing Policies
In case buyers resist accepting a seller's proposal because of high perceived level of risk, the seller has the option of offering to absorb part or all the risk if it does not deliver the full promised value.
Gain and risk sharing pricing
Impact of price on other parties
distributors
supplier
dealers/ retailer
sales force
competitors
can respond to aggressive price cutting by smaller competitors
in several ways
market leader
Initiating price increases
Cost inflation
over demand