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L5: Discounts and Target Pricing / L6: Pricing Strategy (Price…
L5: Discounts and Target Pricing / L6: Pricing Strategy
Target Costing
Instead of cost plus, price minus
What is product allowed to cost from a consumer's view?
Strong market orientation, foregrounds consumer perceptions
Approach
WTP (Willingness to pay) / target price
Target cost allocation by product parts, product functions, processes
Plan and undertake measures to reach the cost target
Narrow cost control
Arguments
Strong market orientation
Effective cost management from early stage
Ensure profit through integration of market and cost perspective
Promotes innovation for meeting cost targets
But: Does consumer know what he is willing to pay?
Target Valuing
Assessment of the biggest margins between willingness to pay and price targeting
Different elements of performance are existent, need to identify the most
Pricing Strategy
Initiating a Price Cut
Exploiting a significant cost advantage vs competition in a market that is price elastic
If there is long-term impact in markets with habit formation
Respond to new entry and new industry supply
Building substantial volume in segment with lower WTP
Adjust pricing to long-run profit max level
Short-run vs. Long-run
Short-run: maximising short-run profits, study elasticities, costs and iso-profit
Price Discrimination (Price Customization)
Preconditions
Company needs market power
Differences in: consumer responsiveness to price, demand, costs structure
Consumer separation ability is needed
Consumers should not be able to engage in arbitrage
Defintion: 'Charging customers different prices for the same product or service. Ranges from chargin each customer the maximum he is willing to pay to placing customers in groups based on certain attributes.
Degree Price discrimination
Company charges the maximum possible price for each unit consumed.
Second Degree:
Customers self-select different price points as seller offer same set of products and pricing options to all customers (passive programs)
-Price customisation achieved through choices customer themselves make
E.g. Quantity discounts (bulk), bundling, sales promotion etc.
Third degree:
Different price to different consumer groups (active)
Prices differ based on observable buyer characteristics that indicate WTP and/or price sensitivity
e.g. moviegoers: seniors, adults, children
Implementation
Product based
Number of different features e.g. different iphones
Time-based
price variation via time e.g. monday movie discount
Place-based
Seat location, geographic location e.g. opera/concert, train/plain, geographic location
Customer-based
E.g. different flight ticket prices based on cookie history, offering different prices with regards to seniority (insurance)
Take Away: 2 to 3 Segments are usually enough
Contra-Arguments
Added costs of price administration: more data and records
Avoid leakage/arbitrage across customers/segments
Avoid delegating pricing authority to sales force
Don't play with consumer's trust
Avoid risk of competitive reaction and downward price wars
Avoid external / internal confusion
Psychological Pricing
Price as quality indicator (Prestige or quality image)
Reference Pricing: Introduce products next at moderate level to position it next to more expensive ones
Bundle: Sell bundles of products at single price
EDLP: Everyday low prices
Odd-even pricing: Ending the price at a certain number to influence buyer's perception e.g. 0.99£ (Price treshold)