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Unit15How to Set a Price on a Product作者：南开大学商学院作者：南开大学商学院 李桂华李桂华Business School of Nankai UniversityUnit15How to Set a Price on a1Glossaryoriented:adj.以.为方向目的的,面向的status quo:n.The existing condition or state of affairs.现状现存情况或事态maximization:n.最大值化,极大值化elasticity:n.The condition or property of being elastic;flexibility.弹性有弹性的状态或性质；弹性alternation:n.Successive change from one thing or state to another and back again.交替从一种事物或状态变为另一种事物或状态并再变回来的一系列变化skimming:n.To remove floating matter from(a liquid).撇去把飘浮的物质从（液体）上移走penetration:n.The act or process of piercing or penetrating something,渗透穿透或渗透的行为或过程neoprene:n.A synthetic rubber produced by polymerization of chloroprene and used in weather-resistant products,adhesives,shoe soles,paints,and rocket fuels.氯丁橡胶由氯丁橡胶聚合而生产的合成橡胶，用于抗风化产品、粘胶鞋底、涂料和火箭燃料scuba:n.A portable apparatus containing compressed air and used for breathing under water.自携式水下呼吸器包括压缩空气和在水下用于呼吸的便携式仪器Business School of Nankai UniversityGlossaryoriented:adj.以.为方向2Glossarydeterioration:n.恶化;变坏;退化clot:n.A thick,viscous,or coagulated mass or lump,as of blood.凝块稠的、粘的或凝结的团或块，如血液的凝块breakthrough:n.A major achievement or success that permits further progress,as in technology.重大成就允许进一步发展的主要成就或成功，如在技术上attainable:adj.可达到的;可得到的tacitly:adv.肃静地,沉默地hairstylist:n.发式专家,发式师spectrum:n.A broad sequence or range of related qualities,ideas,or activities:系列，范围，幅度相关质量、概念或活动的广大范围：price-sensitive market:价格不稳定的市场materialize:v.To assume material or effective form:实质化；具体化具备物质的或实际的形式：gradually:adj.Advancing or progressing by regular or continuous degrees:逐级地，逐步地规则地或连续地发展或前进的：prestige:n.Widely recognized prominence,distinction,or importance:有影响的得到广泛承认的卓越，非凡，或重要：prestigious:adj.Having prestige;esteemed.有威望的；受尊敬的Business School of Nankai UniversityGlossarydeterioration:n.恶化;3Key Terms and ConceptsPrice strategy:(价价格格策策略略)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.Price skimming:(撇撇脂脂定定价价)A pricing policy whereby a firm charges a high introductory price,often coupled with heavy promotion.Penetration pricing:(渗渗 透透 定定 价价)A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market.Base price:(基基础础价价格格)The general price level at which the company expects to sell the good or service.Business School of Nankai UniversityKey Terms and ConceptsPrice st4TextPrice is one of the most important marketing variables in the marketing mix.Generally speaking,setting the right price on a product is a four-step process(see exhibit below):Establish pricing goals.Estimate Demand,Costs,and ProfitsChoose a price Strategy to help determine a base price.Fine tune the base price with pricing tactics.Business School of Nankai UniversityTextPrice is one of the most i5TextEstablish pricing goals.EstimateDemand,Costs,and Profits.Choose a price Strategy to help determine a base price.Fine-tune the base with pricing tactics.Results lead to the right price.Exhibit.1.Steps in Setting the Right Price on a ProductBusiness School of Nankai UniversityTextEstablish pricing goals.Es6TextThese four steps are discussed next.The first step in setting the right price is to establish pricing goals.Generally speaking,the pricing objectives fall into three categories:profit oriented,sales oriented,and status quo.These goals are derived from the firms overall objectives.A good understanding of the marketplace and of the consumer can sometimes tell a manager very quickly whether a goal is realistic.For example,if firm As objective of a 20 percent target return on investment(ROI),and its product development and implementation costs are$5 million,the market must be rather large or must support the price required to earn a 20 percent ROI.Assume that company B has a pricing objective that all new products must reach at least 15 percent market share within three years after their introduction.A thorough study of the environment may convince the marketing manager that the competition is too strong and the market share goal cant be met.Business School of Nankai UniversityTextThese four steps are discu7TextAll pricing objectives have trade-offs that managers must weigh.A profit maximization objective may require a bigger initial investment than the firm can commit or wants to commit.Reaching the desired market share often means sacrificing short-term profit,because without careful management,long-term profit goals may not be met.Meeting the competition is the easiest pricing goal to implement.However,can managers really afford to ignore demand and costs,the life cycle stage,and other considerations?When creating pricing objectives,managers must consider these trade-offs in light of the target customer and the environment.Business School of Nankai UniversityTextAll pricing objectives hav8TextEstimate Demand,Costs,and Profits Theoretically,total revenue is a function of price and quantity demanded and that quantity demanded depends on elasticity.After establishing pricing goals,managers should estimate total revenue at a variety of prices.Next,they should determine corresponding costs for each price.They are then ready to estimate how much profit,if any,and how uh market share can be earned at each possible price.These date become the heart of the developing price policy.Managers can study the options in light of revenues,costs,and profits.In turn,this information cab help determine which price can best meet the firms pricing goals.Business School of Nankai UniversityTextEstimate Demand,Costs,an9TextChoose a price StrategyThe basic,long-term pricing framework for a good or service should be a logical extension of the pricing objectives.The marketing managers chosen price strategy defines the initial price and gives direction for price movements over the product life cycle.The price strategy sets a competitive price in a specific market segment,based on a well-defined positioning strategy.Changing a price level form premium to superpremium,may require a change in the product itself,the target customers served,the promotional strategy,or the distribution channels.Thus,changing a price strategy can require dramatic alternations in the marketing mix.A carmaker cannot successfully compete in the superpremium category if the car looks and drives like an economy car.Business School of Nankai UniversityTextChoose a price StrategyBus10TextA companys freedom in pricing a new product and devising a price strategy depends on the market conditions and other elements of the marketing mix.If a firm launches a new item resembling several others already on the markets,its pricing freedom will be restricted.To succeed,the company will probably have to charge a price close to the average market price.In contrast,a firm that introduces a totally new product with no close substitutes will have considerable pricing freedom.The three basic strategies for setting a price on a good or service are price skimming,penetration pricing,and status quo pricing.A discussion of each type follows.Business School of Nankai UniversityTextA companys freedom in pri11TextPrice Skimming Price skimming is sometimes called a“market-plus”approach to pricing,because it denotes a high price relative to the prices of competing products,Radius Corporation produces unique oval-headed toothbrushes made of black neoprene that look like a scuba-diving accessory.Radius uses a skimming policy,pricing the toothbrushes at$9.95,compared to around$2.00 for a regular toothbrush.The term price skimming is derived form the phrase“skimming the cream off the top.”Companies often use this strategy for new products when the product is perceived by the target market as having unique advantages.For example,Caterpillar sets premium prices on its construction equipment to support and capture its high perceived value.Genzyme Corporation introduced Ceredase as the first effective treatment for Gaucher;s disease.The pill allows patients to avoid years of painful physical deterioration and lead normal lives,A years supply for one patient can exceed$300,000.Business School of Nankai UniversityTextPrice Skimming Price skimm12TextAs a product progresses through its life cycle,the firm may lower its price to successfully reach larger market segments.Economists have described this type of pricing as“sliding down the demand curve.”Not all companies slide down the curve.Genentechs TPA,a drug that clears blood clots,was still priced at$2,200 a dose four years after its introduction,despite competition from a much lower priced competitor.Price skimming works best when the market is willing to buy the product even though it carries an above-average price.If,for example,some purchasing agents feel that Caterpillar equipment is far superior to competitors products,then caterpillar can charge premium prices successfully.Firms can also effectively use price skimming when a product is well protected legally,when it represents a technological breakthrough,or when it has in some other way blocked entry to competitors.Managers may follow a skimming strategy when production cannot be expanded rapidly because of technological difficulties,shortages,or constraints imposed by the skill and time required to produce a product.As long as demand is greater than supply,skimming is an attainable strategy.Business School of Nankai UniversityTextAs a product progresses th13TextA successful skimming strategy enables management to recover its product development or educational costs quickly.(Often,consumers must be taught the advantages of a radically new item,such as high-definition TV.)Even if the market perceives an introductory price as too high,managers can easily correct the problem by lowering the price.Firms often feel it is better to test the market at a high price and then lower the price if sales are too slow.They are tacitly saying,If there are any premium-price buyers in the market,lets reach them first and maximize our revenue per unit.Successful skimming strategies are not limited to products.Well-known athletes,entertainers,lawyers,and hairstylists are experts at price skimming.Naturally,a skimming strategy will encourage competitors to enter the market.Business School of Nankai UniversityTextA successful skimming stra14TextPenetration Pricing Penetration pricing is at the end of the spectrum,opposite skimming.Penetration pricing means charging a relatively low price for a product as a way to reach the mass market.The low price is designed to capture a large share of a substantial market,resulting in lower production costs.If a marketing manager has made obtaining a large market share the firms pricing objective,penetration pricing is a logical choice.Penetration pricing does mean lower profit per unit,however.Therefore,to reach the break-even point,it requires higher volume sales than would a skimming policy.If reaching a high volume of sales takes a long time,then the recovery of product development costs will also be slow.As you might expect,penetration pricing tends to discourage competition.Business School of Nankai UniversityTextPenetration Pricing Penetr15TextA penetration strategy tends to be effective in a price-sensitive market.Price should decline more rapidly when demand is elastic,because the market can be expanded through a lower price.Also,price sensitivity and greater competitive pressure should lead relatively slow decline in the price later.Southwest Airlines success is based on penetration pricing.By flying only the Boeing 737,it realizes efficiencies in stocking parts and training pilots and mechanics.It also saves by avoiding a costly computer reservation system,such as Apollo or SABRE,and by not serving meals.Southwest has a cost per seat mile of 7.0the lowest in the industry.Costs per seat mile for other major carriers are USAir,10.8;United,9.6;Delta,9.4;Northwest,9.1;and American,8.9.Business School of Nankai UniversityTextA penetration strategy ten16TextIf a firm has a fixed cost structure and each sale provides a large contribution to those fixed costs,penetration pricing can boost sales and provide large increases to profitsbut only if the market size grows or if competitors choose not to respond.Low prices can draw additional buyers to enter the market.The increased sales can justify production expansion or the adoption of new technologies,both of which can reduce costs.And,if firms have excess capacity,even low-priced business can provide incremental dollars toward fixed costs.Penetration pricing can also be effective if a large experience curve will cause costs per unit to drop significantly.The experience curve proposes that per-unit costs will go down as a firms production experience increases.On average,for each doubling of production,a firm can expect per-unit costs to decline by roughly 20 percent.Cost declines can be significant in the early stages of production.Manufacturers who fail to take advantage of these effects will find themselves at a competitive cost disadvantage relative to others who are further along the curve.Business School of Nankai UniversityTextIf a firm has a fixed cost17TextThe big advantage of penetration pricing is that it typically discourages or blocks competition from entering a market.The disadvantage is that penetration means gearing up mass production to sell a large volume at a low price.What if the volume fails to materialize?The company is faced with huge losses from building or converting a factory to the failed product.Skimming,in contrast,lets a firm stick its toe in the water and see if the limited demand exists at the high price.If not,the firm can simply lower the price.Skimming lets a company start out with a small production facility and expand it gradually as price falls and demand increases.Business School of Nankai UniversityTextThe big advantage of penet18TextAnother problem with penetration pricing is when a prestige brand moves to penetration pricing to gain market share and fails.When Omega watchesonce a brand more prestigious than Rolexwas trying to improve market share,it adopted a penetration pricing strategy that succeeded in destroying the watchs brand image by flooding the market with lower-priced products.Omega never gained sufficient share on the lower price/lower image competitors to justify destroying its brand image and high-priced position with upscale buyers.Similar out-comes were experienced by the Candillac Cimarron and Lacoste clothing.Sometimes marketers use unusual pricing schemes to reach their pricing goals.Managers must understand both the legal and marketing consequences of price strategies,they should set a base price,the general price level at which the company expects to sell the good or service.The general price level is correlated with the pricing policy:above the market(price skimming),at the market(status quo pricing),or below the market(penetration pricing).The final step,then,is to fine-tune the base price.Business School of Nankai UniversityTextAnother problem with penet19TextSometimes marketers use unusual pricing schemes to reach their pricing goals.Managers must understand both the legal and marketing consequences of price strategies,they should set a base price,the general price level at which the company expects to sell the good or service.The general price level is correlated with the pricing policy:above the market(price skimming),at the market(status quo pricing),or below the market(penetration pricing).The final step,then,is to fine-tune the base price.Business School of Nankai UniversityTextSometimes marketers use un20TextFine-tuning techniques are short-run approaches that do not change the general price level.They do,however,result in changes within a general price level.These pricing tactics allow the firm to adjust for competition in certain markets,meet ever-changing government regulations,take advantage of unique demand situations,and meet promotional and positioning goals.Fune-tuning pricing tactics include various sort of discounts,geographic pricing,and special pricing tactics.Business School of Nankai UniversityTextFine-tuning techniques are21Business School of Nankai UniversityTanhk you！Business School of 22
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