Planning and Marketing
Helpm31990
9781284094428_SLID_CH09copy.pptxChapter 9
Price
Chapter 9 Learning Objectives
Appreciate the many factors that affect pricing decisions.
Recognize the array of alternative pricing strategies available to health care marketers.
Calculate break-even pricing.
Learn the positioning value of price.
Introduction
Price
The level of monetary reimbursement a firm demands for its goods or services
Represents the economic value that the buyer provides to the producer in exchange for a product or service
Price should be established that corresponds to the level of value that the consumer perceives in the service being offered.
Can affect consumer demand and competition response
Trends in Pricing
Transparency (regulatory, organizational)
Consumer response (negotiation, shopping)
Introduction
Price in health care—alternative approaches
Cost-based reimbursement
Fee-for-service
Diagnostic related groups (DRGs)
Capitation
Pay for performance (P4P)
Learning Objective 1
Establishing the price
Multistep process
Identify the constraints to the pricing policy.
Determine objectives.
Estimate demand and revenue.
Determine the cost, volume, and profit relationships.
Select a pricing strategy.
Consider the positioning element.
6
Discuss each step briefly with the students—see pp. 242–260. Elaborate. This would be a good time for think-pair-share, breaking the students into groups to discuss each step in the process.
Learning Objective 1
Identifying constraints
Demand—basic economics
Newness in life cycle
Volume objectives or profit objectives?
Single vs. multiple-product pricing
How many products in line?
Complementary?
7
Discuss volume vs. profit in introductory phase of the PLC.
Learning Objective 1
Identifying constraints (cont.)
Production cost
Channel length (distribution determines price)
Market structure
Monopoly, oligopoly, monopolistic competition, pure competition
8
Discuss. Have students recap market structure from Chapter 3 and discuss pricing in each.
EXHIBIT 9-2 Industry Structure and the Impact on Price
Learning Objective 1
Pricing objectives
Profit
Sales
Market share
Image
Stabilization
10
Have students discuss each of the objectives.
Learning Objective 1
Estimating demand and revenue
Prepare a demand schedule—summary of amounts of a product that are desired at each price level
Helps understand consumers’ price sensitivity at various levels
Price elasticity—change in demand relative to price changes
11
Have students discuss price elasticity.
Learning Objective 1
Cost and volume relationships
Fixed costs—do not change based on volume
Variable costs—vary with amount of service delivered
Indirect costs—costs that cannot be identified with a particular customer or unit of the organization
Total cost—total expense firm bears in delivering and marketing its service
Combination of fixed and variable costs and indirect costs
12
Have students give examples of fixed, variable, and total costs.
Learning Objective 2
Simplest approaches to price setting
Cost-plus pricing
Selling price represents total cost of service plus some additional amount for profit.
Does not consider the differences between fixed and variable costs
13
Learning Objective 2
Cost/price relationships
High fixed cost / Total cost = Volume sensitive
High variable cost / Total cost = Margin sensitive
Learning Objective 2
Cost and volume relationships (cont.)
Marginal cost pricing
Price per additional procedure must equal or exceed the cost of an additional procedure.
Useful in attracting large-volume purchasers
Markup pricing
P = BR; Price = Service cost
(100 – Markup %) / 100
15
See example on p. 244.
Learning Objective 2
Cost and volume relationships (cont.)
Target pricing
Sets price to provide a targeted rate of ROI for a standard level of service delivery
Common in capital-intensive firms
Limitation—price is set with no consideration of market demand.
Demand-minus pricing
What the market is willing to pay, and mark backward
Very marketing-based vs. CFO-based
16
See example on p. 245.
Learning Objective 2
Pricing strategies
Price lining—product lines
Gives impression of quality differences between price lines
Odd pricing—just below whole dollar amounts
Item budget theory
One-price vs. flexible pricing
One-price policy, same price to all customers under same conditions
Flexible pricing policy—negotiation, consumer buying power
17
Discuss reasons for odd pricing.
Learning Objective 2
Pricing strategies (cont.)
Prestige pricing
Leader pricing
Bundled pricing
Reference pricing models (CalPeERS)
Going rate pricing
18
Discuss each and health care implications, pp. 257–260.
Learning Objective 2
Pricing strategies
Discounts (cont.)
Volume
Functional
Seasonal
Allowances
Centers of excellence contracting
Learning Objective 3
Break-even analysis
Company determines break-even point needed to cover total costs.
Break-even point = Total fixed cost Price – Variable cost
Point of volume where total revenue equals total cost
20
Learning Objective 4
Positioning value of price
Consider competitive environment and where product or service is priced (high or low).
Consider how much focus will be placed on price in promotion (active or passive).
21
Refer to p. 250, Figure 8-4.
Summary
The price an organization establishes has an economic, perceptual, and positioning value to the firm.
Multiple factors affect the pricing decision, such as demand, life cycle, product line, and channel structure.
Organizations can pursue several different pricing objectives—profit, sales, market share, image, and stabilization.
Summary (cont.)
An important consideration in pricing is determining the amount of sales needed in order to break even. This figure is based on the total fixed cost, variable cost, and price charged.
In addition to break-even pricing, firms can follow a cost-plus pricing, marginal cost pricing, markup pricing, target pricing, or demand-minus price-setting policy.
In establishing price lines, it is essential to have noticeable differences in perceived quality for the distinct lines.
Summary (cont.)
Odd pricing is based on item budget theory, which assumes a consumer predetermines the amount to be spent on an item.
Prestige pricing is counterintuitive to the economic logic of a rational buyer. Too high a price, however, will lead to a decline in demand.
Bundling, or selling several medical services together at one set price, is becoming a common strategy in health care, particularly as buyers turn to reference pricing.
Summary (cont.)
There are several ways an organization can reduce the price for a product. Discounts can be based on volume, function, seasonality, an allowance, or centers of excellence contracting.
Price has an important positioning value depending on how active or passive a role it plays in the promotional strategy, and on the level of the price relative to the competition.
