Pricing strategies and models

Pricing

Detail each step of the pricing process along with any external pricing influences you feel are present.

Organizing the external pricing influences into a framework needs to begin with an analysis of the key factors that influence pricing decisions, the behavior of pricing over time for product lines, the elasticity of pricing including the definition of substitute products, and most critically, an analysis of fixed and variable costs for the proposed products. In the case of defining a price point for a decaffeinated beverage from Pepsi targeted at college-educated males and females age 25-40 in the Detroit metro area, who are professionally employed, and describe their lifestyles as busy or hectic, the following pricing process is used.

First, as the market is only 250,000 units (it is assumed this is yearly demand for the beverage) and the fixed costs are relatively high ($900K or 60% of the $1.5M total costs for the product), quickly translates into setting a pricing goal of a premium-oriented beverage. As a typical 20 oz container of Caffeine-Free Diet Coke is just $1.50, it is clear that for the proposed drink to be successful, it will need to have a significantly different and higher-end position in the market relative to Pepsi's foremost competitor's offering in the mainstream decaffeinated market. As a result of these preliminary figures, it's clear that the demographics and specifically the spending levels of the target market for the proposed beverage is OK with spending at least $3.85 per 20 oz. container, as this is the price that will bring break-even financial returns on a volume of 250,000 units given the fixed and variable costs associated with the proposed beverage. As college-educated professionals in this age group are more pressed for time (as self-described in the problem example) and therefore value convenience, the creation of a premium beverage that would give them the advantage of both being able to enjoy a premium drink while not having to take the time to wait in line, go to a specialty shop, or fight traffic to get it, all would contribute to the successful launch of a premium beverage.

Combining these demographic factors and the assumption that busy and hectic professionals want convenience in a premium beverage, the concept of a bottled premium decaffeinated coffee drink, which can sustain the pricing required to make the proposed beverage successful, begins to take shape as a concept. Besides, Pepsi and Starbucks have discussed creating a partnership for years, and the introduction of bottled decaf lattes and frappacinos in a variety of flavors could command the price points required to make this a successful product. Additional factors that favor this product concept are the relatively early stages in the produce lifecycle this type of bottled drink is in today, and the potential for growing an entire bottled family of Starbucks beverage. In short, the elasticity of demand for this proposed bottling of decaf Starbuck's drinks could be a significant revenue producer over time for Pepsi.