Pricing Considerations and Strategies

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Pricing Considerations and Strategies
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What is a Price?

• Price g the amount of money charged for a product
  or service (narrowest sense)
• Price g the sum of all the values that consumers
  exchange for the benefits of having or using the
  product or service
• The major determinant of buyer choice
• The only element in the marketing mix that
  produces revenue
• One of the most flexible elements of the mktg mix

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Pricing Decisions and Strategies

• Pricing price competition g important problem
  facing many mktg managers
• Common mistakes in pricing
• Companies are too quick to reduce prices in order
  to sell
• Pricing is too cost-oriented
• Price is not revised often enough to reflect
  market changes
• Price is set without taking into account other
  elements of the marketing mix
• Price is not varied enough for different
  products, market segments and purchase occasions

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Factors Affecting Price Decisions
External Factors Nature of the market and
demand Competition Other environmental factors
(economy, resellers, government)
Internal Factors Marketing Objectives Marketing
Mix Strategy Costs Organizational
considerations
Pricing Decisions
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Internal Factors Affecting Pricing Decisions
Marketing Objectives
Survival Low Prices to Cover Variable Costs
and Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the
Price that Produces the Maximum Current Profit,
Etc.
Marketing Objectives
Market Share Leadership Low as Possible Prices to
Become the Market Share Leader.
Product Quality Leadership High Prices to Cover
Higher Performance Quality and R D.
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Internal Factors Affecting Pricing Decisions
Marketing Objectives (cont.)

• Other specific objectives include
• Set prices low to prevent competition from
  entering the market,
• Set prices at competitors level to stabilize the
  market
• Set prices to keep the loyalty and the support of
  resellers
• Prices might be reduced temporarily to create
  excitement or draw more customers. Set prices low
  to prevent competition from entering the market
• One product may be priced to help the sales of
  other products in the companys line

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Internal Factors Affecting Pricing Decisions
Marketing Mix Strategy

• Price decisions must be coordinated with product
  design, distribution, and promotion decisions to
  form a consistent mktg program
• Some companies make their pricing decisions first
  and base other mktg mix decisions on
• Some others de-emphasize price and use other mktg
  mix tools to create nonprice positions

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Internal Factors Affecting Pricing Decisions
Costs

• The company wants to charge a price that covers
  all its costs and provides a fair rate of return
  for its effort and risk
• Many companies work to become low-cost producers
  in their industries
• Management needs to know how its costs vary with
  levels of production

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Types of Costs
Fixed Costs Costs that dont vary with sales or
production levels. (Executive Salaries, Rent )
Variable Costs Costs that do vary directly with
the level of production. (Raw materials)

• Total Costs
• Sum of the Fixed and Variable Costs for a Given
• Level of Production

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Internal Factors Affecting Pricing Decisions
Costs (cont.)

• As the firm gains experience in production
• The experience curve (or the learning curve)
  indicates that average cost drops with
  accumulated production experience.
• Strategy company should price products low
  sales increases costs continue to decrease and
  then lower prices further.
• Risks are present with this strategy.

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Internal Factors Affecting Pricing Decisions
Organizational Considerations

• In small companies g prices are often set by top
  management (not by mktg or salespeople)
• In large companies g pricing is handled by
  division or product-line managers
• In industries where pricing is a key factor g a
  pricing department set prices or assist others in
  determining appropriate prices
• Others exerting an influence on pricing g sales
  managers, production managers, finance managers,
  accountants

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External Factors Affecting Pricing Decisions
Market and Demand
Competitors Costs, Prices, and Offers
Other External Factors Economic
Conditions Reseller Needs Government
Actions Social Concerns
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External Factors Affecting Pricing Decisions
Market and Demand

• Demand sets a ceiling on the price that the
  company can charge for its product
• Pricing freedom varies with different types of
  markets
• Pricing is affected also by consumer perceptions
  of price and value
• Marketers need to know how responsive or elastic
  the demand would be to a change in price (g Price
  Elasticity)
• Price Elasticity of Demand Change in Quantity
  Demanded
• Change in
  Price

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Price Elasticity of Demand
A. Inelastic Demand - Demand Hardly Changes
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
B. Elastic Demand - Demand Changes Greatly
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
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External Factors Affecting Pricing Decisions
Competitors Costs, Prices and Offers

• The company needs to benchmark its costs against
  its competitors costs (to learn whether it is
  operating at a cost advantage or disadvantage)
• The company also needs to learn the price and
  quality of its competitors offers and their
  possible reactions to its pricing moves

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General Pricing Approaches

• Cost-based pricing
• Cost-plus pricing g approach that adds a standard
  markup to the cost of the product. This is the
  simplest pricing method
• Break-even pricing (target profit pricing) g
  setting price to break-even on the cost of making
  and marketing products or to make the target
  (desired) profit

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General Pricing Approaches (cont.)

• Value-based pricing g setting prices based on
  buyers perceptions of value rather than on the
  sellers cost.
• Price is considered along with other mktg mix
  variables, before the mktg program is set
• The firm use the nonprice variables to build up
  perceived value in the buyers minds g price is
  set to capture this perceived value
• Companies using this approach g must find out
  what value the buyer assigns to different
  competitive offers
• More and more marketers have adopted value
  pricing strategies g offering just the right
  combination of quality and good service at a fair
  price

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General Pricing Approaches (cont.)

• Competition-based pricing
• Going-rate pricing g prices are set based largely
  on following competitors prices rather than on
  company costs or demand.
• Firms feel that the going rate represents the
  collective wisdom of the industry
• They also feel that holding to the going-rate
  price will prevent harmful price wars.
• Sealed-bid pricing g the firm sets prices based
  on how the firm thinks competitors will price
  rather than on its own costs or demand estimates

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The Three Cs Model for Price Setting
Costs
Competitors prices and prices of substitutes
Customers assessment of unique product features
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Pricing Strategies

• A company sets no single price, but g a pricing
  structure that covers different items in its line
• Pricing structure changes over time g as products
  move through their life cycles
• The company adjusts prices g in order to reflect
  changes in costs and demand to account for
  changes in buyers and situations
• The company initiates price changes and respond
  to them g as the competitive environment changes

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New Product Pricing Strategies

• Market Skimming g setting a high price for a new
  product to skim maximum revenue from the
  segments willing to pay the high price.

• Conditions
• A sufficient number of buyers must have a high
  current demand
• The products quality and image must support its
  high price (high price should communicate a
  superior product)
• The unit costs of producing a small volume cannot
  be so high that they cancel the advantage of
  charging more
• The high initial price should not attract more
  competitors to the market

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New Product Pricing Strategies (cont.)

• Market Penetration g setting a low price for a
  new product in order to attract a large number of
  buyers and a large market share

• Conditions
• The market must be highly price sensitive and low
  price produces more market growth
• Production and distribution costs fall as sales
  volume increases (result of accumulated
  production experience)
• The low price discourages actual and potential
  competition

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Product Mix Pricing

• Product Line Pricing
• Optional-Product Pricing
• Captive-Product Pricing
• By-Product Pricing
• Product Bundle Pricing

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Product Mix Pricing

• 1.) Product Line Pricing g setting the price
  steps between various products in a product line
• based on cost differences between the products,
  customer evaluations of different features, and
  competitors prices.

• Sellers use a well-established price points for
  the products in their line
• The sellers major task is to establish perceived
  quality differences that support the price
  differences

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Product Mix Pricing

• 2.) Optional Product Pricing g pricing optional
  or accessory products sold with the main product.

3.) Captive Product Pricing g setting a price for
products that must be used along with a main
product.

• Two-Part Pricing g in the case of services
• the price of the service is broken into a fixed
  fee plus a variable usage rate)

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Product Mix Pricing (cont.)

• 4.) By-Product Pricing g setting a price for
  byproducts in order to make the main products
  price more competitive

• 5.) Product Bundle Pricing g combining several
  products and offering the bundle at a reduced
  price

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Price Adjustment Strategies

• Discount and Allowance Pricing reducing prices
  to reward customer responses such as paying early
  or promoting the product
• Segmented Pricing adjusting prices to allow for
  differences in customers, products, or locations
• Psychological Pricing adjusting prices for
  psychological effect
• Promotional Pricing temporarily reducing prices
  to increase short-run sales
• Geographical Pricing adjusting prices to
  account for the geographic location of customers
• International Pricing adjusting prices for
  international markets

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Price Adjustment Strategies (cont.)
Discount and Allowance Pricing

• A cash discount g price reduction to buyers who
  pay their bills without delay
• A quantity discount g price reduction to buyers
  who buy in large volumes
• A functional discount g price reduction offered
  by the seller to the trade channel members if
  they perform certain functions such as selling,
  storing and record-keeping
• A seasonal discount g price reduction to buyers
  who buy merchandise or services out of season
• Allowances g other types of reductions from the
  list price (trade-in-allowances, promotional
  allowances)

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Price Adjustment Strategies (cont.)

• Segmented (Discriminatory) Pricing g when a
  company sells a product or service at two or more
  prices that do not reflect a proportional
  difference in costs

• Customer-segment pricing g different customer
  groups are charged different prices for the same
  product
• Product-form pricing g different versions of the
  product are priced differently but not accoding
  to differences in their costs
• Location pricing g the same product is priced
  differently at different locations, even though
  the cost of offering at each location is the same
• Time pricing g prices are varied by season, day
  or hour

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Price Adjustment Strategies (cont.)

• Conditions for effective segmented pricing
• The market must be segmentable, the segments must
  show different intensities of demand
• Members of the lower-price segment must not be
  able to resell the product to the higher-price
  segment
• Competitors must not be able to undersell the
  firm in the higher-price segment
• The costs of segmenting the market must not
  exceed the extra revenue derived from the price
  discrimination
• Segmented prices must reflect the real
  differences in customers perceived value

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Price Adjustment Strategies (cont.)

• Psychological Pricing g psychology of prices are
  considered in addition to their economics

• Especially effective with ego-sensitive products
• (such as perfume and expensive cars)
• Relationship between price and quality
  perceptions
• when alternative information about true quality
  is available g price becomes a less significant
  indicator of quality
• when this information is not available g price
  acts as a quality signal
• Reference prices g prices that buyers carry in
  their minds and refer to when looking at a given
  product
• Setting prices ending with odd numbers
  (e.g.19.995 TL)

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Price Adjustment Strategies (cont.)

• Promotional Pricing g temporarily pricing
  products below the list price and sometimes even
  below the cost, to increase short-term sales

• Several forms of promotional pricing
• Loss leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer warranties
• Free maintenance and service contracts
• Discounts from normal prices

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Price Adjustment Strategies (cont.)

• Geographical Pricing g involves the company
  deciding how to price its products to different
  customers in different parts of the country.

• Important issues
• Whether the company should charge higher prices
  to distant customers to cover the higher shipping
  costs and risk losing their business
• Whether it should charge a lower price hoping
  that a lower price will generate a higher sales
  volume
• How to get paid?

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Price Adjustment Strategies (cont.)

• International Pricing g involves companies in
  deciding what prices to charge in different
  international countries in which they market

• The price to be set in a specific country depends
  on
• Economic conditions
• Competitive situation
• Laws and regulations
• Development of the retailing and wholesaling
  system
• Specific consumer perceptions and preferences
• Marketing objectives of the company

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Price Changes

• Price Cuts situations leading a firm to
  consider price cutting
• Excess capacity
• Declining market share
• To dominate the market through lower costs
• Price Increases
• Cost inflation
• Overdemand

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Price Changes (cont.)

• Buyers Reactions to Price Cuts
• Current models are being replaced by newer models
• Current models have some fault and are not
  selling well
• The firm is in financial trouble and may not stay
  in business
• Price will come down even further
• Quality has been reduced
• Buyers Reactions to Price Increases
• The item is in demand and will be unobtainable
  unless it is purchased soon
• The item represents an unusually good value

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Price Changes (cont.)

• Competitors are most likely to react when
• the number of the firms in the industry is small
• the product is homogenous
• the buyers are higly informed
• Competitors Reactions on a price cut
• the company is trying to obtain a larger market
  share
• the company is dooing poorly and trying to
  increase its sales
• the company wants the whole industry to reduce
  prices to increase total demand

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Price Changes (cont.) Responding to Price
Changes
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Price Changes (cont.)

• Responses to Competitors Price Cuts
• Reduce the price to match competitors price
• Maintain the companys price but raise the
  perceived quality of its offer
• Improve quality and increase price
• Launch a new low-price fighting brand