Marketing Mix - Price

Marketing Mix Price

Price The amount of money charged for a product or service or the sum of the values that consumers exchange for the benefits of having or using the product or service All for-profit organizations and many nonprofit organizations set prices on their goods or services. Whether the price is called rent (for an apartment), tuition (for education), fare (for travel), or interest (for borrowed money), the concept is the same. Throughout most of history, prices were set by negotiation between buyers and sellers.

Marketing approaches to pricing To a marketer, price is not just a mechanism for revenue, but it is a strategic tool. Price has many functions.        

To indicate how much is to be paid for the product To indicate the quality level of the product To maximize profits Eg. By skimming and hit and run pricing To position the product and create an image To add benefit of status into the product To fight competition Eg. Penetration pricing To differentiate a brand To divert demand Eg. By differentiated pricing

For these reasons marketers use a range of pricing strategies   

Market penetration – short term goal-market share; long term goal-profits Market price skimming-short term –profits; long term-market share Price skimming-start high in price and then come down  Prestige pricing-start high and continue the same price throughout

Factors to consider when setting price       

The image of your product-price must compliment/match the image of the product. Eg. High image car has a higher price. BMW Competitors’ prices-if competitors offer similar products and in highly competitive markets prices must be similar to competition Stage of PLC-introductory stage higher prices can be charged, skimming in maturity prices are lower. Cost of production – prices must finally cover cost to earn profit. Demand and elasticity of demand Affordability and willingness to pay Eg. Anchor in Sri Lanka even though not affordable the customer is willing to pay Strategies of the company-target segments, positionmi9ng of your brand, level of differentiation of your product.

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Marketing objective-market share, profits or turnover

Options of pricing strategies There are three principal categories of pricing strategy 

Market oriented pricing strategy This is where the strategies used are based upon customers’ requirements and customers’ responses

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Cost oriented pricing strategy These strategies revolve around the cost of the product and expected returns

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Competitor oriented pricing strategy These are based upon an expectation of the competitors’ response

Market Oriented pricing strategies 1 - Market penetration Pricing This is a strategy, which initially focuses on securing marketing share. Then product is launched at a price lower than the existing market price, and this is supported by heavy promotions in order to attract customers to the brand. After the required market share has been achieved, the prices are allowed to gradually “float” upward to the level of larger companies who are able to take a loss for some time and the risk of a price war, It is also ideal in situations where the competitors are not satisfying customers adequately.

2- Market Price Skimming Here the focus in the short term is to maximize profitability. It is ideal for a company that is launching a new product into the market. Initially the company will focus on the high-income customers within his target market and offer them the product at high prices. The skimming strategy is justified by other marketing theories such as the Adoption of innovation model and the PLC concept. 3- Hit and Run Pricing This strategy is used to maximize profitability at times when there is a surge of demand and scarcity of supply. At these times prices are increased and later brought back to the original level when demand subsides. This can be used for products for which supply is limited in the short – term e.g. agricultural products etc.

4- Product Line Pricing Here a range of products are priced on the basis of the total profitability that the company expects from the whole range. Thus some products in the rage are priced very attractively in order to draw the customer to the brand and build brand loyalty. The other products are priced so as to bring in profits. This pricing must be done carefully to ensure that in the final analysis the expected profit is achieved. This is used often by owners of retain outlets. 5- Premium/Prestige Pricing This is a long term strategy where a product is priced always at a level above the price of similar products in that product category. This is done when the product offers the customer the additional benefit of status or –prestige. This differs from Market Skimming in that a status benefit is continuous and permanent and therefore the price will always be at a level to attract the high income, prestige-conscious customer. 6- Differential Pricing There are three types of differentiated pricing: Time

Differentiated Pricing

Here the same product is offered to the same customer at different prices depending on the time of the day, month or year at which the product is purchased. E.g. Telecom customers are charged a “peak” rate for calls during office hours and a different cheaper rate for calls taken at night. Media owners (specially electronic media T.V, Radio) charge different advertising rates for different times of the day. Market

Differentiated Pricing

Here the same product is offered to different customers at the same time at different prices. Eg – Public utility services like transportation, charge different prices for adults and children. Tourist attractions are sold at higher prices to foreigners and lower prices to locals. Product

Differentiated Pricing

Here essentially the same products is offered with slight variations at vastly different prices to the same customers at the same time. E.g. Different classes of seats on an aircraft or in a cinema. 7 - Value Pricing The Marketer creates a high perceived value of the product by consistent product performance, high quality and effective promotions. The price is fixed below the perceived value such that the

brand occupies a ‘Bargain Brand Positioning’. E.g. Adopted by Proctor & Gamble for Pampers brand.

Cost Oriented Pricing Strategies These are methods favored by the accountants and they revolve around the cost of the –product mark-up or profit. They do not take account of market opportunities or threats, and on the value the market places on the product. 1 - Cost Plus Mark-Up Pricing This involves determining the total cost of each unit and adding to this cost the desired mark-up or profit in order to set the selling price. The price is common with retailers. 2 - Return On Investment Pricing (R.O.I Pricing) The company decides what it wants as profit or return on investment at the end of the year. It will divide this profit from the no. of units it hopes to sell during the year. This will give the required profit per unit. This 0rofit per unit is then added to the cost per unit and the selling price is fixed. 3 - Marginal Pricing Marginal pricing is based on marginal costing. The marginal cost of a product is the cost of manufacturing and selling one extra/additional unit of that product. Therefore it is similar to the variable cost of that product. (Fixed costs are the costs that do not change with output/product e.g. rent, salaries, etc. variable costs such as raw material cost, electricity etc can be attributed to each unit).

Competitor Oriented Pricing Strategies These strategies are based on the principle that a price must be set after taking account of the competitor’s price. 1 - Going Rate/Follow The Leader Pricing This is useful for a company that enters a market, which is already dominated by big players. It would be unwise to use market oriented pricing (such as penetration pricing) because this will anger the competitors and force them into a price war. Therefore the company prefer to fix the price close to the price charged by the market leaders. 2 - Closed Bid Pricing

Most governments and public bodies use a tender system for their purchases. Each supplier must submit his price which is kept secret until the opening of the tenders. Since the best offer will be selected, each supplier will try and fix his price on what he thinks his competitor will offer. 3 - The Open Bid Pricing Auctioneers and stock dealers (stock market) use this method. 4 - Negotiated Contract Pricing When selling high value items it is usually the case that customers will try to bargain or negotiate the terms of sale. This often results in a final price different to the original price. This bargaining arises because competitors have also offered this product to the customers. For other marketing notes visit – http://ragulan.wordpress.com/2009/07/01/marketing-notes/