Mkt Mgt # Chap16 Pricing

Chapter # 16 Developing pricing strategy

1

Pricing

Price is the amount of money charged for a product or service or the some of the values that consumer exchange for the benefits of having or using the product or service. Fixed pricing – setting one price for all buyers Dynamic pricing – charging different pricing depending on individual consumers and situations.

2

Importance of Pricing • Price is the only one element of marketing mix that can generate revenue • Most flexible element of the marketing mix  Many companies do not handle pricing well • One problem – Companies are too quick to reduce price to get sale rather convincing buyer that their product are worth a higher price ; • Other mistake – pricing is too cost oriented rather customer value oriented. 3

Nine price-quality strategies Price High Q U A L I T y

High 1. Premium Medium Low

Medium

Low

2. High-value

3. Super-value

4. Overcharging

5. Medium-value

6. Good-value

7. Rip-off

8. False economy 9. Economy

4

Setting pricing policy

Selecting the pricing objective Determining demand Estimating cost Analyzing competitor’s cost, price and offer Selecting a pricing method Selecting the final price 5

Step 1: Selecting the pricing objective Five major objectives •

Survival - plagued with over capacity, intense competition, or changing customer wants. Pricing cover variable cost as well as a portion of fixed cost.

2. Maximum current profit - choose the price that produces the maximum current profit, cash flow or ROI. Company may sacrifice long run performance by ignoring the effect of other mkt-mix, competitors and legal restraints. 6

Step 1: Selecting the pricing objective (cont…) 3. Maximum market share - higher sales volume lead to lower unit cost - higher long run profit-set lowest price due to price sensitive customer. “Market penetration pricing” 4. Maximum market skimming - Setting a high price for a product to maximize revenues. Conditions: sufficient buyers, production cost not high, high initial price not attract competitors, high price communicate superior image. 5. Product quality leadership - high prices to cover higher performance quality. 7

Price

Step 2: Determining demand P2 A. Inelastic Demand demand hardly changes with a small change in price.

P1 Q2 Q1

Price

Quantity Demanded per Period

P2 P1 Q2 Q1 Quantity Demanded per Period

B. Elastic Demand demand changes greatly with a small change in price.

8

Step 3: Estimating cost Total Cost Sum of the fixed and variable costs for a given level of production Variable Costs Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Salaries,Rent, interest

Costs that do vary directly with the level of production. Raw materials, packaging 9

Step 3: Analyzing competitor’s costs prices and offer The firm take the competitor’s costs, price and possible price reaction into account. The firm first consider the nearest competitor’s price The firm’s positive differentiations feature

10

Step 4: Selecting a pricing method

Markup Pricing Target-return Pricing Perceived-Value Pricing Going Rate Pricing Auction type pricing Group Pricing 11

Markup Pricing Simplest pricing method - adding a standard markup to the cost of the product.To illustrate mark- up cost, suppose a manufacturer had the following cost and expected sales. Variable cost $ 10 Fixed cost $ 3,00,000 Expected unit sales 50,000 Unit cost = Variable cost + Fixed cost / unit sales = 10+ $ 300000/50000 = $ 16 To earn 20% mark up on sale, Mark-up Price = unit cost /1-desired return on sale = $ 16 / 1-.2 = $ 20 12

Markup Pricing (cont…)

• Drawback : Mark up pricing works only if that price actually brings the expected level of sales. Mark-up pricing is still popular, because • Perceived fairness to both buyers and sellers • Sellers are more certain about costs than demand • Minimizes price competition

13

Target-return Pricing The price that would yield its target rate of return on investment Target-return = Unit cost+ (Desired return* invested capital)/ unit sales Example: if unit cost is $16 and desired return is 20%, invested capital $1000000, unit sales50000 =$16+(.20*$1000000) / $50000=$20 14

Cost in dollar (thousands)

Target-return Pricing (cont…) (Break even analysis) Total Revenue

1,200 1,000

Target Profit ($200,000)

.

800 600

Total Cost

Break even point

400

Fixed Cost

200 10

20

30

40

50

Sales Volume in Units (thousands)

Break even volume = Fixed cost / (price – variable cost) 15

Perceived-Value Pricing Perceived value is made up of several elements buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support and softer attributes such as supplier reputation, trustworthiness and esteem. Price buyer – Stripped-down product & reduce services Value buyer – Keep innovating new value & reaffirming their value. Loyal buyer – invest in relation building & customer intimacy. 16

Going Rate Pricing Company sets prices based on what competitors are charging. The firm might charge the same, more or less than major competitors In oligopolistic industries, (steel,fertilizer) firms normally charge the same price. The smaller firms “follow the leader” changing their price when the leader changes their price without considering their demand or costs. 17

Auction type pricing

English auctions – one seller & many buyer Dutch auctions – one seller & many buyer, or many seller & one buyer Sealed-bid auctions – submit one bid and do not know other bid.

18

Step 6: selecting the final price

Psychological Pricing Gain-and-risk-sharing pricing The influence of other marketing -mix elements Company pricing policies Impact of price on other parties

19

Psychological Pricing  Psychology considered not simply the economics.  Price as a quality indicator  Image pricing effectively ego-sensitive products – perfume  Reference price a mental benchmark  Odd number – $299 instead of $300.

20

Gain-and-risk-sharing pricing

Buyer may resist accepting a seller’s proposal because of a high perceived level of risk. The seller has the option of offering to absorb part or all of the risk if he does not deliver the full promised value.

21

The influence of other marketing -mix elements Relationship among relative price, relative quality, and relative advertising Average quality-high advertising-premium price High quality-high advertising-highest prices High price-high advertising-lifecycle stage for market leader

22

Impact of price on other parties

Distributor and dealer Sales force Competitors react Suppliers Govt. Intervene and prevent

23

Price adaptation strategies

Geographical Pricing Price discounts and allowances Promotional pricing Discriminatory pricing Product-mix pricing

24

Geographical Pricing

Adjusting prices to account for the geographic location of customers • Uniform -delivered pricing • Zone pricing pricing • Basing-point pricing & • Freight-absorption pricing

25

Price discounts and allowances  Cash discount - prompt payment-2/10,net30  Quantity discount - large volume buyers  Functional discount- perform certain functionsselling, storing, and record keeping.  Seasonal discount-price reduction out of season.  Allowances Trade-granted for turning in an old item when buying a new one. Promotional-reward for participating in ad, and sales promotion.

26

Promotional pricing  Loss-leader pricing– supermarkets and department stores often drop the price to stimulate additional store traffic  Special-event pricing  Cash rebates-Help clear inventories without cutting the stated list price-specified time period.  Low interest financing-Without cutting price can offer low interest financing.  Longer payment terms  Warranties and service contracts  Psychological discounting

27

Discriminatory pricing  Customer segment pricing - Each segment pays different prices for same product  Product-form pricing - Product versions priced according to cost  Location pricing-Price changes with location - cost constant  Image pricing – based on image pricing  Channel pricing-price depends on whether it is purchased  Time pricing-Price for specific period

28

Product-mix pricing • Product Line Pricing - setting price steps between product line items - between $300 to $500. • Optional-Product Pricing - pricing optional or accessory products sold with the main product - car options • Captive-Product Pricing - pricing products that must be used with the main product - film with camera. • Two-part pricing - consisting of a fixed fee plus a variable usage fee - telephone line. • By-Product Pricing - pricing by-products to make the main product price more attractive i.e. Lumber mills • Product-Bundle Pricing - combine several products in a bundle,offer at reduced price 29

Initiating price cuts Several situation leads to price cuts excess capacity “follow the leader price” decline market share drive to dominate market share through lower cost Price cutting strategy involves possible traps – low-quality trap fragile-market-share trap shallow-pockets trap 30

Initiating price increase The following circumstances lead to prices increases Cost inflation Over demanded Company decide whether to increase sharply or raise it by small amount by several times.

31

Reaction to price change • Customer reactions – if price cut can be interpreted in the following ways  the item is replaced by new one  the is faulty & not selling well.  the firm is financially trouble  quality has been reduced A price increase deter sales but carry positive some meaning – the item is hot and represent good value. • Competitor reactions  Market share objective – match the price change  profit-maximization objective – improving product quality or increasing advertising budget. 32

Responding to competitors’ price changes Brand leader can response several ways: Maintain price Maintain price and value add Reduce price Increase price and improve quality launch a low-price fighter line

33