Pricing

PRICING

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Synonyms for Price        

Rent Tuition Fee Fare Rate Toll Premium Honorarium

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Special assessment Bribe Dues Salary Commission Wage Tax

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What is Price?  Price is commonly confused with the notion of cost.  Price is what a buyer pays to acquire products from a seller whereas cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer.  Price is the only element in the marketing mix of the firm that generated revenue.  Price is the amount customer have to pay to obtain the product.  In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (buyer) in order to obtain something offered by another party (seller).

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Price is a key element in the marketing mix  Directly -Price relates directly to the generation of total revenue -Price is also the only marketing mix element that generates revenue, others are costs  Indirectly -Price can be a major determinant of the quantity of goods sold -Price also influences total costs through its impact on quantity sold  Symbolically -Price has a psychological impact on customers -By raising price the quality of the product can be emphasised -By lowering price marketers can emphasis a bargain

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Importance of Pricing    

Most Flexible Marketing Mix Variable Trigger of First Impressions Important Part of Sales Promotion Setting the Right Price

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Price - Quality Strategies High

Product Quality

High High

Med

Low Low

Price Medium

Low

Premium Premium Value Value

High Value

Super Value

Overcharging

Medium Value

Good-Value

Rip-Off

False Economy

Economy 18-6

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The Three C’s Model for Price Setting

Low Price

Costs Competitors’ prices and No possible prices of profit at substitutes this price

Customers’ High Price assessment No possible of unique demand at product this price features

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Price and Competition  Price competition Is a policy whereby marketers emphasises price as an issue and matches or beats the prices of competitors

 Non-price competition Is a policy in which a seller elects not to focus on price but to emphasis other factors instead.

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Non-Price Competition Non price competition is done in the following ways: -

Reinforcing the quality image of the product Reinforcing the desirability of the product benefits Using extended warranty to help customers think they are getting more for their money Emphasise the longer term cost saving derived from using this product with the cheaper competition Customer loyalty cards Incentives for purchasing off-peak, or out of season Internet shopping Home delivery systems

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Internal Influences on Pricing  Organisational objectives - the role pricing can play in achieving long and short-term corporate objectives  Marketing objectives - long & short term objectives; price & product positioning

marketing

 Costs - the relationship between price and cost; balancing the need to cover costs against the price the market will bear

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External influences on pricing  Customers and consumers: demand & elasticity; price sensitivity  Channels of distribution: need to cover costs, value added to products; desired margins  Competitors: pricing under different market structures  Legal and regulatory: freedom to set prices, unfair pricing practices: sales taxes, VAT and their impact on prices

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Internal & External Influences on Pricing  Internal factors Marketing strategies .Targeting .positioning and .marketing mix strategy -Financial strategies .the cost base of fixed & variable costs .the financial objectives of the organisation

 External factors -Types of customers -customer perception of value of the product -elasticity of demand -the competitiveness of the market place .perfect competition .monopolistic .oligopolistic pure monopoly

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Two generic pricing strategies for new products Skimming Policy

Penetration Policy

 Price skimming involves charging a relatively high price for a short time where a new, innovative, or muchimproved product is launched onto a market  A major disadvantage is that it encourages new entrants

 Penetration pricing involves the setting of lower, rather than higher prices in order to achieve a large, if not dominant market share.  This strategy is most often used in businesses wishing to enter a new market or build on a market share.  A successful penetration pricing strategy may lead to large sales volumes/market shares and therefore lower costs per unit.

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New product launch strategy Promotion High High

Low

Rapid skimming

Slow skimming

Rapid penetration

Slow penetration

Price Low

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New product launch pricing strategies  Rapid Skimming strategy - tends to combine high price and high promotion expenditure. High prices is used to create high revenue, while high promotion used for product awareness & knowledge

 Slow skimming strategy tends to combine high prices with low level of promotion expenditure - High prices means high revenue but promotion is left to mainly word-of-mouth

 Rapid penetration strategy - tends to combine low prices with high promotional expenditure - aims to gain market share rapidly

 Slow penetration strategy - tends to combine low prices with low promotional expenditure mainly used by Own-label brands 18-17

Conditions for charging high & low prices  Conditions for charging high prices -product provides high value -customers have high ability to pay -lack of competition -high pressure to buy

 Conditions for charging low prices -lack of differential advantage -market presence/dominance -economies of scale -to make money later -make money by using loss leader to attract customers -using low price as a barrier to entry

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1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors’ costs, prices, and offers 5. Selecting a pricing method 6. Selecting final price 18-19

COSTS Fixed Fixed Costs Costs (Overhead) (Overhead)

Variable Variable Costs Costs

Costs Coststhat thatdon’t don’t vary varywith withsales salesor or production productionlevels. levels.

Costs Coststhat thatdo dovary vary directly directlywith withthe the level of production. level of production.

Executive ExecutiveSalaries Salaries Rent Rent

Raw Rawmaterials materials

Total Total Costs Costs

Sum Sumof ofthe theFixed Fixedand andVariable VariableCosts Costsfor foraaGiven Given Level Levelof ofProduction Production 18-20

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PRICING

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