10. pricing Flashcards
What is Price?
Price is the sum of the values that consumers exchange for the
benefits of having or using the product or service (usually
amount of money)
▪ Income
▪ Flexible and quick to alter
▪ Easy to imitate
▪ “Right” price is determined by customers
why pricing is key
No matter how good the product, how creative the promotion
or how efficient the distribution, unless price cover costs, the
company will make a loss.
▪ Undercharging → lost margin
▪ Overcharging → lost sales
▪ Both elements can affect firm’s profitability.
importance of pricing
▪ Pricing should be used as a strategic tool.
▪ It can help to achieve corporate and brand objectives without
necessarily cutting prices.
▪ Price is always set in relation to the other elements of the
marketing mix.
▪ Price is key to positioning → often, it sends quality cues to
customers
pricing methods
- cost
- competition
- marketing
Cost-orientated Pricing
Price based on costs of production and other costs, plus a
reasonable return for the efforts and risks of the company
▪ Assumption
▪ Low cost → lower prices → more sales → more profits
▪ Two methods are normally used
▪ Full-cost pricing
▪ Direct- (or marginal-) cost pricing
Advantages cost oriented pricing
▪ Gives an indication of minimum
price needed to make a profit.
▪ Can be used with other methods –
acts as a constraint.
critics cost oriented pricing
Takes no account of customers’
willingness to pay.
▪ If followed strictly, leads to an
increase in price when demand
falls.
▪ Is illogical because a sales estimate
is made before a price is set.
▪ There may be problems in
allocating overheads
Direct-cost pricing Advantages
▪ Avoids problem of allocating
overheads.
▪ Avoids ‘price up as demand down’
problem.
▪ Indicates lowest price at which it
is sensible to take business.
Direct-cost pricing critics
▪ When business is buoyant, gives
no indication of optimum price.
▪ Cannot be used in the long-term
because fixed costs need to
covered too.
Competitor-orientated Pricing
Price based on focusing on competitors rather than costs when
setting prices
▪ Two often used forms
▪ Going-rate pricing
▪ Competitive bidding
Going-rate pricing
▪ With no product differentiation,
producers are forced to accept the
going rate.
▪ In reality there is almost no situation
in which no differentiation occurs.
competitive bidding
The supplier will price according to
a specification drawn up by the
purchaser. Usually the supplier will
choose the lowest (most
competitive) price tendered.
▪ Statistical modelling has resulted in
the following basis for calculating
expected profits:
Expected profit =
Profit x Probability of winning
competitor based pricing - restrictions
Restricted in practice
▪ Difficult to express precise statistical probability
▪ Only in situations with medium to long term range
▪ Relies heavily on competitor information systems
Market-orientated pricing and strategy
The price of a product should be set in line with marketing strategy.
▪ The danger is to view price in isolation.
▪ Price should refer to other marketing decisions, such as positioning,
strategic objectives, promotion, distribution, and product benefits.
▪ The idea is to diminish customer confusion.
▪ Setting prices will depend whether is a new or an existing product
pricing new products
▪ The usual pricing objective for new products is to gain profitable market
penetration.
▪ A key decision that marketing management faces when launching new
products is positioning strategy.
Implications for pricing new products:
1. Marketing management must decide on a target market and on the
extent of its differential advantage
2. Where multiple segments appear attractive, modified versions of the
product should be designed and priced differently in line with the
respective values that each target market places on the product.
