12. 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
final price
List Price – (Incentives + Allowances) + Extra Fees
importance of pricing
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
pricing importance (2)
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 oriented 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
Full-cost pricing advantages
Gives an indication of minimum
price needed to make a profit.
▪ Can be used with other methods –
acts as a constraint.
Full-cost pricing critique
▪ 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 Criticisms
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 oriented 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 oriented pricing is difficult in practive, why?
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 oriented pricing
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 of pricing new products
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.
New product launch strategies
promotion high pricing high = rapid skimming
promotion high pricing low = rapid penetration
promotion low pricing high = slow skimming
promotion low pricing low = slow penetration
market skimming
High price to skim maximum revenues layer by layer from the segments willing to pay the
high price
market penetration
Low price to attract large target audience
Benefit from economies of scale
Characteristics of high price market segments
- Product provides high value
- Customers have high ability to pay
- Consumer and bill payer are different
- Lack of competition
- Excess demand
- High pressure to buy
- Switching costs
Conditions for charging a low price
- Only feasible alternative
- Market penetration or domination
- Experience curve effect/low costs
- Make money later
- Make money elsewhere
- Barrier to entry
- Predation
methods of estimating value
- Trade-off analysis (also known as Conjoint Analysis)
▪ Experimentation
▪ Economic value to the customer analysis
initiate price change: circumstance
increase:
Value greater than price
Rising costs
Excess demand
Harvest objective
cut:
Value less than price
Excess supply
Build objective
Price war unlikely
initiate price change: tactics
increase:
Price jump
Staged price increases
Escalator clauses
Price unbundling
Lower discounts
cut:
Price fall
Staged price reductions
Fighter brands
Price bundling
Higher discounts
initiate price change: Estimating consumer reaction
Strategic objectives
Self-interest
Competitive situation
Past experience
Statements of intent
price fixing
Restraints the consumer’s freedom
of choice
▪ Interferes firm’s interest in offering
high-quality products at the best
price
predatory pricing
A firm cutting prices to drive out its competition
deceptive pricing
▪ e.g., misleading price comparisons
penetration pricing and obesity
Charging too low prices for fatty/unhealthy food targeting
young people
price discrimination
Offering a better price for the
same product to one buyer and
not to other
product dumping
▪ Exporting products at much lower prices than charged in the
domestic market
freq mistakes in pricing
- Dropping price too quickly
▪ Focusing too much on cost, rather than value
▪ Neglecting to change price based on market changes
▪ Setting price independent of rest of marketing mix
▪ Not sufficiently applying differentiated pricing
