Week 6 Flashcards
Price
Price is one of the most important elements determining a firm’s market share and profitability. There is both a narrow and broad definition for price.
Price narrow definition
Price is the amount of money charged for a product or service.
Price broad definition
Priceis the sum of all the values that customers give up in order to gain the benefits of having or using a product or service.
Why is pricing important
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.
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It is one of the most flexible marketing mix elements –can be changed quickly
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It is a key strategic tool for creating and capturing customer value
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Prices have a direct impact the bottom line.
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Part of the overall value proposition -key role in creating customer value and building customer relationships.
Considerations in setting price
The price will fall somewhere between a price that is too high to produce any demand, and a price that is too low to produce a profit.
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Three main approaches to pricing
1. Customer-value based pricing – Good Value pricing – Value-added pricing 2. Cost-based pricing 3. Competition-based pricing
Customer value-based pricing
Setting the price based on buyers’ perceptions of value, not the seller’s cost
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Two approaches to customer-value pricing
Good-value pricing
Value-added pricing
Good-value pricing
Offering just the right combination of quality and good service at a fair price.
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Introducing less expensive versions of established brand
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Redesigning existing brands to offer more quality(or same quality for less)
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Every-day-low-price (EDLP) vs High-low pricing
Value-added pricing
Rather than cutting prices to match competitors’ prices, marketers adopting this strategy attach value-added featuresand services to differentiatetheir offerings, and this supports higher prices.
Cost-based pricing
Setting prices based on the costs of producing, distributing and selling product, plus a fair rate of return.
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The key is to manage the spread between costs and prices -how much the company makes for the customer value it delivers
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Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits (low cost producer).
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Other companies intentionally pay higher costs so that they can add value and claim higher prices and margins (differentiator).
Cost-based pricing includes:
– Types of costs – Cost-plus pricing – Breakeven pricing
Types of Costs
Fixed costs (overhead)
Variable costs
Total costs
Fixed costs (overhead)
Costs that do not vary with production or sales level.
Variable costs
Costs that vary directly with the level of production.
Total costs
The sum of the fixed costs and variable costs for any given level of production
Cost-plus pricing
Cost-plus pricing (markuppricing) is the simplest method of pricing.
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Add a standard markupto the cost of the product.
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Typically used by Professional services.
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Not the best approach to pricing -ignores consumer demand and competitor pricing
Why is Cost-plus pricing used
Used because
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Sellers are more confident about the costs than the demand
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Links the price to cost –simplifying pricing
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When all companies in a market do this, it standardises the price (when costs are similar –less price competition)
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Sellers earn a fair return on investment
Breakeven pricing
Breakeven pricing (or target return pricing) is setting the price to break even on the costs of making and marketing a product, or to make the desired profit.
Competition based pricing
Setting prices based on competitor’s strategies, costs, prices and market offerings.
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Consumers make their judgments of product value by comparing the prices that competitors charge for similar products
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Two approaches:
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High price-high margin
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Low price-low margin
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The goal of competition based pricing is notto match or beat competitors’ prices, rather to set prices according to the relative value created versus competitors.
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If a company creates greater value for customers, higher prices are justified.
Competition based pricing
Actions available
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Other internal and external considerations in pricing
Marketing Strategy, objectives & mix
Organisational Considerations
The Market and the Demand
Marketing strategy, objectives and marketing mix
Pricing plays a role in achieving company objectives at many levels:
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Attract new customers or to profitably retain existing customers.
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Deter new competitors from entering the market to stabilise the market.
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Retain the loyalty of resellers or avoid government intervention.
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Reduced to temporarily create excitement for a brand or to help the sales of other products in the line.
Marketing strategy, objectives and marketing mix
Price positioning strategies
Target costing
Non-price positions
High price maintenance
Target costing
Starts with an ideal selling price based on customer value considerations; and then targets costs that will ensure price is met.
Non-price positions
The market offering is differentiated to make it worth a higher price.
High price maintenance
Products are positioned on high prices, featuring them as part of their product’s allure.
Organisational considerations
Companies handle pricing in a variety of ways.
Small companies
Large companies
Industrial markets
