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
Small companies
Prices are often set by top management rather than by the marketing or sales department
Large companies
Pricing is typically handled by divisional or product-line managers
Industrial markets
Salespeople may be allowed to negotiate with customers within certain price ranges.
Top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.
The market and demand
Pricing can differ based on the types of market.
There are four types of markets:
1. Pure competition 2. Monopolistic competition 3. Oligopolistic competition 4. Pure monopoly
Pure Competition
Sellers cannot charge more than the going price because buyers can obtain as much as they need at that price
There are a large number of buyers and sellers for undifferentiated(commodity) products.
Monopolistic competition
A range of prices occurs because sellers can differentiate their offers.
Product offerings are differentiatedby design, quality, brand image and product features.
Oligopolistic Competition
Sellers are highly sensitive to each other’s pricing and marketing strategies.
Market can be dominated by a small number of large suppliers.
Pure monopoly
Pricing is handled differently, depending on whether it is a government monopoly or a regulated monopoly.
Essentially, one supplier can determine price without regard for competition
The demand curve
The demand curve is a graphshowing the relationship between price and volume sold. As price rises, quantity sold falls.
Price elasticity:
A measure of the sensitivity of demand to changes in price.
Elastic demand
When demand changes greatly with a small change in price
Inelastic demand
When demand hardly changes with a small change in price
Other price considerations
The economy
Economic factors such as boom or recession, inflation and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs.
Other price considerations
Other external factors
• Government • Industry protection & regulation • Public policy • Social Concerns • Equity & access • Service of uneconomic markets – e.g. disadvantaged, special needs, remote communities
New-product pricing strategies
When companies bring out a new product can choose between 2 broad strategies to set the prices: • Market-skimming pricing • Market-penetration pricing
Market-skimming pricing
Setting a high initial price for a new product to skim maximum revenue from the segments willing to pay the high price; the company makes fewer but more profitable sales.
Market-skimming pricing makes sense only under certain conditions.
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the product’s quality and image supports its higher price
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enough buyers want the product at that price
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the costs of producing a smaller volume cannot be so high that it cancels out the advantage of charging more.
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competitors should not be able to enter the market easily and undercut the high price
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typically used in shopping and speciality goods
Market penetration pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share. The high sales volume results in falling costs, allowing the companies to cut their prices even further.
Market-penetration pricing makes sense under the following conditions.
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The market must be highly price sensitive so that a low price produces more market growth.
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production and distribution costs must fall as sales volume increases
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the low price must help keep out the competition, and the company adopting penetration pricing must maintain its low-price position –otherwise, the price advantage may be only temporary
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Purchase intervals are short
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typically used in convenience goods
Product-mix pricing strategies
Product line pricing
Optional product pricing
Captive-product pricing
By-product pricing
Product-bundle pricing
Product line pricing
Setting prices across an entire product line
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Management must decide on the price steps to set between the various products in a line.
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Take into account cost differences between the products
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Account for differences in customer perceptions of the value of different features
Optional product pricing
Pricing optional or accessory products sold with the main product
Captive-product pricing
pricing products that must be used with the main product
By-product pricing
pricing low-value by-products to get rid of them or to make money on them and the main products
Product-bundle pricing
Pricing bundles of products sold together
Price-adjustment strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic/online pricing
Discount and allowance pricing
Reducing prices to reward customer responses such as volume purchases, paying early or promoting the product
Segment pricing
Customer-segment pricing
Product form pricing
Location based pricing
Time based pricing
Revenue management
Segment pricing definition
The company sells a product or service at two or more prices, even though the difference in price is not based on differences in costs
Customer-segment pricing
customers pay different prices for the same product
Product form pricing
different forms of the product are priced differently, but not based on costs
Location based pricing
different prices for specific locations, not based on costs
Time based pricing
different prices for time of day, time of year etc.
Revenue management
Revenue management (aka yield management): prices routinely set hour by hour depending on availability, demand and competitor price changes
Psychological pricing: Reference prices
prices that consumers carry in their minds, and which come from current prices, remembering past prices or assessing the buying situation.
Sellers consider the psychology of prices and not simply the economics.
Marketers can influence reference prices through a variety of pricing cues such as shelf placement, price points or price terminal digits.
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Promotional pricing
Promotional pricing can be an effective means of generating sales. However, it can be damaging if taken as a steady diet. • Includes: – Discounts: off reduction from normal price to increase sales – Rebates: cash back – Functional (trade) Discounts: volume – Special-event Pricing: season based – Low-interest Finance
Promotional pricing should not be used too frequently
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Promotional pricing is easily copied
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Cause brand position and value erosion
Geographic pricing
• FOB-origin pricing • Uniform-delivered pricing • Zone pricing • Basing-point pricing • Freight-absorption pricing
Price changes: Initiating price changes
When initiating prices changes (whether cuts or increases), marketers must consider… – Buyer reactions – Competitor reactions
Price changes: Responding to price changes
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Public policy: Within channel levels
Prohibited practices (within channels):
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Price fixing: talking to competitors to fix prices
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Predatory pricing: selling below cost with the intention of punishing a competitor or putting the competitor out of business
Public policy: Across channel levels
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Prohibited practices (across channels):
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Price discrimination: offering different prices or trading terms to different customers
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Resale price maintenance: Manufacturers cannot require retailers to charge specified prices
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Deceptive pricing: stating or advertising prices that are not available to the customer
