Week 9: Price Setting

Question 1

Outline the FIVE key components of the price-setting decision process

Answer 1

1. Set pricing objectives
   - Pricing decision must be based on the marketing and overall corporate objectives
   - Start with principal objectives and add collateral pricing goals:
   - > Achieving target return on investment
   - > Achieving market-share goal
   - > Meeting competition
2. Demand determinants and assessing value
   - Issues when considering demand:
   - >Usage and importance of product/service by various segments
   -> Price sensitivity (elasticity of demand)
   -> Assessing value
   -> Possible buyer preference for a supplier because a total offering provides more value
   - Differentiating through value-creation
   ->Value? - relationships, emphasise unique add-on benefits:
   …Benefits = core and add-on
   …Sacrifices = acquisition, processing and usage costs
3. Determine costs and relationship to volume
   - Target pricing and costing
   - > Many companies calculate price using ‘cost’ and ‘mark up approach’ - adding an amount to the cost of a product to determine its sale price (internally not market driven)
   - Target pricing
   - >First examine and segment the market
   - > Determine what type, quality and attributes each segment wants at a pre-determined target price
   - > Understand the perception of value to the target selling price
   - > Calculate costs considering margins
   - Cost classification system goals
   - >Target pricing forces marketers to understand what buyers want are are willing to pay
   - >Target costing forces companies to understand their cost structure in terms of direct and indirect costs, fixed and vairable costs and their contribution margins
   - >Combining target pricing and target costing means that instead of using cost-control techniques, a better approach is to compute the total costs that must not be exceeded, allowing for acceptable margins
4. Competition
   - Competition establishes an upper limit on price
   - Price is only one component of the cost-benefit equation
   - There are many ways to have a differential advantage other than price: advanced features, technical expertise, timely delivery and product reliability (zero defects)
   - Service and support also have a differentiating effect
5. Set price level
   - Pricing and profit objectives
   - Demand determinants
   - Cost determinants
   - Competition

Question 2

Explain the first stage of the value-based approach to pricing

Answer 2

1. Defining key market segments

- Segment markets into customers on the basis of what the customers value

Question 3

Explain the second stage of the value-based approach to pricing

Answer 3

2. Isolating drivers of value
   - Cost drivers - create value by economic savings
   - Revenue drivers - add incremental value by facilitating revenue or imprving sales revenue, increase profit, increase margins

Question 4

Explain the third stage of the value-based approach to pricing

Answer 4

3. Quantifying the impact of the suppliers product on the driver
   - Quantify the impact of a firms product or service offering on customer’s business - how much money is made/saved?
   - Compare the firms product/service offering compares to next best alternative (eg. competitors offering)
   - Isolate unique features that differ from competitor - do those provide value the customer cannot get elsewhere? How much value is created?

Question 5

Explain the fourth stage of the value-based approach to pricing

Answer 5

4. Estimating the value created by the product and service offering
   - Understand how customer uses the product and how much value customer will realise
   - Search and switching costs
   - Extent of a customers search and ability to switch products and or suppliers influence price sensitivity
   - Other factors
   - >End use: how important is the product as an input into total cost of the end product, if cost is insignificant, demand is inelastic
   - > End market focus: since demand for many industrial products is derived from the demand for the product of which they are a part, strong end user focus needed

Question 6

Explain the fifth stage of the value-based approach to pricing

Answer 6

5. Developing the pricing strategy and marketing plan
   - Set the price and develop responsive marketing strategy
   - >Elasticity varies by segment
   - >Price elasticity measures how sensitive customers are to price changes
   - >Price Elasticity of demand refers to rate of percentage change in quantity demanded to percentage change in price
   - > Overall demand in the market will not change (is derived) but demand at a target (customer) level may vary between targets