Download Why study pricing?

Pricing
23A00110 Markkinoinnin perusteet / Principles of
Marketing
Why study
pricing?
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
1
The only element of the marketing mix
that brings in money
Place
Product
Promotion
Price!
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
3
The slightest improvement in price can
make a huge difference
44 million passengers in 2001
Average ticket price: $193
Charging an average of 2€ the
difference between operating at a
loss and making a profit
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
4
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
2
Career prospects
41% of firms claim that they are unable to recruit employees with the
right pricing skillets1.
1Tucker
© 2015 Alexei Gloukhovtsev
(2010)
Department of Marketing
12/11/15
5
How do we price a
product?
Some common approaches that many companies use, but
probably shouldn’t
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
3
Cost-based pricing
Price of pen =
(variable cost of pen + average fixed cost of pen) (1 + % markup)
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
7
Cost-based pricing
Problem?
You have to know the exact costs of everything
Price calculations end up being circular
Frequently results in underpricing
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
8
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
4
Competition based-pricing
Copy competitors’ prices
Set objective, then discount our price relative to competition until
goals are reached
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
9
Competition based-pricing
Problem?
Underpricing
May lead to price wars
Myopic focus on market share
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
10
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
5
Customer-based pricing
Let the customer set the price
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
11
Customer-based pricing
Problem?
Customers will not reveal how much they value the product
Customers do not know how much they value the product
Customers may revolt at price increase
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
12
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
6
Some common approaches that many
companies use, but probably shouldn’t
Using the three Cs encourages a reactionary approach when it
comes to pricing.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
13
Steps in setting a pricing policy1
1. 
2. 
3. 
4. 
5. 
6. 
Select the pricing objective
Determine the demand
Estimate costs
Analyze competitors’ costs, prices, and offers
Select a pricing method
Select the final price
1Kotler
© 2015 Alexei Gloukhovtsev
& Keller (2015)
Department of Marketing
12/11/15
14
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
7
1. Select the pricing objective
1. 
2. 
3. 
4. 
5. 
Survival
Profit maximization
Market share maximization
Marketing skimming
Product-quality leadership
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
15
2. Determine demand
Elastic
Luxury goods
Significant percentage of income
Many substitutes
Bought frequently
Inelastic
Necessities
Small percentage of income
Few close substitutes
Bought infrequently
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
16
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
8
3. Estimate costs
“You have to know the cost so that you can understand the
profitability implications of price, but not for the purpose of setting
the price”
Kent Monroe
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
17
4. Analyze competitors
“The firm must take competitors’ costs, prices, and possible
reactions into account”
Kotler and Keller (2015)
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
18
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
9
5. Select a pricing method
1. 
2. 
3. 
4. 
5. 
6. 
7. 
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Everyday low pricing
Going rate pricing
Auction-type pricing
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
19
Perceived-value pricing
Economic Value to the Customer1: customers will pay for a
product only if its perceived value outweighs the perceived value of
the closest alternative.
1Tucker
© 2015 Alexei Gloukhovtsev
(2010))
Department of Marketing
12/11/15
20
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
10
Perceived-value pricing
1.  Identify what benefits your product provides
2.  Identify closest competitive offering
3.  Identify potential sources of differentiation, and how much value
these create
4.  Add 2. and 3. to get the EVC
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
21
Perceived-value pricing
Atlantic Co sells servers that are twice as efficient as its competitors.
By buying one server instead of two, a company saves $4 000 in
labor costs, $500 in electricity, and $1 500 in software licenses. The
price of two servers from the competitor is €6 800.
What is the EVC of Atlantic Co’s server?
EVC = $6 800 + $6 000 = $12 800.
1Tucker
© 2015 Alexei Gloukhovtsev
(2010))
Department of Marketing
12/11/15
22
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
11
Perceived-value pricing
EVC not always the best option:
If your firm operates in a winner-takes-all market
If your goal is initial customer lock-in
If you are hoping to prevent competitor response
1Tucker
© 2015 Alexei Gloukhovtsev
(2010))
Department of Marketing
12/11/15
23
Value pricing
1Tucker
© 2015 Alexei Gloukhovtsev
(2010))
Department of Marketing
12/11/15
24
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
12
Everyday low pricing
1Tucker
© 2015 Alexei Gloukhovtsev
(2010))
Department of Marketing
12/11/15
25
6. Select the final price
1. 
2. 
3. 
4. 
Impact of other marketing activities
Company pricing policies
Gain-and-risk-sharing pricing
Impact of price on other activities
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
26
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
13
Does anything ever
have one single price
for everybody?
“Well, Mr. DiCaprio…”
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
28
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
14
Sell me this pen.
Who are you?
How long have you been our customer?
How many pens are you buying?
Are you buying online or in-store?
Did you bring your frequent pen-shopper card?
…and so on.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
29
Pricing to segmented customers
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
30
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
15
Examples of price discrimination
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
31
Pricing to segmented customers
Firms should price to segmented customers when:
1. 
2. 
3. 
4. 
The product has differentiation value
Multiple segments have different valuations for the product
Each segment has similar EVC
Product must not be tradable across segments
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
32
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
16
Implementing customer-based price
segmentation
Up to the firm to select which price a customer should pay based on
observable characteristics
Characteristics must be unambiguous and correlated with EVC
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
33
Is it legal?
Generally, yes.
You may run into trouble if you charge competing buyers different
prices for the same “commodity”, or if you charge different prices in
return for services, thus giving customer an “unfair” edge in the
market.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
34
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
17
Is it ethical?
You be the judge.
Sometimes it’s a question of framing the “discrimination”:
Finnkino offers cheaper tickets for children.
Finnkino forces adults to pay more.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
35
The psychology of
pricing:
An experiment
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
18
Imagine that you are planning to buy a
subscription to Helsingin Sanomat
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
37
Imagine that you are planning to buy a
subscription to Helsingin Sanomat
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
38
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
19
The psychology of pricing
We can plan our pricing strategy and our pricing policy, but in the
end, we must remember that the consumer is often irrational and
unpredictable.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
39
Student questions
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
20
Are frequent shopper discounts a form
of price discrimination?
Yes, they are. Price discrimination isn’t necessarily (always) evil.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
41
Why should companies practice price
discrimination?
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
42
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
21
Should pricing be more fair to the
customer? Can higher markups be
justified by other reasons than “if
people buy, why not”?
You tell me! Obligation to maximize shareholder value can be used
as a justification for setting high markups.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
43
Martin Shkreli: The most hated man on
the internet
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
44
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
22
Do the same pricing strategies (e.g.
market penetration) work for services?
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
45
Do companies use “trial-and-error” to
find the optimal price?
Yes, unfortunately.
Experiments, prior data analysis are always a better option.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
46
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
23
Pricing seems very analytical. Is this
really part of a marketing-person’s job
description?
A degree in Marketing will qualify you to do all kinds of work, from
consulting to advertising to sales management to business
analytics.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
47
How do I know when a product’s price
is the best possible price?
In practice, it is impossible to know for certain whether a product’s
price is the best possible price. We don’t have access to the
counterfactual (i.e. what would have happened if the price was
different at that particular moment in time).
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
48
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
24
How do seasonal discounts affect
demand when product is not on sale?
Depends on the product (elasticity of demand, etc.).
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
49
How is price elasticity of demand
measured in practice?
Analysis of sales data, lab experiments are some of the most
common ways.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
50
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
25
Do sales of a more expensive product
decline if the same company brings a
cheaper alternative to market?
Depends on the product. Generally not the case for luxury products,
as long as the two brands are distinct in the mind of the consumer
(e.g. Gibson and Epiphone, Rolex and Tudor).
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
51
Why do some businesses offer free
services to students? Is this
profitable?
These businesses tend do either be subsidized by the government,
or they are playing the “long game”: locking in students by offering
free services, and hoping that the students will eventually turn into
profitable customers when they graduate.
© 2015 Alexei Gloukhovtsev
Department of Marketing
12/11/15
52
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
26
Thank you!
© 2015 Alexei Gloukhovtsev. For instructional use only. Do
not copy or distribute this material.
27