Download Module-2 - Notes Milenge

DEVELOPING PRICING STRATEGIES
AND PROGRAMS
LEARNING OBJECTIVES
After reading this chapter, students should:
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Know how consumers process and evaluate prices
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Know how a company should set prices initially for products or services
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Know how a company should adapt prices to meet varying circumstances and opportunities
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Know when a company should initiate a price change
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Know how a company should respond to a competitor’s price change
Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Prices are perhaps the easiest element of the marketing program to adjust.
Price also communicates to the market the company’s intended value positioning of its
product or brand. A well-designed and marketed product can command a price premium
UNDERSTANDING PRICING
Price is not just a number on a tag or an item.
A) Throughout most of history prices were set by negotiation between buyers and sellers.
B) Setting one price for all buyers is a relatively modern idea.
C) Today the Internet is partially reversing the fixed pricing trend.
D) Traditionally, price has operated as the major determinant of buyer choice.
E) Price remains one of the most important elements determining market share and profitability.
How Companies Price
Companies do their pricing in a variety of ways.
A) In small companies, prices are often set by the boss.
B) In large companies, pricing is handled by division and product-line managers.
C) In large companies, top management sets general pricing objectives, policies, and often
approves the prices proposed by lower levels of management.
D) In industries where pricing is a key factor, companies will often establish a pricing department
to set or assist others in determining appropriate prices.
E) Many companies do not handle pricing well.
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F) Others use price as a key strategic tool.
1) There are customized prices and offerings based on segment value and costs.
G) Effectively designing and implementing pricing strategies requires a thorough understanding
of consumer pricing psychology and a systematic approach to setting, adapting, and changing
prices.
PRICE(Definition) - The amount of money charged for a product or service, or the sum of the
values that customers exchange for the benefits of having or using the product or service.
Factors to Consider When Setting PricesThe price that the company charges will fall somewhere between one that is too high to produce
any demand and one that is too low to produce a profit.
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Customer Perceptions of ValuePricing decision like any other marketing mix decisions must start with customer value. When
customer buy a product, they exchange something of value in order to get something of value.
Value Based Pricing –
It uses buyer’s perception of value, not the sellers cost, as the key to pricing. Price is considered
along with the other marketing mix variables before the marketing program is set.
The above figure compares value-based pricing with cost-based pricing. Cost based pricing is
product driven. Value based pricing reverses this process. Two types of value-based pricing:
a) Good-value pricing
b) Value-added pricing
Good Value Pricing- Offering just the right combination of quality and good service at the right
price.e.g. Mc Donalds offers Value meals. Or Tata Nano’s economical car.
EDLP(Every Day Low Pricing) is also an example of good value pricing. It involves charging a
constant, everyday low price with few or no temporary discounts.
Value-added Pricing- Attaching value added features and services to differentiate a company’s
offers and charging higher prices. It is adding more feaudetures and services to differentiate their
offers and thus support higher prices.
Company and Product CostsWhere as customer-value perceptions set the price ceiling, costs set the floor for the price that the
company can charge. Cost-based pricing involves setting prices based on the costs for
producing, distributing and selling the product plus a fair rate of return for its effort and risk.
Types of CostsA company’s cost can take two forms: fixed and variable.
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Fixed costs are costs that do not vary with production or sales level.
Variable Costs vary directly with the level of production.
Total Costs are the sum of the fixed and variable costs for any given level of production.
Pricing Decision FactorsInternal Factors
• Marketing objectives.
• Marketing mix.
• Costs.
• Organization style.
• Target market.
• Positioning objectives
External Factors
• Nature of the market.
• Demand
• Competitor.
• Economic state.
• Reseller needs.
• Government actions.
• Social concerns.
Pricing Decision Internal Factors
• Marketing objectives.
– Company must decide on its strategy for the product. The company must decide
on its overall marketing strategy for the products and services.
• General objectives.
– Survival, current profit maximization, market share leadership and product quality
leadership.
• Costs.
– Fixed Costs.
• Costs that do not vary with production or sales level.
– Variable Costs.
• Costs that vary directly with the level of production.
• Organizational considerations.
– Must decide who within the organization should set prices.
This will vary depending on the size and type of company
Pricing in Different Markets
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Pure competition.
– Many buyers and sellers where each has little effect on the going market
price
Monopolistic competition.
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– Many buyers and sellers who trade over a range of prices
Oligopolistic competition.
– Few sellers and sensitive to each other’s pricing/marketing strategies
Pure monopoly.
– Market consists of a single seller
Demand and Elasticity
• Demand.
– The relationship between price changes and the number of units sold.
• Elasticity.
– A way of measuring how sensitive the market is to price changes.
• Inelastic – minimal change in demand
as price increases.
• Elastic – significant drop in demand as price increases.
General Pricing Approaches
• Cost-based approach.
– Cost-plus pricing.
– Break-even analysis.
– Target profit pricing.
• Value-based approach.
– Consumer perceptions of value.
• Competition-based approach.
-What competitors are charging
Cost-Plus Pricing
• Adding a standard markup to the cost of the product.
• Popular because:
– Sellers more certain about cost than demand.
– Simplifies pricing.
– When all sellers use, prices are similar and competition is minimized.
– Some feel it is more fair to both buyers and sellers.
Value-Based Pricing
• Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
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• A less expensive piano might play well, but would it take you places you’ve
never been before?
Competition-Based Pricing
• Going-rate pricing.
– Firm bases its price largely on competitors’ prices, with less attention
paid to its own costs or to demand.
• Sealed-bid pricing.
Firm bases its price on how it thinks competitors will price rather than on its own
costs or on demand
New Product Pricing
• Skimming pricing.
– High price to reap maximum profit from early adopter segments.
– Can encourage competition.
– Products must be unique and hard to copy.
• Penetration pricing.
– Low price to gain maximum market share.
– May discourage competition.
– Used when the product is easily copied.
Product Mix Pricing Strategies
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Product line -- pricing levels to deliver value to different segments.
Optional products – separate options available for the main product.
Captive products – needed to make main product usable.
By-products – created from the manufacture of the main product.
Product bundles – combinations.
Product Line Pricing
• Involves setting price steps between various products in a product line based
on:
– Cost differences between products.
– Customer evaluations of different features.
– Competitors’ prices.
Optional Product Pricing
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Pricing optional or accessory products sold with the main product (e.g.,
ice maker with the refrigerator
Product Bundle Pricing
– Combining several products and offering the bundle at a reduced price
(e.g., computer with software and Internet access).
Captive-product
Pricing products that must be used with the main product (e.g.,
replacement cartridges for Gillette razors).
By-product pricing
• Setting a price for by-products in order to make the main product’s
price more competitive (e.g., sawdust and buttermilk).
Price-Adjustment Strategies
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Discount and allowance pricing.
Segmented pricing.
Psychological pricing.
Promotional pricing.
Geographical pricing.
International pricing.
Discounts and Allowances
• Discounts – a straight reduction based on:
– Cash.
– Quantity.
– Function.
– Season.
• Allowances – promotional money paid by manufacturer to retailer.
Segmented Pricing
• Selling a product or service at two or more prices, where the difference in
prices is not based on differences in costs.
– Customer-segment.
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– Product-form.
– Location pricing.
– Time pricing.
Psychological Pricing
• Considers the psychology of prices and not simply the economics.
• Consumers usually perceive higher-priced products as having higher quality.
• Consumers use price less when they can judge quality of a product
Promotional Pricing
• Promotional pricing approaches.
– Loss leaders.
– Special event pricing.
– Low-interest financing.
– Longer warranties.
– Free maintenance.
– Discounts.
– Cash rebates.
Geographical Pricing
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FOB-origin pricing.
Uniform-delivered pricing.
Zone pricing.
Basing-point pricing.
Freight-absorption pricing.
International Pricing
• Price depends on many factors, including:
– Economic conditions.
– Competitive situations.
– Laws and regulations.
– Development of the wholesaling and retailing system.
– Costs.
– Internet.
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