Download FY Mktg Mix PRICING - International University College, Sofia

Pricing policy
Dr. Vesselin Blagoev
23/05/2017
1
Pricing methods
Cost
Marketing
Pricing methods
Competition
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2
Possible Pricing
Objectives
Target return
Profit oriented
Maximize profits
Pricing
objectives
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EURO or unit
sales growth
Sales oriented
Status quo
oriented
Growth in
market share
Meeting
competition
Non-price 3
competition
Price as seen by Consumers
List Price -
Product:
Less:
Discounts
• Physical
( Quantity, Seasonal,
Cash, Temporary sales)
• Assurance of quality
Less: Allowances
(Trade-inns)
• Service
equals
• Repair facilities
• Packaging
• Credit
Less: Rebate and
coupon value
• Trading stamps
Plus:
Taxes
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Place of delivery
4
or when available
Price setting methods
Markup
Break-even
Pont (BEP)
Bait pricing
Psychological
pricing
Average-cost
pricing
Price
setting
Price lining
Prestige pricing
Bundle pricing Complementary
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Perception price
product
Bid pricing
5
Cost based
methods
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Costs
 Fixed
costs are those costs that
remain unchanged no matter how
much is produced (rent, depreciation,
managers’ salaries, insurance,
employees’ salaries)
 Variable
costs – changing
expenses, closely related to the output
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Cost-oriented pricing
Markup
The Markup is a money amount
(EUR, $, BGN), or percent,
added to the cost of products to get the
selling price
Example:
Cost 1 Euro + 0.50 Euro markup = 1.50 Euro
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Average-cost pricing
Average-cost
pricing
means adding a reasonable
markup to the average cost
of a product
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Full cost pricing
(Cost-oriented pricing)
Year 1
Direct costs (per unit)
Fixed costs
Expected sales
Cost per unit
Direct costs
Fixed costs (200,000:100,000)
Full costs
Mark-up (10%)
Price (cost+mark-up)
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=2
= 200,000
= 100,000
=2
=2
=4
= 0.40
= 4.40
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Full cost pricing
(Cost-oriented pricing)
Year 2
Expected sales
Cost per unit
Direct costs
Fixed costs (200,000:50,000)
Full costs
Mark-up (10%)
Price (cost+mark-up)
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= 50,000
=2
=4
=6
= 0.60
= 6.60
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Cost-oriented pricing
Full cost pricing
 It
leads to an increase in price as sales
fall
 Sales estimates are made before the
price is set – illogical procedure
 It focuses at the internal costs, rather
than to the customers willingness to pay
 Overheads are difficult to estimate in a
multi-products company
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Average and marginal
cost
 Average
cost : the average cost for all
products
 Marginal cost : the cost to produce one
more unit.
Example: 275 Euro is the cost to produce 9
units and 280 Euro – to produce 10 units. Then
the marginal cost is the additional cost (5 Euro)
to produce 1 more unit.
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Direct cost pricing

Use of direct cost (or marginal cost).
This involves calculating only the costs
for materials and labor + mark-up.
This price does not cover the full costs.
It is applied in some service
businesses, such as hotels, airlines,
where the product can not be stored
(the unused capacity means lost
revenue).
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BEP pricing

Break-even point represents the quantity
where the firm’s total cost will just equal its
total revenue
Total fixed costs
BEP (units) =
Fixed cost contribution
per unit
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Total revenue and cost (USD000)
BEP pricing
Total revenue curve
100
Total cost curve
75
Profit area
50
25
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Loss area
Units of production (000)
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BEP pricing
Let us take an example:
Let the price of product A = 1.2 Euro
Let the total fixed cost is 30,000 Euro.
Let the variable cost is 0.80 Euro. Then the fixed
cost of that product is (1.2 – 0.8) = 0.4 Euro per unit.
BEP =
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30,000 Euro
= 75,000 units
0.40 Euro
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Competitors
based
methods
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Tertiary competitors
Secondary
competitors
Immediate
Competitors
Technically
Similar
product
Different products solving the
same problem in similar way
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Different products solving or eliminating
the problem in a different way
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Competitor-oriented
pricing
 Going-rate
pricing: the prices
used by the competitors. No price
differentiation (away from the
marketing principles)
 Below the competition
 Above the competition
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Competitor-oriented pricing
Bid pricing
 Bid
pricing means offering a
specific price for each possible
job rather than setting a price
that applies to all customers,
i.e. building contractors.
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Competitor-oriented pricing
Bid pricing
Expected profit = Profit x Probability of
winning
Profit = Bidding price - Costs
Based on past experience about the pricing
(bidding) policy of the competitors
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Competitor-oriented pricing
Bid pricing
Bid price
Profit
2000
2100
2200
2300
2400
2500
0
100
200
300
400
500
Probability Expected
0.99
0.90
0.80
0.40
0.20
0.10
0
90
160
120
80
50
Which bid price do you recommend ?
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Competitor-oriented pricing
Bid pricing
Bid price
Profit
2000
2100
2200
2300
2400
2500
0
100
200
300
400
500
Probability Expected
0.99
0.90
0.80
0.40
0.20
0.10
0
90
160
120
80
50
The recommended bid price is EUR 2200 –
based on the Expected Profit criterion
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Marketing
methods
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Costs
Market
factors
Explicability
Marketing
Orientated
Pricing
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Price-quality
relationship
Negotiating
margins
Value to
customers
Competition
Marketing
Strategy
Effect on
distributors/
retailers
Political
Factors
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Reference pricing
Price lining
 The
customers have a “feeling” about
the price levels and compare the tagprice with those levels.
 Setting a few price levels for a product
line and then marking all items at these
prices. For example, most watches are
priced between 30 and 200 BGN. And
the prices are 30, 70, 110, 150, 200.
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Value pricing
Value pricing means setting a fair
price level for a marketing mix
that really gives customers what
they need.
Toyota is an example of a company
which has different marketing
mixes for different markets, each
one offering more compared to the
competing offerings.
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Perception pricing
A tractor with a relatively very high price
USD 90,000 Competitors’ price
+ 7,000 for superior durability
+ 6,000 for superior reliability
+ 5,000 for superior after sale service
+ 2,000 for additional guarantee on parts
USD 110,000 a deserved price
- 10,000 discount
USD 100,000 our deserved list price
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Perception pricing
Weight Characteristics
%
Pro ducts
A
B
C
25
Durability
40
40
20
30
Reliability
33
33
33
30
Delivery terms
50
25
25
15
Quality of service
45
35
20
41.65
32.65
24.9
100%
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Psychological pricing
 Psychological
pricing means
setting prices that have special
appeals to target customers. Some
scholars believe that there are
whole ranges of prices that
potential customers see as the
same. Price cuts within the range
do not increase the demand.
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Psychological pricing
Price (EUR)
Demand curve when Psychological
pricing is appropriate
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Quantity
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Prestige pricing
Prestige
pricing is setting a
rather high price to suggest
high quality or high status
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Prestige pricing
 Lowering
the prices will
reposition the business/product,
resulting in a failure to attract
the target market
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Skimming price
A skimming price policy (skim the
cream) is based on selling to the
top of the market products at the
highest possible price. It is applied
by the market leaders only (image,
high quality products, new
products)
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Conditions for charging
high prices
 Lack
of competition
 Product provides high value
 Customers have high ability to pay
 Consumer and bill payer are
different
 High pressure to buy
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Complementary
product pricing
 Complementary
product
pricing is setting prices on
several products as a group.
One of them can be priced very
low so that the demand for the
whole group will increase and
maximize the profit.
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Bait pricing
Bait
pricing is setting
some very low prices to
attract customers, and trying
to sell some more expensive
models or brands once the
customer is in the store
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Odd-even pricing
Odd-even
pricing is setting
prices that end in certain
numbers, i.e. number 5,
number 9 or 99.
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New product launch
strategies
Promotion
Low
Low
Price
High
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High
Slow
Rapid
penetration penetration
Slow
skimming
Rapid
skimming
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Introductory price
 Used
to speed new products
into a market
 The
plan is to raise the prices
as soon as the introductory
offer is over
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Penetration pricing
 Penetration
pricing policy is based
upon selling to the market at one low
price. This is the case when the
whole demand curve is fairly elastic.
It is very efficient when the economy
of scale in production leads to a
substantial reduction of the cost.
Some scholars call the penetration
price ‘stay-out-price’.
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Conditions for charging
low prices
 Only
feasible alternative
 Dominating competitors
 Make money later
 Make money elsewhere
 Experience effect (computers)
 Barrier to entry
 Predation – an attempt to put other
companies out of business
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Price discrimination
 Price
discrimination is selling
the same products to different
buyers at different prices
if it injures competition ->
Robinson-Patman Act (of 1936)
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Price discrimination
It refers to segmentation of the market
and pricing differences, based on price
elasticity characteristics of these
segments
 Example: Dinner menu for 15 BGN is
offered for 10 BGN from 6 to 7 p.m.
Time flexible and money sensitive
customers will add sales. The variable
cost has to be < 7
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
Discounts
Discounts are reductions from
the list price given by a seller
to buyers who either give up
some marketing function or
provide the function
themselves
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Discounts
Discounts
Quantity
discounts
Offered to encourage customers to
buy in larger amounts.
1-3 PCs at 350 EUR
4-6 PCs at 330 EUR
7+ PCs at 300 EUR
Cumulative
quantity
discounts
Seasonal
discounts
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Apply to purchases over a given
period of time
Encourage buyers to order in low
seasons
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Discounts
Discounts
Net 10
or Net 30
Cash
discounts
2/10 net
30
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It means that the customer is given 10
days or 30 days to pay
Encourage the buyers to pay their bills
quickly. Usually the cash discount
modifies
the net terms.
Means that the buyer can take a 2%
discount off the face value of the
invoice if the invoice is paid within 10
48
days.
Discounts
Discounts
A list price reduction given to the
Trade
(functional) channel members for the job they
are doing in the sales process
discount
Sale price
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A temporary discount from the list
price to encourage the customers
for immediate buying
49
Allowances
Allowances – like discounts
– are given to channel
members, customers or final
users for doing something or
accepting less of something
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Allowances
Allowances
Advertising
allowances
Stocking
allowances
Push money
(prize
money)
Trade-in
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allowance
Price reductions given to firms in the
channel to advertise or otherwise promote
supplier’ products locally
To get shelf space for a product
Called also PMs or spiffs – given to
retailers to pass on the salesclerks for
aggressively selling certain items
A price reduction given for used products
when similar new products are bought51
Rebates
The rebates are refunds paid
to consumers after a
purchase. Some car dealers
offer rebates of USD 500 to
2500 to push the sales of
slow-moving models.
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Types of prices
F.O.B. price – Free On Board
some vehicle at some place. At
the point of loading the title to the
products passes to the Buyer.
Then the Buyer pays the freight
and takes responsibility for
damage in transit.
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Types of prices
C.I.F. (Cost Insurance and
Freight): The title to the product
remains with the Seller until the
unloading of the product in the
place of destination is done
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Types of prices
Free custom office in Bourgas.
The product must be delivered
to the specified place.
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Types of prices
Zone
pricing means making
an average freight charge to all
buyers within specific
geographic areas. The Seller
pays the actual freight charges
and bills each customer for an
average charge.
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Dumping
Dumping
is pricing a
product sold in a foreign
market below the cost of
producing it or at a price
lower than in its domestic
market
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Initiating price changes
Circumstances
Increase the price
Cut the price
Value greater than price
Value less than price
Rising costs
Excess supply
Excess demand
Build objective
Harvest objective
Price war unlikely
Stop competitors’ entry
Tactics
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Price jump
Price fall
Staged price increases
Staged price reduction
Escalator clauses (aver. Salary) Fighter brands (2nd brand)
Price unbundling (training)
Price bundling
Lower discounts
Higher discounts
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