Download What is Marketing?

Pricing: A Strategy Marketing
Decision
With Duane Weaver
10-1
© 2010 Pearson Education Canada
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What is Price?
Factors to consider when setting prices
Value Based
Cost Based
Target Profit Based
Price and Demand (Elasticity)
Market Structure and Pricing
Strategic Pricing Decisions
Public Policy and Pricing
10-2
© 2010 Pearson Education Canada
What is Price?
• Price relates to the amount of money charged
for a product or a service or the sum of the
value that buyers exchange for the benefits of
having or using the product or service
• Price is the element that
– Creates revenue in the marketing mix
– Is the most flexible in the marketing mix
– Can create most problems for the marketing
personnel if not carried out correctly.
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Factors to Consider when Setting Prices
• Understanding the value the customer would gain
• Cost of the product and its operations
• Relationship between price and demand in the
market place
• The marketing strategy pursued by the
organization
• Type of market structure it operates in
• Competitor activity in the market
• Marketing environmental forces that affect the
company
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Value-Based Pricing
• Price setting based on the buyer’s
perceptions of value rather than on the
seller’s cost
• Variations of value-based pricing options
– Good-value pricing, such as everyday low
pricing (EDLP)
– Value-added pricing
10-5
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Cost-Based Approach to Pricing
• Cost based pricing is a pricing strategy that takes the
product costs into consideration in setting the prices.
• The cost based approach would set the price floor (the
lowest possible price) the company can charge its
product.
• However these approaches fail to consider customer
value and relationships between price and demand for
a product.
• Cost based pricing has many methods in setting the
price of a product.
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Cost-Based Pricing
• Cost plus pricing
– Cost is made up of variable cost and fixed cost per
unit
– Adds a mark up to the cost in arriving at the price
• Breakeven pricing (see p. 398)
– Calculating the price at which the company
breakeven on the product
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Target Profit Pricing
• This is an extension from the breakeven pricing
method.
• The organization could add the targeted profit
to the break even amount and could identify
how many units it needs to sell to achieve the
intended target profit.
• Target profit volume =
(fixed costs + target profit ) ÷ (price – variable
costs)
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Relationship between Price and
Demand (Price Elasticity)
• Each price the company charge will lead to a
different level of demand.
• This is due to the inverse relationship between
price and quantity demand.
• The demand curve will highlight this
relationship graphically.
• The degree to which the level of
responsiveness between price of a product and
its quantity demanded is explained by the
concept of price elasticity. (Fig. 10.4)
10-9
© 2010 Pearson Education Canada
in-class notes
Factors to Consider When Setting Prices
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Customer perceived value
Costs (fixed and variable)
Relationship between price and demand
Marketing strategy
Type of market
Pricing of competitive products
The marketing environment
10-10
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Market Structures and Pricing
• Pure Competition – The company has to take the price
determined by the market
• Monopolistic Competition – Through differentiation, the
company can set different prices for different segments
• Oligopolistic Competition – consist of few sellers who
are highly sensitive to each others pricing and
marketing strategies
• Pure Monopoly – Depending on the nature of
ownership and regulations, they may pursue different
pricing strategies
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in-class notes
Strategic Pricing Decisions
• Market skimming pricing (or price skimming)
– Setting a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay the
price
• Market penetration pricing (or penetration pricing)
– a strategy that sets a low price for a new product in order to
attract a segment of buyers, then raises the price.
• Prestige pricing
– is used to set prices for luxury products. Unlike in the market
skimming strategy, the high prices set for the product in the
beginning would remain as it is.
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in-class notes
Strategic Pricing Decisions
• Product line pricing
– Relates to setting the price steps between products in a
product line based on cost differences and customer
perceptions of the value.
• Captive-product pricing (see next slides)
• By-product pricing (see next slides)
• Bundle pricing (see next slides)
10-13
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Forms of Product line Pricing (1 of 2)
• Relates to setting the price steps between
products in a product line based on cost
differences and customer perceptions of the
value.
• Optional-product pricing - The pricing of optional or
accessory products along with a main product. E.g.
pricing a computer system with an array of processors,
hard drives etc.
• Captive product pricing - Setting a price for a product
that must be purchased along with a main product. E.g.
– printers and cartridges, consoles and games
10-14
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Forms of Product Line Pricing (2 of 2)
• By product pricing – products that are created
through the production process. Using by-product
pricing, the company seeks a market for these byproducts to help offset the costs of disposing of them.
• Bundle pricing - Setting one price for a set of
products. The price is only valid if all the products in
the set are purchased. E.g. Rogers bundling prices for
internet, cable and phone services.
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in-class notes
Price Adjustment Strategies
• Discount and Allowance Pricing – adjusting the original price
to reward customers for various responses.
• Segmented Pricing – setting different prices for different
segments
• Psychological Pricing – setting the price based on the
psychological affect on the customer
• Promotional Pricing – temporary price reductions below list
prices to create buying excitement and urgency
• Geographic Pricing – setting prices depending on the
customers location (FOB, Zone, Basing Point, Freight Absorption)
• Dynamic Pricing – adjusting prices to meet the characteristics
and needs of individual customers
• International Pricing – pricing set based on the international
scale of operations
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Reasons for
Initiating Price Changes
• Price Cuts
• Price Increases
– Excess capacity.
– Falling market
share.
– Dominate market
through lower costs.
10-17
– Cost inflation.
– Over-demand. cannot
supply all customers’
needs.
© 2010 Pearson Education Canada
in-class notes
Public Policy and Pricing
• In Canada, the Competition Act defines what is legal in
pricing tactics
• Laws are different in Canada and the U.S.
• Price fixing, price discrimination, and deceptive pricing
are illegal
• Predatory pricing (to drive competitors out of business)
is illegal
• Companies must offer the same price to retailers
regardless of their size
• Companies cannot dictate the price a retailer sells their
product for
10-18
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Thank you for your time!
10-19
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