Download Pricing

GLOBAL MARKETING
Pricing Management
Pricing...
• Converts the underlying value of a product
offering or service into revenues and
profits.
• Is a fundamentally important activity to the
firm--pricing power.
• Is not a simple process.
Basic Concepts & Jargon
• Marginal costs--the unit costs of
production
– In a competitive market, establishes the
lowest feasible price a firm can set.
• Value price--the highest price the market
will bear
– Establishes an upper bound on prices, though
competition usually prevents value prices
from being realized.
The Pricing Range
Value Price
Downward price pressure
From competitive substitutes
Upward price pressure
through marketing efforts
Our Price
Feasible
Price
Range
Marginal Cost
Our
Premium
0
Price Sensitivity
• How customers respond to price changes
• Price elasticity of demand
– Demand is less elastic when:
•
•
•
•
Few or no substitutes or competitors
Buyers do not notice the higher price
Buyers are slow to change their buying habits
Buyers think the higher prices are justified
Pricing Methods
• Mark-up pricing
– Add a standard mark-up to the product’s costs
unit cost
Mark-up
price = (1-desired return on sales)
– So, if unit cost = $16, and the manufacturer
wants to earn a 20% mark-up on sales, what
would the mark-up price be?
• Target-return pricing
– The firm determines price based on desired target rate of return
on investment (ROI)
Target-return
Unit desired return x invested capital
= cost +
unit sales
price
– So, if the unit cost is $16, unit sales are expected to be 50,000,
the manufacturer has invested $1 million and wants to earn a
20% return, what would the target-return price be?
• Perceived value pricing
– Base price on customers’ perceived value
– Have to deliver more value than the competitor and
demonstrate this to prospective buyers
• Value pricing
– Based on firm becoming a low-cost producer while
maintaining quality
– Targets value-conscious consumers
– Everyday low pricing
• Going-rate pricing
– Base prices primarily on competitors’ prices
– The same, more, or less than major
competitor
• Auction-type pricing
• Group pricing
Pricing Goals
• Determining pricing tactics depends on
what goals are to be accomplished
– Maximize cash flow
– Penetrate market
– Social objectives
– Short-term survival
Effective Pricing Management
• Discriminate between customers according
to market segments.
• Coordinate incentives across intermediaries
and consumers.
• Effectively deal with competition.
• Integrate with the firm’s other marketing
efforts.
• Understand consumers’ willingness to pay.
• Understand pricing effects throughout
product line.
Customer Discrimination
• Different segments of customers often
have different value prices for the same
product.
• Ideally, firms would like to charge each
customer his/her value price.
• Discrimination, in the sense of charging
different prices for the same good to
reasonably identical customers is
generally considered illegal.
Discrimination (continued)
• There are legal exceptions to
discrimination:
– Price-customization opportunities
• Business-to-business, service relations
– Customers self-select into appropriate price
tiers
• Choose between differently priced options
– Quantity discounts
– Loyalty programs
• Proactively shape customers into what is desired
Incentive Coordination
• Directly link incentives to desired behavior
• Three areas of incentive coordination:
– Salesperson incentives and price flexibility
– Intermediary margins and push
– End-user incentives and service pricing
Salesperson Incentives
• The degree of pricing flexibility allocated to
the salesperson directly affects selling
behavior.
• Direct link between incentives and
salesperson’s compensation plan.
– If commission is tied to volume, the salesperson
will discount heavily and frequently in order to
maximize quantity sold.
– If commission is tied to profitability, the
salesperson will try to hold prices high in order to
maximize margins, but low sales volume may
result.
Intermediary Incentives
• The margin built into a price provides
resellers with incentives to push the
product.
• Trade promotions are another type of
incentive:
– Quantity discounts
– Compensate marketing efforts
End-User Incentives
• Salient to services.
• To avoid over-utilization of services (e.g.,
health care), link cost savings to
consumption to encourage judicious
consumption behavior.
Dealing with Competition
• In a competitive environment, have to set
prices with competitor actions in mind.
– Commodity market: often use fluctuating prices
– Mature products: high use of discounts and
promotions
• Promotions can result in forward buying
• Take price out of the equation
– Automatic Price Protection
• Loyalty programs
– Useful in product categories marked by low
differentiation
Integration With Other
Marketing Efforts
• Price should reflect the value of the
product or service.
• High prices--skimming
– Obtain low market share with high margins.
– Marketing program needs to communicate
product benefits.
– Intensive selling.
– Maximize intermediary push.
Integration (continued)
• Low prices--penetration
– Obtain high market share with low margins.
– Marketing program should focus on
generating general awareness.
– Focus on productive capacity.
Consumers’ Willingness to Pay
• What is the impact of consumers’
willingness to pay on demand and a firm’s
net income?
– At various price levels
– When price is changed
• Behavioral price vs. objective price
– “How fair of a deal am I getting?” vs. “How
good of a deal am I getting?”
A survey of managers….
• 84% were well-informed on the variable
cost of providing their product.
• 81% were well-informed on the fixed cost
of providing their product.
• 75% were well-informed on the price of
competitors’ products.
Survey (continued)
• 61% were well-informed on the value of
their product to the customer.
• 34% were well-informed on how
consumers would respond to price
changes.
• 21% were well-informed on consumers’
willingness to pay at various price levels.
Survey (continued)
• Most managers understand the economic
perspective of pricing:
– Consumers buy when perceived value
exceeds price.
• Most managers do not understand the
psychological perspective of pricing
Psychological Update #1
• Willingness to pay is impacted by relative
incentives.
In determining willingness to pay, a consumer
will consider both absolute “economic utility”
from the transaction [i.e., perceived value actual price] and relative incentive to enter the
transaction [i.e., (perceived value - actual
price)/actual price].
Psychological Update #2
• Willingness to pay is impacted by a
salient reference price.
In determining willingness to pay, a
consumer will consider economic utility
from the transaction [i.e., perceived value actual price] and the consistency between
the actual price and a salient reference
price [i.e., actual price - reference price].
• The most common basis for a reference
price is the previous price paid for a
product.
Psychological Update #3
• Willingness to pay is impacted by cost of
goods sold.
In determining willingness to pay, a consumer
will consider his/her economic utility from the
transaction [i.e., perceived value - actual
price] and the economic utility of the firm [i.e.,
actual price - cost of goods sold].
• Consumers do not want to be taken
advantage of.
Psychological Update #4
• Perceptions of fairness vary across
product categories.
– In determining willingness to pay, the degree
to which a consumer will rely upon economic
utility from the transaction [i.e., perceived
value - actual price] will vary across product
categories.
• Necessary vs. discretionary purchases.
• Luxury vs. utilitarian products.
Managing Perceptions of
Transaction Fairness
• Strategy #1: Actively manage price
expectations.
– Establish credible reference prices.
• Customary prices
• Odd prices
– Manage product price trends.
– Encourage favorable comparisons.
– Avoid unfavorable comparison through
product differentiation.
Managing Perceptions...
• Strategy #2: Actively manage perceptions
of cost of goods sold.
– Focus attention of fully-loaded cost of goods
sold.
– Bundle products to obscure cost of goods
sold.
– Focus attention of consumer value.
Product Line Pricing
• The pricing of one product in product line
may affect sales of other products in
product line.
• Price elasticity of demand
– The degree of responsiveness of demand to a
price change.
• Cross-elasticity of demand
– The degree to which changing the price of
one product affects demand for another
product.
Cross-elasticity of Demand
• Products with positive cross-elasticity
are substitutes.
– Lowering the price of Product A decreases
demand for Product B without any change
in the price of Product B.
• Products with negative cross-elasticity
are complementary products.
– Lowering the price of Product A increases
demand for both Product A and Product B
without any change in the price of Product
B.