Download Price Adjustment Strategies

Principles of
Marketing
“ Pricing Products: Pricing
Strategies”
Fundamentally in managing the
price element of a company’s
marketing mix, management
of a firm first must decide on
its pricing goal and then set
the base price for a good or a
service. The final task is to the
design pricing strategies that
are compatible with the rest of
the marketing mix
Price Vs Non-price competition
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Price competition: A company engages in
price competition by regularly offering
products priced as low as possible and
typically accompanies by few if any services.
(think value pricing not just price)
Non-price Competition: Here sellers maintain
stable prices and attempt to improve their
market positions by emphasizing other
aspects of their marketing programs. (think
brand equity)
Market Entry Strategies
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In preparing to enter the market with a new product,
management must decide which of these strategies to
choose:
a)
Market-Skimming Pricing
- Setting a high price for a new product to skim maximum
revenues layer by layer from segments willing to pay the
high price; the price set is set at its highest possible level
that the most interested will pay for the new product. The
company makes fewer but more profitable sales.
- This strategy is used because it provides healthy profit
margins to recover costs of high R&D.
- Demand is curtailed to a level that does not outstrip the
firm’s production capacity.
- It provides flexibility because it is much easier to lower an
initial price that meets consumer resistance than it is to
raise an initial price that has proven to be too low to cover
costs.
Market Skimming is suitable under these
conditions:
- The new product has distinctive features
strongly desired by consumers.
- Demand is fairly inelastic.
- The new product is protected through entry
barriers such as patents.
b) Market Penetration Pricing
- Here a low initial price is established for a new
product. The price is low in relation to the target
market’s range of expected prices
- The primary aim of this strategy is to penetrate
the mass market immediately and in doing so
generate substantial sales volume and a large
market share.
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This strategy is used if the
following conditions exits:
A large market exists for the
product.
Demand is highly elastic.
Substantial reductions in unit
costs can be made through large
scale operations.
Fierce competition already exists
in the market.
Product Mix Pricing Strategies
1)
2)
Product Line Pricing: Setting the price steps
between various products in a product line
based on cost differences between the
products, customer evaluations of different
features and competitors prices.
Optional product pricing: The pricing of
optional or accessory products along with a
main product (in automobiles).
Product Mix Pricing Strategies
3)
4)
5)
Captive Product Pricing: Setting a price for
products that must be used along with the main
product such as Energizer batteries and the
Energizer recharger.
By product Pricing: Setting a price for by products
in order to make the main product’s price more
competitive e.g. cream and butter from skimmed
milk.
Product Bundle Pricing: Combining several
products and offering the bundle at a price like
deals from Mr. Burger. This helps promote sales of
products consumers might not otherwise buy.
Price Adjustment Strategies
1)
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Discount and Allowance Pricing: Discount is a straight
reduction in pricing during a stated period of time, discounts
come in these forms;
Cash discount – 2/10, net 30 meaning that although payment is
due with in 30 days, the buyer can deduct 2 percent if the bill is
played within 10 days.
Quantity discount – buy two get one free
Functional discount – provided to channel members from
sellers usually called trade discount
Seasonal discount – price reduction to buyers who buy good
and merchandise out of season, like sale on winter clothes at
mother care during summer.
Allowances are promotional money paid by manufacturers to
retailers in return for an agreement to feature the
manufacturers products in some way.
Price Adjustment Strategies
Segmented Pricing: Selling a product or service at two or more
prices where he difference in price is not based on cost.
Customer segment pricing – PIA charges a lower fare from
students
Product form pricing – N series Mobile phones in Nokia are
priced differently due to the difference in their features.
Location pricing – front seats in a theater or in the stadium are
more expensive than other seats.
Time pricing – Tickets for Lahore at the time of Basant are as
expensive as a return ticket from Dubai.
Segmented pricing is also called yield or revenue management – its
means selling the right product to the right person at the right
time.
2)
Price Adjustment Strategies
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1.
2.
3.
4.
For segmented pricing to be effective:
The market must be segment able
The segments should show different
degrees of demand
The cost of segmenting and watching the
market should not exceed extra revenue
obtained
Segmented pricing must be legal
Price Adjustment Strategies
3) Psychological Pricing – Here sellers consider the
psychology of prices and not simply economics.
Customers perceives a product with a high price to
have high quality
Reference pricing – the prices that buyers carry in
their mind and refer to when they look at a product,
this reference may be formed by looking at current
prices, remembering past prices and assessing the
buying situation. E.g. a product sold at Agha’s
might signal that its worth a higher price.
Price Adjustment Strategies
Good Pricing Cues:
1.
Sale Signs , the most straightforward retail pricing
cue, but overuse may create suspicion in the
buyer’s mind
2.
Prices ending in 9: if you compare Rs 300 to Rs
299.9, although the price difference is just .1 , the
psychological difference is much greater
3.
Signpost Pricing ( loss-leader pricing) – When
sellers offer selected signpost items to buyers at or
below cost hoping to make money on the shoppers
other purchases.
4.
Pricing Matching Guarantees – Here stores
promise to meet or beat competitors price.
Price Adjustment Strategies
4) Promotional Pricing : Companies temporarily reduce
their prices to create excitement and urgency,
these may be
Loss leader pricing
Cash rebates
Special Event pricing
But promotional pricing can be easily copied if
used too frequently , it can make the buyers deal
prone and erode the value of a brand, it can get
addictive for the company which wont know how to
get out of this loop. It can also lead to industry
price wars.
Price Adjustment Strategies
4) Geographical Pricing :
a)
FOB origin Pricing – A geographical pricing
strategy in which goods are placed Free on Board
(FOB) a carrier; the customer pays the freight from
the factory to the destination. Not too attractive for
distant customers.
b)
Uniform delivered Pricing – Here the company
charges the same price plus freight to all
customers regardless of location, freight charge is
set at average freight cost henceforth customers in
close proximity are at a disadvantage
Price Adjustment Strategies
4) Geographical Pricing :
c)
Zone Pricing – The company sets up two or more
zones. All customers within a zone pay the same
total price; the more distant the zone, the higher
the price.
d)
Basing-point pricing – Here the seller designates
some city as a basing point and charges all
customers the freight cost from that city to the
customer.
e)
Freight Absorption pricing – Here the seller
absorbs all or part of the freight charges in order to
get desired business.
Price Adjustment Strategies
Basing-point pricingPSO oil tanker charges
Khi to Lhr Rs 4000
Khi to Landhi Rs 4000
Khi to Murree Rs 4000
Base point is Karachi and this is done in order
to keep costs uniform and to eliminate price
competition.
c)
Price Adjustment Strategies
5) International Pricing : This is base don the
economic conditions , competitive situations
law and regulations and the wholesaling
and retailing system of a country.
Price Changes
Initiating Price Cuts – Usually done to deal with
excess capacity, may lead to price wars. A
company may also cut prices in a drive to
dominate the market through lower costs.
2.
Initiating Price Increases – Caused by cost
inflation , to give it a sense of fairness price
increase should be supported by
communicating to the customer why the
increase took place and slowly increasing
prices by eliminating discounts or curtailing
production of low margin products.
Price cuts may be viewed with suspicion if its on a
prestige good, similarly price increase could
trigger something about quality to the buyers.
1.
Responding to Price Changes
Has competitor
cut price?
No
Hold current price;
continue
to monitor
competitors price
yes
Will lower price
negatively
affect
our market share or polls?
No
Reduce price
Raise perceived
quality
yes
No
Can/should effective
action be taken?
Improve quality
and
increase price
yes
Launch low-price
“fighting brand”
Public Policy and Pricing
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Price fixing
Predatory pricing – selling below costs to drive out
competitors
Price discrimination – offering same price to all
retailers
Retail price maintenance – sellers cannot require
dealers to charge a specific price for its product
Deceptive pricing – When a seller states prices or
price savings that mislead consumers or are not
actually available to consumers.