Lec 09 Two Sessions (Pricing Model).pptx

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1. Marketing Principles Pricing Products: Pricing Considerations and Approaches Session 8

2. What is Price? Price Has Many Names Rent Fee Rate Commission Assessment Tuition Fare Toll Premium Retainer Bribe Salary Wage Interest Tax

3. Definition Price The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

4. Dynamic Pricing on the Web allows BUYERS to: Get instant price comparisons from thousands of vendors. Find and negotiate lower prices. Negotiate prices in online auctions and exchanges. What is Price?

5. Price and the Marketing Mix: Only element to produce revenues Most flexible element Can be changed quickly Price Competition Common Pricing Mistakes What is Price?

6. Factors Affecting Price Decisions

7. Factors to Consider When Setting Price Market positioning influences strategy Other pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership Not-for-profit objectives: Partial or full cost recovery Social pricing Marketing objectives Marketing mix strategies Costs Organizational considerations Internal Factors

8. Product quality leadership: Four Seasons starts with very high quality service, then charges a price to match.

9. Factors to Consider When Setting Price Pricing must be carefully coordinated with the other marketing mix elements Target costing is often used to support product positioning strategies based on price Nonprice positioning can also be used Marketing objectives Marketing mix strategies Costs Organizational considerations Internal Factors

10. Swatch used target costing to manage costs carefully and create a watch offering the right blend of fashion and functions at a price consumers would pay.

11. Factors to Consider When Setting Price Types of costs: Variable Fixed Total costs How costs vary at different production levels will influence price-setting Experience (learning) curve effects on price Marketing objectives Marketing mix strategies Costs Organizational considerations Internal Factors

12. Factors to Consider When Setting Price Who sets the price? Small companies: CEO or top management Large companies: Divisional or product line managers Price negotiation is common in industrial settings Some industries have pricing departments Marketing objectives Marketing mix strategies Costs Organizational considerations Internal Factors

13. External factors must also be considered when planning pricing strategy.

14. Factors to Consider When Setting Price Types of markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Consumer perceptions of price and value Price-demand relationship Demand curve Price elasticity of demand Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements External Factors

15. 11- 15 How would you characterize the type of market – in terms of level of competition – for the following: Electricity and gas utilities Cable TV, Internet services Local, long-distance, wireless telephone service Discussion Question

16. Factors to Consider When Setting Price Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competition Low-price low-margin strategies inhibit competition High-price high-margin strategies attract competition Benchmarking costs against the competition is recommended Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements External Factors

17. PC marketing has become extremely price competitive. Knowledge of competitive prices, offers, and costs is key to pricing strategy.

18. Factors to Consider When Setting Price Economic conditions Affect production costs Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may limit or restrict pricing options Social considerations may be taken into account Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements External Factors

19. Figure 11-5: Major Considerations in Setting Price

20. Cost-Based Pricing: Cost-Plus Pricing Adding a standard markup to cost Ignores demand and competition Popular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as fairer to both buyers and sellers General Pricing Approaches

21. Cost-Based Pricing Example Variable costs: $20 Fixed costs: $ 500,000 Expected sales: 100,000 units Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000/100,000 = $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 - .20) = $31.25 General Pricing Approaches

22. Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. Companies wishing to make a profit must exceed the break-even unit volume. General Pricing Approaches

23. 11- 23 Assume the following costs: Fixed costs (FC): $ 500,000 Variable cost/unit (VC): $ 10.00 Recalling that BE = FC/(P-VC), calculate the break-even unit volume at selling prices of $15.00 and $20.00 per unit. How many units would need to be sold if a profit of $250,000 was desired? Discussion Question

24. Figure 11-7: Cost-Based Versus Value-Based Pricing

25. Value-Based Pricing: Uses buyers’ perceptions of value rather than seller’s costs to set price. Measuring perceived value can be difficult. Consumer attitudes toward price and quality have shifted during the last decade. Introduction of less expensive versions of established brands has become common. General Pricing Approaches

26. Competition-Based Pricing: Also called going-rate pricing May price at the same level, above, or below the competition General Pricing Approaches

27. Pricing Strategies New-Product Pricing Strategies Product Mix Pricing Strategies Price Adjustment Strategies Price Changes Topic Outline

28. New-Product Pricing Strategies Market-skimming pricing Market-penetration pricing Pricing Strategies

29. New-Product Pricing Strategies Market-skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market(Premium Price Strategy ) Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily

30. New-Product Pricing Strategies Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Price sensitive market Inverse relationship of production and distribution cost to sales growth Low prices must keep competition out of the market

31. Pricing Strategies

32. Product Mix Pricing Strategies Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices Optional product pricing takes into account optional or accessory products along with the main product Pricing Strategies

33. Product Mix Pricing Strategies Captive-product pricing involves products that must be used along with the main product Two-part pricing involves breaking the price into: Fixed fee Variable usage fee Pricing Strategies

34. Price Mix Pricing Strategies By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery. Pricing Strategies

35. Price Mix Pricing Strategies Product bundle pricing combines several products at a reduced price Pricing Strategies

36. Price-Adjustment Strategies

37. Price-Adjustment Strategies Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product Discounts Allowances Pricing Strategies

38. Price-Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost Pricing Strategies

39. Price-Adjustment Strategies To be effective: Market must be segmentable Segments must show different degrees of demand Watching the market cannot exceed the extra revenue obtained from the price difference Must be legal

40. Price-Adjustment Strategies Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics Reference prices are prices that buyers carry in their minds and refer to when looking at a given product Noting current prices Remembering past prices Assessing the buying situations

41. Price-Adjustment Strategies Promotional pricing is when prices are temporarily priced below list price or cost to increase demand Loss leaders Special event pricing Cash rebates Low-interest financing Longer warrantees Free maintenance

42. Price-Adjustment Strategies Risks of promotional pricing Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price Creates price wars

43. Price-Adjustment Strategies Geographical pricing is used for customers in different parts of the country or the world FOB pricing Uniformed-delivery pricing Zone pricing Basing-point pricing Freight-absorption pricing

44. Price-Adjustment Strategies FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer Uniformed delivery pricing means the company charges the same price plus freight to all customers, regardless of location

45. Price-Adjustment Strategies Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price Basing point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped

46. Price-Adjustment Strategies Freight absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

47. Price-Adjustment Strategies Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations

48. Price-Adjustment Strategies International pricing is when prices are set in a specific country based on country-specific factors Economic conditions Competitive conditions Laws and regulations Infrastructure Company marketing objective

49. Price Changes Price cuts Price increases

50. Price Changes Initiating Pricing Changes

51. Price Changes Buyer Reactions to Pricing Changes

52. Price Changes Questions Why did the competitor change the price? Is the price cut permanent or temporary? What is the effect on market share and profits? Will competitors respond? Responding to Price Changes

53. Price Changes Solutions Reduce price to match competition Maintain price but raise the perceived value through communications Improve quality and increase price Launch a lower-price “fighting” brand Responding to Price Changes

54. Public Policy and Pricing Price fixing : Sellers must set prices without talking to competitors Predatory pricing : Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business Pricing Within Channel Levels

55. Public Policy and Pricing Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers Scanner fraud failure of the seller to enter current or sale prices into the computer system Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying Pricing Across Channel Levels