Chapter 4: The pricing model

Learning objectives After studying this chapter you should be able to: Understand what is meant by the pricing model Discuss the different types of pricing models Discuss the internal and external factors that influence pricing decisions Explain the steps that should be followed when developing the prices of new products Discuss the pricing objectives Discuss and calculate the different types of basic pricing

The pricing model One of the toughest decisions for any new organization is how to price their products and services. The implications of these decisions are enormous because it defines the brand image, the funding requirements and the long-term business viability of an organization. Pricing models: Product or service is free, revenue from ads and critical masses Product is free, but you pay for services Freemium model

The pricing model cont… Cost-based model Value model Portfolio pricing Tiered or volume pricing Competitive positioning Feature pricing Razor blade pricing Discount pricing Market pricing

Factors that influence pricing decisions Internal factors Marketing goals Use pricing strategies in order to reach various marketing goals. Costs If the price is fixed, the organisation should look at its costs to see whether the product is worth stocking or not. Organisations should use the cost of their products or services as a way of working out the product’s sale prices and demand. Other decisions an organisation makes

Factors that influence pricing decisions cont… External factors The nature of the market demand The amount of a product that a person will buy will largely depend on its price. Consumer behaviour Perception of price differneces Reference prices Price-quality relationships Demand band Price as a statement of value

Factors that influence pricing decisions cont… Competition In any competitive situation, a seller and buyer can negotiate a sales prices and either the seller or buyer will benefit more. What suppliers do Organisations that make or supply things must be aware of prices and needs. What authorities and government do Legal environment. Economic conditions Inflations and interest rates are most likely the most important variables that organisations should keep in mind.

Establish pricing objectives Before sellers can set the selling price of their merchandise, they must set specific, measureable objectives that correspond to their marketing and enterprise objectives. Steps in developing the prices if new products Developing marketing strategy Make marketing mix decisions Estimate the demand curve Calculate cost Understand environmental factors Set pricing objectives Determine pricing

Establish pricing objectives cont… Three categories of pricing objectives Profit orientated objectives Profit maximisation, target profitability or net sales. Price objectives are set so that the best possible profit can be earned. Sales orientated objectives Expressed in terms of sales volume or market share. Sales objectives aim to attract a new or relatively new product and to keep customers support for a fairly long time. Maintaining the status quo Objectives directed at meeting or preventing competition or non-price competition.

Determining the basic price Basic pricing strategies used by marketers Strategy based on cost Organisations think about all the costs. Cost-plus pricing Mark-up pricing Target-pricing Break-even pricing Strategy based on value Demand-minus pricing Chain mark-up pricing Price discrimination

Determining the basic price cont… Strategy based on competition Going-rate pricing Leadership pricing Pricing by competitive bidding

Summary Organisations work in more competitive and fast-changing pricing environments, where price decisions have become more critical. The various different types of price models used depends on the different types of price models that organisations uses.