An introduction to pricing Hoorcollege marketing blok 2 week 5

Learning goals By the end of this week’s colleges and the reading you should: Understand the roles of pricing in the marketing mix Be aware of the factors that affect the price set Understand the strategies available to marketers when setting prices Know some of the tactics available for changing prices

Agenda The importance of price What is price? Factors that influence pricing decisions Setting prices: pricing strategies Tactics for changing price

The importance of price

Price is important Price is one of the most important factors in the buying decision If it is perceived as too high by the target customer, demand will be low Price is the only income generator in the marketing mix If the price is too low, profits will not be optimal Price suggests a positioning to the consumer If the price is out of step with the rest of the marketing mix it will weaken the offer Price is what the customer pays in the exchange process The customer must feel they are getting a fair deal

What is price?

What is a price? All products and services have a price Gratis is also a price A price the thing (usually money) that is charged in exchange for a product or service More broadly a price is the sum of all values that consumers exchange for the benefits of having or using a product or service This might include things such as extra warranty and cost of ownership

Perception (perceptie) is very important I’ll get a drink of water Oh bugger! I’m thirsty Cool! If the consumer feels the price is too high they will try to find an alternative or may even go without

Perception of what is “too much” (or too little) varies by consumer Cool! Waste of money US$ 23,000 Knowing what your target customer understands as valuable is essential to setting a price What’s in it for them?

Factors affecting price setting

Price setting can be complex

But in most cases there are two key factors The highest price that can be charged is the maximum the target customer perceives as being “worth it” The minimum is (usually) what is necessary not to lose money The other factors affect where you can sit between these two

Setting prices: pricing strategies

Deciding strategy In order to set a price you first need to understand What the target customer sees as the maximum price that is “worth it” And What your minimum price is based on the costs you have Then you decide you pricing strategy

New product or new price? A new price might be for a new product or for an existing one Deciding the price of a new product tends to be different from changing the price of an existing product With new products you often have less information to work with

New product pricing

New product pricing Two types of “new” product Imitative products Products that the consumer can compare easily with another offer meeting the same need Innovative products Products that the consumer cannot compare with another solution These are rarer than many think Each requires a different approaches

Imitative products The issue you here is how to position the product against existing offers There are two variables involved Relative price compared to alternatives Relative quality compared to alternatives These offer 4 possible strategies

Price positioning strategies for imitative products Relative Price High Low Relative Quality High Premium strategy Good-value strategy Low Overcharging strategy Economy strategy

Beware of being a “me too” offer Relative Price High Low Relative Quality High Premium strategy Good-value strategy Me too Low Overcharging strategy Economy strategy

Innovative products These products have no reference Although they may be an innovative replacement for an existing offer Price is set based on an deep understanding of the target customer’s idea of value There are two main strategies Market-skimming pricing Market-penetration pricing

Market-skimming This involves setting the starting price high to skim layers of the market The price must be dynamic and adjusted over time to maintain sales Stage 1 Set a price that is just “worth it” for some segment (usually innovators) of the market Stage 2 As sales slow down because the market segment is saturated or competitors enter the market the price is reduced for the next segment (early adopters) And so on...

Market-skimming for & against Advantages Positions product in terms of Uniqueness Quality Allows quicker recovery of development costs Risks Failure to react to product life cycle development Setting the price too high Over-estimating the target customer’s sense of what is valuable Product not really unique Fast competitor reaction

Market-penetration This involves setting a price that is low enough to attract large numbers of buyers

Conditions favouring market-penetration Price sensitive market Production and distribution costs will fall as a result of high volumes The low price helps keep competition out of the market

Advantages of penetration Develop a market for a new offer quickly Take advantages of economies of scale Keep competition out of the market Develop dominant market position

Market-skimming versus penetration Market-skimming works best when: The product is genuinely unique Competitors cannot copy the product quickly E.g. it is protected by a patent The product offers real value to some market segments The market is not price sensitive Production and distribution costs will not fall quickly Market penetration works best when: The market is price sensitive Production and distribution costs will fall based on increased volumes The product is easily copied The value of the product is less clear

“Normal” pricing

There is no such thing as “normal” pricing, but Pricing existing or updated products is easier (a little like imitative new products) There are 13 different strategies These can sometimes be used in combinations

“Normal” pricing strategies

“Gratis” pricing isn’t really gratis Even when it’s gratis, someone has to pay This had better be worth it! Gratis…Cool!

Ways of keeping things “gratis” Advertising Selling database customer information Selling-up

Some tactics for changing price These really are used

Changing price is sometimes necessary…but risky A price rise can mean Angry customers Potential reduction in market share if competitors do not increase A price decrease can mean A potential decrease in profit Image problems Sometimes it is better not to change price, but find a more creative way to handle the price This may not be the case for economy brands

Some ways to avoid increasing price Change the product (e.g. make it smaller) Bundle the product Separate extras and make the options Change discount to intermediaries Charge for deliver and extras Move away from lower margin products in line-up Offer “prompt payment” discounts Late payment penalties Change minimum order size Leave the market

Some ways to avoid decreasing price Short-term promotions Bundle pricing Value packs Increase warranty Increase intermediary discounts Extend payment terms Increase product quality Offer better service Leave the market

Summary Price is the only element of the marketing mix that makes money Poor pricing can ruin your marketing mix Pricing of new products is more complex than existing products Where possible avoid changing price Unless you are a economy brand