School of Marketing 1 Lecture 7: Pricing considerations and approaches School of Marketing

2 Chapter Objectives (ch 13) 1. Explain how marketing objectives, marketing-mix strategy, costs, and other company factors affect pricing decisions 2. List and discuss factors outside the company that affect pricing decisions 3. Explain how price setting depends on consumer perceptions of price and on the price-demand relationship 4. Compare the five general pricing approaches School of Marketing

3 Chapter Objectives (ch 13) cont’d 5. Describe some major strategies for pricing new products 6. Outline some price adjustment strategies and the rationale 7.Summarise steps to effective pricing

School of Marketing 4 Factors to consider when setting prices Internal factors: –Marketing objectives –Marketing mix strategy –Costs

School of Marketing 5 Factors to consider when setting prices External factors –The market, and demand –Consumer perceptions of price and value –Competitor’s prices

School of Marketing 6 Price “floor” dictated by your costs Price “ceiling” indicated by customer valuation of your features Orienting points set by competitors prices Setting your price High price Low price

School of Marketing 7 General pricing approaches Cost-based pricing Value-based pricing Competition-based pricing Performance-based pricing Relationship pricing

School of Marketing 8 Cost-based pricing (‘cost-plus’) The simplest pricing method is cost-plus pricing - adding a standard mark-up to the cost of the product. Construction companies, for example, submit job bids by estimating the total project cost and adding a standard mark-up for profit. Also popular in: –Professional services – salary costs plus 100% –Retailers, wholesalers Ensures costs are covered Fair (costs up or down, prices up or down !) What are the negatives?

School of Marketing 9 Value-based pricing Buyers perceptions of value, not just sellers costs How do you do this ? Often methods such as conjoint analysis are used to determine the ‘worth’ of each product feature Positive/negatives?

School of Marketing 10 Competition-based pricing First lets talk about: Going rate pricing –What are the competitors doing ? –Common in commodity-type industries –Can avoid price wars Sealed bid – tenders Common for construction and provision of services to government “what will the competitors bid …can I bid just under and make money”

School of Marketing 11 Competition-based pricing Economic value pricing This uses the idea of value- based pricing but explicitly compares to competitors It says “don’t just look at the price of our product look at what it does to your overall costs” So economic value pricing sets a price such that a particular economic (money) benefit can be shown to the customer when total costs are summed Mainly business to business CompetitorVacuum seal (us) Value comparison Cost component: Carton$0.60 Packaging material $0.80$1.10 Labour$0.90$0.10 Freight$2.70$2.20 Total cost$5.00$4.00 Economic value +$1.00

School of Marketing 12 Performance-based pricing The seller is paid according to some set performance criteria If they perform in full, they get the full payment Example: a maintenance company responds to equipment breakdowns within 6 hrs at least 98% of the time.

School of Marketing 13 Relationship pricing Background: A move towards closer buyer-seller relationships in business markets

School of Marketing 14 Three levels of relationship pricing Special relationship –Work together to find ways to add value to both businesses Enrichment –Seller helps buyer save a lot of money, the ‘price’ is a portion of the saving Shared risk and reward –Price is replaced by a sharing arrangement based on value provided –Example – work together to develop a new technology, if seller’s contribution results in 30% of the ‘value add’ then they get 30% of the resultant profits or cost saving.

School of Marketing 15 Pricing and the PLC The price of a product changes along with its life cycle. The introductory stage is the most challenging stage for new products. Companies may use marketing-skimming pricing when they introduce innovative new products. Such companies set a high price in order to maximise their profit quickly. Marketing-skimming pricing Setting a high price for a new product to skim maximum revenue from the segments willing to pay the high price; the company makes fewer but more profitable sales. (useful if competitors cannot copy) Market penetration pricing. Pricing low, build market share quickly. Perhaps can attract and retain customers and help costs fall.

School of Marketing 16 Product Mix Pricing Strategies some key terms and approaches Product Line Pricing Setting price steps between product line items Optional-Product Pricing Pricing optional products sold with the main product Captive-Product Pricing Pricing products that must be used with the main product By-Product Pricing Pricing low-value by-products to get rid of them Product-Bundle Pricing Pricing bundles of products sold together

School of Marketing 17 Adjusting price NB value pricing is really no different to segmented pricing here

School of Marketing 18 Steps to effective pricing 1.Determine the value the customer places on the product. 2.Assess the different value placed by different market segments. 3.Determine price sensitivity. 4.Identify the best pricing structure. 5.Take account of competitors’ likely reactions. 6.Measure and monitor the net prices obtained in the market— know the effects of price changes, discounts etc. 7.Assess customers’ emotional responses to prices. 8.Determine whether the market segment or key customer provides sufficient returns in relation to costs to serve.