Block III Unit IV - Pricing

What Is a Price? Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service.

What Is a Price? Price is the only element in the marketing mix that produces revenue; all other elements represent costs

Factors to Consider When Setting Prices Customer Perceptions of Value Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value

Factors to Consider When Setting Prices

Value-based pricingGood-value pricingValue-added pricing

Value-based Pricing Value-based pricing means that the seller cannot design a product and marketing program and set the price thereafter.

For e.g. calculating the cost of ingredients in a meal at a restaurant is relatively easy. But assigning value to other elements such as taste, ambience, relaxation, conversation, and status is difficult. Such value is highly subjective; and it varies from consumer to customer and at different situations.

Factors to Consider When Setting Prices

Good-value pricing offers the right combination of quality and good service at a fair price Existing brands are being redesigned to offer more quality for a given price or the same quality for a lower price

In some cases, this method has involved introducing less-expensive versions of the established, brand name products that are usually considered as expensive by an average consumer. To meet the consumer budget in this tougher economic time, fast-food restaurants such as McDonald’s offer “value menus.”

Factors to Consider When Setting Prices Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts Big Bazaar highlights its low-price offering by asking “Isse sasta aurkahaan? High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items

The monsoon season in Mumbai, India, is three months of nonstop rainfall. For 147 years, most Mumbaikars protected themselves with a Stag umbrella from Ebrahim Currim & Sons. The basic Stag was sturdy, affordable, and was black. By the end of the twentieth century, Stag umbrellas were threatened by cheaper imports from China. Stag responded by reducing prices and compromising on quality. It turned out to be a bad move: for the first time since the 1940s, the brand began losing money.

Finally, however, Stag realized what it should do. Instead of competing at the ‘price’ level, it started innovating. It started manufacturing umbrellas in attractive designs and cool colors. Teenagers and young adults grabbed them up. It also launched umbrellas with a built-in flashlight for those who walk unlit roads at night; and umbrellas with prerecorded tunes for music lovers. The umbrellas with a flashlight was a hit among the women who had to walk in secluded streets after dark.

Customers willingly paid up to a 100 percent premium for the new products. Under the new value-added strategy, the Stag brand has now returned to profitability. They are now priced 15% higher than the imported Chinese umbrellas. This example illustrates that customers are motivated not by only by price but also by what they get for what they pay.

Company and Product Costs Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk Indigo Airlines and Dell, try to become the “low-cost producers” in their industries.

Company and Product Costs Types of Costs Fixed costs Variable costs Total costs

Company and Product Costs Fixed costs are the costs that do not vary with production or sales level Rent Electricity Interest Executive salaries

Company and Product Costs Variable costs are the costs that vary with the level of production Packaging Raw materials

Company and Product Costs Total costs are the sum of the fixed and variable costs for any given level of production Average cost is the cost associated with a given level of output

Costs at Different Levels of Production

Costs as a Function of Production Experience Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units

Cost-Plus Pricing Cost-plus pricing adds a standard markup to the cost of the product Benefits – Sellers are certain about costs – Prices are similar in industry and price competition is minimized – Consumers feel it is fair Disadvantages – Ignores demand and competitor prices

Break-Even Analysis and Target Profit Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it’s seeking

Break-Even Analysis and Target Profit Pricing

Considerations in Setting Price

Other Internal and External Considerations Affecting Price Decisions Customer perceptions of value set the upper limit for prices, and costs set the lower limit Companies must consider internal and external factors when setting prices

Other Internal and External Considerations Affecting Price Decisions Target costing starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met

Other Internal and External Considerations Affecting Price Decisions Organizational considerations include: Who should set the price Who can influence the price

Considerations Other Internal and External Affecting Price Decisions The Market and Demand Before setting prices, the marketer must understand the relationship between price and demand for its products

For example, when Honda developed its Civic and Accord brands to compete with luxury cars in the higher income segment in India, this required charging a high price. In contrast, as there has been an increasing demand for small, fuel-efficient cars in India, Honda has launched the Honda Jazz in the hatchback segment. This requires charging a low price. Thus, pricing strategy is largely influenced by decisions on market positioning.

Considerations Other Internal and External Affecting Price Decisions The Market and Demand Pure competitionMonopolistic competitionOligopolistic competitionPure monopoly

Pure competition The market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper or any financial securities. No single buyer or seller has much effect on the going market price. A seller cannot charge more than the going price, because buyers can obtain as much as they need at the going price.

Monopolistic competition There are many buyers and sellers will trade over a wide range of prices rather than at a uniform market price. This happens as seller try to differentiate their offers to buyers.

For example, Toyota promotes its Prius brand through strong branding and advertising, reducing the impact of price. It advertises that the 3rd generation Prius takes you from “zero to sixty in 70% fewer emissions.”

Toyota Prius

Oligopolistic Competition The market consist of few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be uniform (steel, aluminum) and non uniform (cars, computers).

Pure Monopoly (Monopolistic market) The market consists of one seller. The seller may be a government monopoly (Railway), a private regulated monopoly (A power house) or a private non regulated monopoly.

Considerations Other Internal and External Affecting Price Decisions The Market and Demand The demand curve shows the number of units the market will buy in a given period at different prices Normally, demand and price are inversely related Higher price = lower demand For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality

Price elasticity of demand = % change in quantity demand % change in price

Competition-based Pricing Competition-based pricing is the practice of setting prices based on competitors’ strategies, costs, prices, and market offerings. For example, a consumer who wants to purchase Sony’s digital camera, will evaluate Sony’s customer value and price against the value and prices of comparable products manufactured by Nikon, Olympus, Kodak, Canon and others