Marketing: An Introduction Armstrong, Kotler Chapter nine Pricing Considerations and Strategies

Looking Ahead Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes

Pricing Definition Narrow definition. price is the amount of money charged for a product or service. Broad definition. price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic pricing. charging different prices depending on individual customers and situations. like eBay

Pricing Decision Factors External Factors Nature of the market. Demand Competitor. Economic state. Reseller needs. Government actions. Social concerns. Internal Factors Marketing objectives. Marketing mix. Costs. Organization style. Target market. Positioning objectives. Figure 1

Pricing Decision Internal Factors Marketing objectives. –Company must decide on its strategy for the product. General objectives. –Survival, current profit maximization, market share leadership and product quality leadership.

Factors Affecting Price Decisions Figure 1

Internal factors Marketing Objectives: company strategy for the product. Survival, profit max. market share, or product quality. Marketing Mix strategy: Price decision must be coordinated with product design, quality, and promotion. Costs; cost set the floor. Fixed and variable costs. So the price should above the total cost, and clarify the profit margin. Organizational considerations: who should set the price? In small companies, top management. In large companies, marketing and sales managers

Pricing Decision Internal Factors Marketing objectives. –Company must decide on its strategy for the product. General objectives. –Survival, current profit maximization, market share leadership and product quality leadership. Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing program.

Pricing Decision Internal Factors Costs. –Fixed Costs. Costs that do not vary with production or sales level. –Variable Costs. Costs that vary directly with the level of production.

External factors The Market & Demand: As the cost set the floor, the market and demand set the upper limit of the price. Demand and Elasticity –A way of measuring how sensitive the market is to price changes. Inelastic – minimal change in demand as price increases. Elastic – significant drop in demand as price increases. Figure 2

External factors Pricing in Different Markets 1.Pure competition : Many buyers and sellers where each has little effect on the going market price 2.Monopolistic competition: Many buyers and sellers who trade over a range of prices 3.Oligopolistic competition: Few sellers and sensitive to each other’s pricing/marketing strategies 4.Pure monopoly: Market consists of a single seller.

Figure 2 Quantity demanded per time Price P2 P1

Price Setting Considerations Product costs. –Price floor – no profits below this price. Competitors’ prices and other internal and external factors. Consumer perceptions of value. –Price ceiling – no demand above this price.

General Pricing Approaches Cost-based approach. –Cost-plus pricing. –Break-even analysis. –Target profit pricing. Value-based approach. –Consumer perceptions of value. Competition-based approach. –What competitors are charging. Figure 3

General Pricing Approaches Figure 3

General Pricing Approaches Cost-based pricing: Adding a standard markup to the cost of the product. Advantages are: _ Sellers more certain about cost than demand. –Simplifies pricing. –When all sellers use, prices are similar and competition is minimized. –Some feel it is more fair to both buyers and sellers. –Break-even (target profit) pricing: setting price to break even (or make a target profit) on the costs of making and marketing a product. Figure 4

Break-even (target profit) pricing Figure 4

Value Based-Pricing Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost

Competition-Based Pricing Going-rate pricing. –Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. Sealed-bid pricing. –Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

Pricing New Products Skimming pricing. –High price to reap maximum profit from early adopter segments. –Can encourage competition. –Products must be unique and hard to copy. Sony New HDTV for $43000 Penetration pricing. –Low price to gain maximum market share. –May discourage competition. –Used when the product is easily copied.

Product Mix Pricing Strategies 1- Product Line strategies; 2- Optional product pricing 3- Captive product pricing 4- By- product pricing 5- Product Bundle pricing

1- Product Line strategies; Setting the different price between various product lines based on cost differences between them. Clothes stores sells suits $300,$400, $ Optional product pricing; Pricing accessories products along with the main product. Car buyer may choose double CD exchanger for extra charges.

3-Captive product pricing Setting price for a product that must be used along with main product. Film with camera. 4- By- product pricing Setting prices for by-products. Products costly if the company get rid of. Chemicals, used Tires, disposed materials. 5- Product Bundle Pricing: combining two or more products and sell it for less. Hotel Packages, meal, room, … Travel packages.

Price Adjustment Strategies Discount and Allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing International pricing Reducing prices to reward customer responses such as paying early. Cash discount, Volume. Dealers Adjusting prices to allow for differences in customers, products, or locations. time price. Museums, Adjusting prices for psychological effect. High Price –high quality. Retail stores: $100 or $99.99 Temporarily reducing prices to increase short-run Sales. Sell below costs. Special events. Industry war Adjusting prices to account for geographic location of customers. Adjusting prices for international markets. Depends On cultural, laws, customers perception…..

Initiating Price Changes Price Cuts –Excess capacity. –Falling market share. –Follow the leader –Dominate market through lower costs. Price Increases –Cost inflation. –Over-demand. Cannot supply all customers’ needs.

Responding to Competitor Price Changes When a competitor lowers prices: –Reduce price to match the competitors’ price. –Maintain price but increase the perceived value of the offer. –Improve quality and raise price. –Hold price and introduce a new brand at a higher price. –Hold price and introduce a new brand at a lower price (fighting brand). Figure 5

Responding to price changes Figure 5

Public Policy and Pricing Prohibited to : –Price fixing: competitors agreed to stabilize price. –Price discrimination: customers must be given proportionally equal discounts when buy from the manufactures, and wholesalers. –Deceptive pricing: cannot mislead customers, then the customers don’t know about the extra charges.