Chapter 9 11/3/2015 7:15 AM1

Objectives  Understanding the factors that affect the pricing strategies  Learn the major strategies and approaches for pricing.  Know about the New-Product Pricing Strategies  Learn how companies adjust their prices to take into account different types of customers and situations. 11/3/2015 7:15 AM2

What Is Price Price Has Many Names ● Rent ● Fee ● Rate ● Commission ● Assessment ● Tuition ● Fare ● Toll ● Premium ● Retainer Bribe Salary Wage Interest Tax 11/3/2015 7:15 AM3

What Is Price?  Definition: “The amount of money charged for a product or service. More broadly price is the sum of the values that consumers exchange for the benefits of having or using the product or service.” 11/3/2015 7:15 AM4

What Is Price?  Price and the Marketing Mix: Only element to produce revenues Most flexible element Can be changed quickly  Common Pricing Mistakes Reducing prices too quickly to get sales Pricing based on costs, not customer value Not taking the rest of the marketing mix into account. As part of company’s overall value proposition, price plays a key role in creating customer value and building customer relationship 11/3/2015 7:15 AM5

Factors To Consider When Setting Price Customer perception of value Other internal and external consideration ____________ Marketing strategy, objectives and mix Nature of the market and demand Competitors’ strategies and price Product cost Price ceiling No demand above this price Price floor No profits below this price No profits below this price 11/3/2015 7:15 AM6

General Pricing Approaches Cost-BasedPricing Cost-PlusPricing Breakeven Analysis And Target Profit Pricing Target Profit Pricing Buyer-Basedpricing Value-BasedPricing Competition-BasedPricing 11/3/2015 7:15 AM7

Value-based Pricing Versus Cost- based Pricing ProductCostPriceValueCustomer customervaluepricecostProduct Cost-based Pricing value-based Pricing 11/3/2015 7:15 AM8

Value-based Pricing Versus Cost- based Pricing ProductCostPriceValueCustomer customervaluepricecostProduct Cost-based Pricing value-based Pricing Idea generation Concept testing Marketing strategy Business analysis Product development 11/3/2015 7:15 AM9

General Pricing Approaches  Buyer-Based pricing -  Buyer-Based pricing - Value-Based Pricing: Uses buyers’ perceptions of value rather than seller’s costs to set price. Measuring perceived value can be difficult. Good-Value Pricing: Good-Value Pricing: offering just the right combination of quality and good service at a fair price ○ Introducing less-expensive versions (value menus ) ○ Redesigning existing brands for less price (more quality for the same, or the same quality for less) Value-Added Pricing: Value-Added Pricing: attaching value-added features and services to differentiate a marketing offer and support higher price, rather than cutting price to match competitions. o Shifting the focus from price to value 11/3/2015 7:15 AM10

General Pricing Approaches  Buyer-Based pricing -  Buyer-Based pricing - Competition-Based Pricing: Going-rate pricing: Going-rate pricing: is setting the price based largely on following competitors’ price rather then on company cost or demand. ○ May price at the same level, above, or below the competition (different fast-food chains) Sealed-Bid Pricing Sealed-Bid Pricing: setting price based on how the firm thinks competitors will price rather than on its own cost or demand ○ Used when company bids for jobs. 11/3/2015 7:15 AM11

General Pricing Approaches  Cost-Based Pricing: Types of Cost 11/3/2015 7:15 AM12

General Pricing Approaches  Cost-Based Pricing: Cost-Plus Pricing Adding standard MARKUP to the cost of the product Markup pricing: Calculating all the costs associated with a product and then determining a markup percentage to cover the costs and expected profits. Example: Example: Variable costs: $20 Fixed costs: $ 500,000 Expected sales: 100,000 units Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000 / 100,000 = $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 -.20) = $ /3/2015 7:15 AM13

General Pricing Approaches  Cost-Based Pricing: Cost-Plus Pricing Ignores demand and competition Popular pricing technique because: ○ It simplifies the pricing process ○ Price competition may be minimized ○ It is perceived as more fair to both buyers and sellers 11/3/2015 7:15 AM14

General Pricing Approaches  Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing Setting a price to break even on the costs of making and marketing a product; or setting price to make a target profit. 11/3/2015 7:15 AM15 Fixed Costs Total Costs Revenues Sales Volume in Thousands of Units Thousands of Dollars Break-even point Target Profit $200,000 Quantity To Be Sold To Meet Target Profit Variable cost

Break-even point calculation The Break-even point (zero profit) BEP (Units) = Total Fixed Cost Price - Variable costs BEP (Dollars) = Fixed Costs Contribution Margin Ratio = Fixed Costs (Price–Variable costs)/ V. costs The Break-even point (zero profit) BEP (Units) = Total Fixed Cost Price - Variable costs BEP (Dollars) = Fixed Costs Contribution Margin Ratio = Fixed Costs (Price–Variable costs)/ V. costs 11/3/2015 7:15 AM16

General Pricing Approaches  Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. The higher the price the less number of units the company will need to sell to break even This method does not take the price-demand relationship into account. 11/3/2015 7:15 AM17

Factors to Consider When Setting Price Price = Money + ….. Value= Client Perception, service, experience - Segmentation - Targeting - Positioning 11/3/2015 7:15 AM18 Internal Factors  Overall Marketing Strategy, Objectives And Mix Market positioning influences pricing strategy Pricing must be carefully coordinated with the other marketing mix elements

Factors to Consider When Setting Price  Pricing objectives: ● Profit-oriented o To achieve a target return, or to maximise profits. ● Sales-oriented o To increase sales volume, or to maintain or increase market share. ● Status-quo oriented o To stabilise prices, or to meet competition. ● Customer retention o Relationship building, attract new customers, and profitably retain existing ones 11/3/2015 7:15 AM19

New-Product Pricing Strategies  Market-Skimming Pricing Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. Normally used to introduce new products to the market that attract the innovator market. The product quality and image must support its higher price Competitors should not be able to enter the market easily. 11/3/2015 7:15 AM20

New-Product Pricing Strategies  Market-Penetration Pricing Setting a low price for a new product in order to attract a large number of buyers and a large market share. Usually to reach mass markets and discourage competition. The market should be highly price sensitive 11/3/2015 7:15 AM21

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  Types of discounts Cash discount Quantity discount Functional (trade) discount Seasonal discount  Allowances Trade-in allowances Promotional allowances Strategies 11/3/2015 7:15 AM22

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  Types of segmented pricing strategies: Customer-segment (museum) Product-form pricing (top models) Location pricing (theaters) Time pricing (seasonal)  Certain conditions must exist for segmented pricing to be effective Strategies 11/3/2015 7:15 AM23

Price Adjustment Strategies  Conditions Necessary for Segmented Pricing Effectiveness Market must be segmentable Segments must show different demand Pricing must be legal Costs of segmentation can not exceed revenues earned Segmented pricing must reflect real differences in customers’ perceived value 11/3/2015 7:15 AM24

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  The price is used to say something about the product. Price-quality relationship Reference prices Differences as small as five cents can be important Strategies 11/3/2015 7:15 AM25

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  Temporarily charge low price or even below cost Loss leaders Special-event pricing Low-interest financing, longer warranties, free maintenance  Promotional pricing can have adverse effects Strategies 11/3/2015 7:15 AM26

Price Adjustment Strategies  Promotional Pricing Problems Easily copied by competitors Creates deal-prone consumers May grind down brand’s value Not a legitimate substitute for effective strategic planning Frequent use leads to industry price wars which benefit few firms 11/3/2015 7:15 AM27

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  Types of geographic pricing strategies: FOB-origin pricing (free on board) – factory price + freight- Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Strategies 11/3/2015 7:15 AM28

Price Adjustment Strategies  Discount / allowance  Segmented  Psychological  Promotional  Geographical  International  Prices charged in a specific country depend on many factors Economic conditions Competitive situation Laws / regulations Distribution system Consumer perceptions Corporate marketing objectives Cost considerations Strategies 11/3/2015 7:15 AM29