Developing Pricing Strategies Lecture 15

Price Price is the art of communicating the value of a product or service at a particular point of time “Don’t get to know the cost of everything and the value of nothing”

Issues in Pricing The Communication Value –to the customer/to the firm Sensitivity Explosive & Far-reaching Consequences –to changes –as a major strategy (price wars) –legally The Perceived Value Issue

Factors Affecting Price Decisions

Factors to Consider When Setting Prices External Factors The market and demand –Pricing in different types of markets –Price elasticity of demand –Price and demand relationship –Consumer perceptions of price and value –Competitor’s prices and offers –Other external factors (e.g. economic, demographic, geographical)

The Market and Demand Pure competition The market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price (tomatoes or flour). Monopolistic competition The market consists of many buyers and sellers. A range of prices occurs because sellers can differentiate their offers to the buyers (Cars)

Oligopolistic competition The market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be uniform or non-uniform. The sellers are few because it is difficult for new sellers to enter the market (Accountancy Firms). A pure monopoly consists of one seller. The seller may be a government monopoly, a private, regulated monopoly or a private, non-regulated monopoly. Pricing is handled differently in each case (PTCL, WAPDA). The Market and Demand

Perceptions of Price and Value Pricing requires more than technical expertise. It requires creative judgment and awareness of buyers’ motivations. The key to effective pricing is the same one that opens doors in other marketing functions: a creative awareness of who buyers are, why they buy and how they make their buying decisions. The recognition that buyers differ in these dimensions is as important for effective pricing as it is for effective promotion, distribution or product development.

Competitors’ Prices and Offers Competitors’ prices and their reactions to other companies’ pricing must be considered. Each company must learn the price and quality of their competitors’ offers which may provide a basis for its own strategy.

Product and Service Adjustment Strategies

Market Skimming  Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.  Results in Fewer, But More Profitable Sales. Market Skimming  Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.  Results in Fewer, But More Profitable Sales. Use Under These Conditions: –Product’s Quality and Image Must Support Its Higher Price. –Costs Can’t be so High that They Cancel the Advantage of Charging More. –Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price. –New Handycams by Sony. New-Product Pricing

Market Penetration  Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.  Attract a Large Number of Buyers and Win a Larger Market Share. Market Penetration  Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.  Attract a Large Number of Buyers and Win a Larger Market Share. Use Under These Conditions: –Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. –Production/ Distribution Costs Must Fall as Sales Volume Increases. –Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary. –Student Biryani.

Legal Aspects of Pricing Price fixing –Competitors illegally getting together to raise or stabilise prices Misleading list prices –Suggesting that prices customers are being asked to pay have been discounted Resale price maintenance –Producer or wholesaler specifies a minimum price below which goods may not be resold Bait pricing –Setting very low prices to attract customers, but trying to sell more expensive models/brands once customers are in the store Price Wars