1. COURSE TITLE : MARKETING MODULE 7: Making Pricing Decisions
Ashesi University
COURSE TITLE : MARKETING
SEMESTER : FIRST, 2010/2011
MODULE 7: Making Pricing Decisions
Lecturer: Ebow Spio

2. Lesson Outcomes
Answer the question “ What is price? “ and appreciate the role of pricing in product management
Appreciate the nature of pricing objectives
Identify and understand the internal & external factors that affect a firm’s pricing decision
Identify major strategies in pricing new and existing products
Compare and evaluate the general approaches to price setting
Explain how firms find a set of prices that maximize the profits from the total product mix
Discuss how companies adjust their prices to take into account different types of customers and situations
Appreciate the ethical issues involved in pricing

3. What is Price?
Price : The amount of money charged for a product or service. It is the sum of the values that consumers exchange for the benefits of having or using the product or service
Price is the only element in the marketing mix that produces revenue, all other elements represent costs.

4. Factors affecting Marketing- Orientated pricing decisions
Internal factors -
Marketing Strategy: Marketing objectives
Marketing mix
Costs
Pricing-Quality Relationships
Product Line Pricing
Negotiating Margins
Explicability
External factors -
Nature of market &
demand
Competition
Political factors
Effect on distributors/retailers
Value to Customers
Pricing
decisions

5. Pricing Objectives
Pricing Objectives represent the measurable goals a company wants to achieve through its pricing policy.
Profit Oriented Objectives
- Target Return
- Maximize Profit
- Survival
2. Cash Flow
3. Sales Oriented
- Unit Sales Growth
- Growth in Market share
4. Status Quo Oriented
- Meeting Competition
- Non price competition e.g. product quality

6. Factors affecting pricing decisions: Internal Factors
Marketing Strategy
Business and Marketing Objectives: Pricing
aligned with or done to achieve specific
business or marketing objective. Pricing decision is
determined by decision on market positioning.
E.g. Toyota decides to produce its Lexus cars to compete with European Luxury car in high income segment, this suggests charging high price
Other Company Objectives: Survival, current Profit Maximization, market share maximization, product –quality leadership

7. Factors affecting pricing decisions: Internal Factors
Marketing Mix Strategy: To achieve effective and consistent
marketing programme price decisions must be coordinated with
Product design, distribution and promotion decisions.
Positioning decision/strategy informs how the marketing mix
elements including price are designed.
E.g. Mercedes Benz image of prestige and high performance will mean that it must command high price to reflect its positioning and to cover higher cost of providing features and imagery to remain true to the positioning.

8. New Product Pricing Strategies
Promotion
High
Low
Rapid Skimming
Slow Skimming
Rapid Penetration
Slow Penetration
Price

9. New Product Pricing Strategies
Market-penetration
Low initial price charged (Price at a discount to competitors)
Attract large volume sales quickly
Large market share
High volume sales save costs
Economies of scale on production and distribution
It is also used if the competition is likely to follow quickly,
If a low price will give competitors less incentive to enter

10. New Product Strategies: Conditions for Charging a low price
Only feasible alternative
Market Penetration or domination
Experience curve effect/low costs
Make money later
Make money elsewhere
Barrier to entry
Predation : Put other competitors out of business.

11. New Product Pricing Strategies
Market-skimming
Setting a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay
the high price, the company makes fewer but more
profitable sales. E.g. Intel
As competitors enter market, price is lowered
More sensible when :
Demand is inelastic
There is an “elite” market that is less price sensitive
Barriers to entry (patents, etc.)

12. New Product Strategies: Characteristics of High Price Market Segments
Products provides high value
Customers have the ability to pay
Consumer and bill payer are different
Lack of competition
Excess Demand
High pressure to buy

13. Pricing Existing Products
The pricing of existing products should also be set within the context of strategy. The strategic objective of each product will have a major bearing on pricing strategy
The following strategic objectives are relevant to pricing :
Build Objective: Strategic objective is to grow sales and market share.
For price-sensitive markets, build objectives for product implies a lower price than competition. If competition raises its price we would be slow to match it.
Hold Objective : Strategic Objective is to hold sales and or market share. The appropriate pricing strategy is to maintain or match price relative to the competition. Respond to competitors pricing moves.
Harvest Objective: Maintaining or raising of profit margins even though sales or market share is falling. The implication for pricing strategy would be to set premium prices. Prices increases by competitors would be swiftly matched whereas the firm may not readily respond to price cut by competition.
Reposition Objective: Changing market circumstances and product fortunes may necessitate the repositioning of an existing product. This may involve a price change. The direction and magnitude of the change will be dependent on new positioning strategy.

14. Repositioning Repositioning Strategies Product Same Different Target
Image
Repositioning
Product
Market
Intangible
Tangible
Repositioning involves changing the target markets and differential advantage or both

15. Factors affecting pricing decisions: Internal Factors
Costs: Costs set the floor for the price that the company can charge for its product. The company wants to charge a price that both covers all its costs for producing, distributing and selling the product, and delivers a fair rate of return for its effort and risk.
Fixed Costs: Cost that do not vary with production or sales level e.g. rent, depreciation, managers salaries, property rate, insurance
Variable Costs : Costs that vary directly with the level of production e.g. raw materials, packaging, sales commissions, hourly wages etc.
Total Costs : The sum of the fixed and variable costs for any given level of production.

16. Factors affecting pricing decisions: Internal Factors
Price –Quality Perception : Many people use price as an indicator of quality. This is particularly the case for products where objective measurement of quality is not possible e.g. perfume. It is also the same for consumer durable
A study of price and quality perceptions of cars e.g. found that higher-priced cars are perceived to possess (unjustified) high quality.
Explicability : The capability of the salespeople to explain a high price to customers may constrain price flexibility. In markets where customers demand economic justification of prices, the inability to produce cost and/or revenue arguments may mean that high prices cannot be set.
Negotiating Margins : There could be difference between list price and realized price or transaction price. The difference can be accounted for by order-size discounts, competitive discounts (a discretionary discount negotiated before the order is taken), a fast payment discount, an annual volume bonus and promotional allowance

17. Factors affecting pricing decisions: External Factors
Nature of Market & Demand : Whereas costs set the lower limits of prices, the market and demand set the upper limit. Before setting the price the marketer must understand the relationship the price and demand for its products. This is determined by the type of market a firm operates in
E.g. Pure Monopoly, Monopolistic Competition, Pure Competition, Oligopolistic, Competition
Pure competition is a market with few many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price
Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.

18. Factors affecting pricing decisions: External Factors
Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other’s pricing and marketing strategies
Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.
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

19. Factors affecting pricing decisions: External Factors
Price elasticity of demand illustrates the response of demand to a change in price
Inelastic demand occurs when demand hardly changes when there is a small change in price
Elastic demand occurs when demand changes greatly for a small change in price
Price elasticity of demand= % change in quantity demand
% change in price
Factors that affect Price Elasticity:
Availability of Substitutes
Comparison Difficulty
Who Pays?
Size of Total Expenditure or Cost Relative to Income
Significance of End Benefit /Quality
Sunk Investment
Switching Costs
Brand Equity or Loyalty

20. Factors affecting pricing decisions: External Factors
Competition :
Firms make effort to know and understand the costs, price and quality of competitors offering
Knowledge of serves as input in setting own price. Pricing is used to position the firm’s offer relative to the competition
Price affects nature of competition it faces. High price, high margin strategy may attract competition, low-price, low margin strategy, may stop competition or drive competitors out of the market

21. Factors affecting pricing decisions: External Factors
Economic Factors: Inflation, boom, interest rates affect pricing decision
Resellers/Intermediary: Price to give resellers fair margin & encourage their support & help them to sell the product effectively
Government or Political
Social Concerns: A firm’s short-term sales, market share and profit goals may have to be tempered by broader societal considerations

22. Factors affecting pricing decisions: External Factors
Value to Customers or Perceived Value for Money
Value is the benefit the customer derives from the purchase of the product. The firm needs to understand the value that the customer places on the benefits received and then price accordingly. Effectively, customers assess the price and measure the benefits received.
Factors that affect the value they place on the product:
Status
Service and after sales service quality
Level of differentiation from competitor products
Quality of any packaging
Product functionality
Any substitute products which may be available

23. General Pricing Approaches
Cost-plus pricing : This adding a standard mark-up to the cost of the product. This is done by Construction Companies, Lawyers, Advertising Agencies, Accountants etc.
Mark-Up: The difference between selling price and cost as a percentage of selling price or cost.
Mark –Up price on sales (also known as Margin) = Unit Cost/(1.0-desired return on sales).
Mark-up price on cost = Unit Cost X (1.0+desired return)
Very simple
It ignores demand and competitor’s prices & not likely to lead to the best price
When firms in industry apply this method, prices tend to be similar and price competition is minimized
It is seen to be fairer to both buyers and sellers. Sellers make a fair
return on investment but do not take advantage of buyers when demand becomes great.

24. General Pricing Approaches
Break-even analysis & target profit pricing:
Setting price to break even on the costs of making and marketing a product or setting price to make a target profit. It is used by public utilities
Break-even volume= Fixed Cost/(price-variable cost)
Breakeven analysis identifies the level of output where total revenue equals total cost. Sales of output beyond this level starts to generate profit.

25. General Pricing Approaches
Value-based pricing: Setting price based on buyers’ perceptions of product values rather than on cost.
The targeted value and price then drive decisions about product design and what costs can be incurred. Pricing begins with analysing consumers needs and value perceptions and a price is set to match consumers’ perceived value
Market research is required to ascertain the value buyers assign to product and that of competitors. This can be difficult.
If a seller charges more than buyers’ perceived value, the company’s sales will suffer.

26. General Pricing Approaches
Going-rate pricing: Setting price based largely on following competitors prices rather than on company costs or demand.
The firm might charge the same as, more , or less than its chief competitors. The smaller firms follow the leader. They change their prices when the market leader’s prices change, rather than when their own demand or costs change E.g. Petrol Retailers.
Sealed-bid pricing: Where buyers submit secret bids for a product

27. Product Mix Pricing Strategies
Product-line pricing - setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitor prices
Optional product pricing – The pricing of optional or accessory products sold along with main product .e.g. car companies use this strategy. Basic product may be stripped of many comforts and conveniences.
Captive product pricing – Setting a price for products that must be used along with a main product, such as blades for a razor and film for a camera
By-product pricing – Setting a price for a by-product in order to make the main product’s price more competitive. Products produced as part of the process involved in producing another product. Manufacturer seeks market for by-products and should accept any price that covers more than cost of storing and delivering them. The practice allows the seller to reduce the main product’s price to make it more competitive.
Product-bundle pricing - combining several products and setting a discounted price e.g. theatres & sports team sell season tickets at less than cost of a single tickets. Hotels , Computer Maker etc.
It used to sell more than the consumer really want

28. Price Adjustments Strategies
Cash Discount: A price reduction to buyers who pay the bills promptly
Quantity Discount: A price reduction to buyers who buy large volumes.
Functional Discount (Trade Discount) A price reduction offered by the seller to trade channel members that perform certain functions such as selling, storing, and record keeping
Seasonal Discount: A price reduction to buyers who buy merchandise or services out of season
Trade in allowance: A price reduction given for turning in an old item when buying a new one.
Promotional Allowance: A payment or price reduction to reward dealers for participating in advertising and sales support programmes
Segmented Pricing : Pricing that allows differences in customers, products and locations. The differences in prices are not based on differences in costs.

29. Price Adjustments Strategies
Psychological Pricing: A pricing approach that considers the psychology of prices and not simply economics; the price is used to say something about the product
Reference Prices: Prices that buyers carry in their minds and refer to when they look at a given product
Promotional Pricing: Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales.
Differential Pricing: A different price is charged to different purchasers of the same product i.e. price can vary

30. Ethical Issues in Pricing
Predatory Price
Deceptive Pricing
Penetration Pricing and Obesity
Price Discrimination
Product Dumping