1. Faculty of Management Sciences Department of Marketing and Logistics
Pricing
Faculty of Management Sciences Department of Marketing and Logistics
Hans-Jürg Schär

2. The nature and role of price in the organisation The role of pricing in the marketing mix
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3. The nature and role of price in the organisation
The importance of price in the economy
The importance of price in the organisation
Value, price and cost
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4. The importance of price in the economy
The price of goods/services plays a cruial role in determining an efficient distribution of resources in a market system
Price acts as a signal for shortages and surpluses which help companies
Respond to changing market conditions
Example: As the supply of oil diminishes, but demand remains strong, this pushes up the prices.
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5. The importance of price in the economy
As the price of oil rises, it starts to change behaviour
Consumers look for more fuel efficient engines; people keener to buy cars which have a better fuel efficiency
People may start cycling rather driving
Firms have incentives to develop cars which do not run on petrol (hybrid cars, electric cars)
The higher price of petrol may create incentives to look for more oil reserves in previously untapped areas (deep water, arctic, tar sand, etc.)
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6. The importance of price in the economy
Therefore, in theory, price will help move an economy away from oil dependency to other means of transport and energy (solar, wind, water, etc.). Some people think we will wake up one day and there will be no oil left and the economy will collapse. But that is unlikely to happen. Price will create signals to firms and consumers to look for alternatives.
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7. The importance of price in an organisation
The company`s overall long term strategy and in particular the marketing strategy determines the pricing strategy
Price is the only revenue generating element amongst the 4 P`s; the other 3 being cost centers
In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market conditions, brand, qualtiy of product, distribution, promotion, etc.
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8. Considerations for pricing strategy
Financial goals of the company
The fit with the market place reality (Will the customer buy at that price ?)
The extent to which the price supports a product`s market positioning and be consistent with the other variables in the marketing mix
Set an efficient price – the price that is very close to the maximum the customer is willing to pay
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9. Value, price and cost
Definition of price: Price is the amount of money paid by the buyer to the seller for any product or service. The amount charged by the seller for a product is known as its price, which includes cost and the profit margin. Definition of cost: Cost is the amount incurred on the inputs like land, labour, capital, entreprise etc. for producing any product or service. It is the amount spent by the company in the manufacturing of a product or rendering a service. Definition of value: Value is the usefulness of any product / service to a customer. It can never be determined in terms of money and varies from customer to customer.
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10. Key differences
Price is what you pay for goods or services you acquire; cost is the amount of inputs incurred in producing a product/service and value is what goods or services pay you i.e.worth
Price is calculated in numerical terms; cost is also calculated in numerical terms, but value can never be calculated in numbers. 
Price is same for all customers; cost is also same for all the customers, while the value varies from customer to customer
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11. Key differences
Price is estimated through the price policy; cost is assessed on actual expenditure incurred on manufacturing a particular product, but the estimation of value is based on customer`s opinion
The ups and downs in the market will affect price and the cost of any Product while value remains unaffected
The ascertainment of price is done with the view of the consumer, the cost is ascertained from a producer`s view whereas the ascertainment of value is done from the user‘s point of view
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12. The role of pricing in the marketing mix Product strategy
Since most brands sell several products within a product group, the pricing of the products have to be in line with the pricing strategy of the product group. Example: Swatch watches Gent size Sfr. 50 Lady size 50 Chrono 100 Scuba 90 Automatic 90 Chronoscuba 120
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13. Product strategy
Some brands also price their products to the market as primary products and complementary products. Example: Audi A 4 Primary product: 4-door sedan with 2.0 l engine (including a number of extras) Complementary product: 4-door sedan with 3.0 l engine (extras to be paid separately)
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14. Pricing / profit model Swatch Chrono, in ND
Margin
Mark-up
Value
Percentage
Retail price with VAT
1080
108 %
VAT 80
8 %
Retail price without VAT
1000
100 %
Profit for retailer
40 %
67 %
400
Salesprice ex wholeseller
600
60 %
Profit for wholeseller
30 %
43 %
180
18 %
Salesprice ex brand (Mfg.)
420
42 %
Profit for brand (Mfg.)
62 %
160
16 %
Manufacturing cost
260
26 %
A margin is calculated from the top value, a mark-up is calculated from the bottom value.
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15. Pricing / profit model Smart car, in ND
Gross margin
Value
Percentage
Retail price with VAT
108 %
VAT
12.000
8 %
Retail price without VAT
100 %
Profit for retailer
16 %
24.000
Salesprice ex wholeseller
84 %
Profit for wholeseller
15 %
18.900
13 %
Salesprice ex brand (Mfg.)
71 %
Profit for brand (Mfg.)
40 %
26.775
17 %
Manufacturing cost
80.325
54 %
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16. Distribution strategy
The point of sale (POS) for a product is a very important statement for the image of a brand. The quality of the POS has to be in line with the quality of the product and its pricing. Examples: Swatch watches: although relatively inexpensive, they are sold at up-market jewellery stores and high-end department stores. Rolex watches: expensive in price; they are normally sold at the best jewellery stores in town (very limited POS) Timex watches: cheap in price; sold at low-end department stores and electronic shops.
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17. Promotion strategy
Quality of the product, quality of the point of sale have to be in line with the quality of the promotion tools used Examples: Rolex watches are advertised in golf magazines, airline magazines etc.; Rolex is a sponsor of F1 races, golf and tennis tournments, etc. Swatch watches are advertised in high class magazines for young adults, sports and airline magazines, etc. Swatch is also sponsoring mountain bike events, advertises in cinemas, etc.
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18. Use of price in positioning strategy
Price is a very key element in positioning a brand vis a vis the consumer
A high price, relative compared to the direct compeditors, requires also a very good quality of the product itself; a very good service and very good customer relationsship program.
Low quality products can never achieve a high price in its relative market segment
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19. Pricing mistakes
Cost plus pricing – market conditions determine the price !
Weak control over discounting
Inadequate systems for tracking competitors selling prices and market share
World wide price inconsistencies
Paying sales reps. on sales values versus profit contribution
Price increases poorly executed
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