1. © 2002 Pearson Education Canada Inc. 10-1 principles of MARKETING Chapter 10 Pricing Strategies

2. © 2002 Pearson Education Canada Inc. 10-2 Pricing Topics Internal factors affecting pricing External factors affecting pricing Three approaches to setting prices Major strategies for pricing new products and product lines Initiating and responding to pricing changes

3. © 2002 Pearson Education Canada Inc. 10-3 What is Price? Amount of money charged for a product or service or the sum of values consumers exchange for the benefits of having or using the product or service

4. © 2002 Pearson Education Canada Inc. 10-4 Pricing Considerations Fixed price policies Dynamic pricing –Role of the Internet Only element of 4P’s that produces revenue Changed quickly Value-based pricing

5. © 2002 Pearson Education Canada Inc. 10-5 Pricing “Best Practices” 1.Develop a 1% pricing mindset 2.Consistently deliver more value 3.Price strategically, not opportunistically 4.Know competition 5.Make pricing a process

6. © 2002 Pearson Education Canada Inc. 10-6 Factors Affecting Pricing Decisions External factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) External factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) Internal factors Marketing objectives Marketing-mix strategy Costs Organizational considerations Internal factors Marketing objectives Marketing-mix strategy Costs Organizational considerations Pricing decisions Pricing decisions

7. © 2002 Pearson Education Canada Inc. 10-7 Internal Factors Affecting Pricing: Marketing Objectives Largely determined by market positioning Common objectives: –Survival –Current profit maximization –Market share –Product quality leadership Prevent competition Maintain loyalty Create excitement Non-profit and public organizations –Partial cost recovery –Social price

8. © 2002 Pearson Education Canada Inc. 10-8 Internal Factors Affecting Pricing: Marketing Mix Strategy Coordinate pricing with other marketing- mix elements Target costing/design to price positioning Non-price positions

9. © 2002 Pearson Education Canada Inc. 10-9 Internal Factors Affecting Pricing: Costs Sets floor for range of possible prices Fixed Costs –Do not vary with production or sales Variable Costs –Vary directly with level of production Total Costs –Sum of Fixed + Variable costs

10. © 2002 Pearson Education Canada Inc. 10-10 Internal Factors Affecting Pricing: Organizational Considerations Who sets the prices? –Top management –Marketing/sales depts. –Salespeople –Pricing department –Accountants

11. © 2002 Pearson Education Canada Inc. 10-11 External Factors Affecting Pricing: Market and Demand Sets the upper limit of price possibilities Latitude of price decisions depends on nature of market competition –Pure competition –Monopolistic competition –Oligopolistic competition –Pure monopoly Consumers buy when price matches value

12. © 2002 Pearson Education Canada Inc. 10-12 External Factors Affecting Pricing:Competitors’ Costs, Prices and Offers Reactions Nature of competition Benchmark against competition Learn about competitors’ offers

13. © 2002 Pearson Education Canada Inc. 10-13 External Factors Affecting Pricing: Other Factors Economic conditions Resellers Government Social concerns

14. © 2002 Pearson Education Canada Inc. 10-14 General Pricing Approaches Low price No possible profit at this price High price No possible demand at this price Competitors prices Other internal and External factors Consumer Perceptions of value Major considerations in setting price Product costs

15. © 2002 Pearson Education Canada Inc. 10-15 General Pricing Approaches: Cost-Plus Pricing Adding standard markup to the cost of the product Markup = Unit cost price --------------------- (1-desired return) Example: if unit cost is $16 and desired return is 20% then the selling price is $20 $16 ------ = $20 (1-.2)

16. © 2002 Pearson Education Canada Inc. 10-16 General Pricing Approaches: Break Even Analysis and Target Profit Dollars (millions) 12 10 8 6 4 2 0 Total cost Fixed cost Target profit $2 million Total revenue 2004006008001,000 Sales volume in units (thousands)

17. © 2002 Pearson Education Canada Inc. 10-17 General Pricing Approaches: Value-Based Pricing Pricing developed early as part of overall marketing program Target price based on perceived value of the extended product Perceived value dictates design and cost Value pricing strategies –Value-added to avoid competing on price –Everyday low pricing (e.g., Zellers or Walmart) –High-low pricing – (e.g., The Bay)

18. © 2002 Pearson Education Canada Inc. 10-18 General Pricing Approaches: Value-Based Pricing Product Cost Price Value Customers Product Cost Price Value Customers Cost-based pricing Value-based pricing

19. © 2002 Pearson Education Canada Inc. 10-19 General Pricing Approaches: Competition-Based Pricing Consumers use competitors’ price as reference for product’s value Going Rate Pricing –Firm benchmarks on competitive price –Price differences small and constant –Going price as indirect measure of demand Sealed-Bid Pricing –Lowest price wins - the winner loses?

20. © 2002 Pearson Education Canada Inc. 10-20 New Product Pricing Strategies: Market Skimming Pricing Setting a high price to skim maximum revenues layer by layer from segments willing to pay the high price, the company makes fewer but more profitable sales Favourable conditions: –Image and quality must support –Production costs shouldn’t cancel –High barriers to entry

21. © 2002 Pearson Education Canada Inc. 10-21 New Product Pricing Strategies: Market Penetration Pricing Low initial price - win many buyers and large market share quickly Potential economies of scale Favourable conditions: –Market is price sensitive –Economies of scale exist –Low price an effective market entry barrier

22. © 2002 Pearson Education Canada Inc. 10-22 Product-Mix Pricing Strategies StrategyDescription Product line pricing Captive-product pricing Product-bundle pricing Setting price steps between product items Pricing products that must be used with the main product Pricing bundles of products sold together

23. © 2002 Pearson Education Canada Inc. 10-23 Price-Adjustment Strategies StrategyDescription Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Setting prices to reward customer responses such as paying early or promoting the product Adjusting prices to allow for differences in customers, products, or locations Adjusting prices for psychological effect Temporarily reducing prices to increase short-run sales

24. © 2002 Pearson Education Canada Inc. 10-24 Price-Adjustment Strategies StrategyDescription Value pricing Geographical pricing International pricing Adjusting prices to offer the right combination of quality and service at a fair price Adjusting prices to account for the geographic location of customers Adjusting prices for international markets

25. © 2002 Pearson Education Canada Inc. 10-25 Price Changes Reasons for initiating: –Excess capacity –Market share falling to competition –Strong price competition –Rising costs and falling profit margins Watch price gouging –Communicate the reasons Watch competitive response

26. © 2002 Pearson Education Canada Inc. 10-26 Responding to Price Changes Has competitor cut price? Has competitor cut price? Will lower price negatively affect our market share & profits? Will lower price negatively affect our market share & profits? Can/should effective action be taken? Can/should effective action be taken? Hold current price; continue to monitor competitor’s price Hold current price; continue to monitor competitor’s price Reduce price Raise perceived quality Raise perceived quality Improve quality and increase price Improve quality and increase price Launch low-price “fighting brand” Launch low-price “fighting brand” Yes No