1. Pricing Strategies

2. What is Price?
Price ğ the amount of money charged for a product or service
(narrowest sense)
Price ğ the sum of all the values that consumers exchange for the benefits of having or using the product or service
Major determinant of buyer choice
Only element in the marketing mix to produce revenues
Most flexible element of the mktg mix

3. Pricing Decisions Common Pricing Mistakes:
Pricing & price competition ğ imp. problem facing many mktg managers
Common Pricing Mistakes:
Companies too quick to reduce prices to get sales
Pricing too cost-oriented (not reflecting customer value)
Price not revised often enough to reflect market changes
Price set without taking into account other elements of the marketing mix
Price not varied enough for different products, market segments and purchase occasions

4. Pricing Decisions and Strategies
Several price-quality positions in a given market
Segment Example
Ultimate Rolls-Royce
Gold Standard Mercedes-Benz
Luxury Audi
Special needs Volvo
Middle Renault
Ease/convenience Ford Escort
Me too, but cheaper Hyundai
Price alone Kia

5. Price - Quality Strategies
High Medium Low
High
Low
Product Quality
Med
1.Premium
Value
5.Medium
9.Economy
2.High
Value
3.Super
6.Good-Value
4.Overcharging
7.Rip-Off
8.False
Economy

6. Setting the Pricing 1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price

7. Selecting the Pricing Objective
Survival
Low prices to cover variable costs and
some fixed costs to stay in business.
Current Profit Maximization Choose the price that produces the maximum current profit
Marketing
Objectives
Market Share Leadership
Low as possible prices to become
the market share leader.
Product Quality Leadership
High prices to cover higher
performance quality and R&D.

8. Determining Demand
Demand sets a ceiling on the price that the company can charge for its product
Each price will lead to a different level of demand
Demand and price are generally inversely related ğ the higher the price, the lower the price
For prestige goods ğ consumers perceive the higher price as quality signal
Pricing is affected also by consumer perceptions of price and value

9. Determining Demand Price Sensitivity
Customers are less price sensitive when:
The product is more distinctive,
Buyers are less aware of substitutes,
Buyers can not easily compare the quality of substitutes,
The expenditure is a minor part of buyer’s total income,
The product is perceived as having more quality, prestige, or exclusiveness,
Buyers can not store the product

10. Determining Demand Price Elasticity
Marketers need to know how responsive or elastic the demand would be to a change in price
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
Demand ğ less elastic in case of;
few or no substitutes or competitors
buyers do not notice the higher price
buyers are slow to change their buying habits
buyers think that higher prices are justified

11. Price Elasticity of Demand
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price P2 P1 Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price
P’2
P’1 Q2 Q1
Quantity Demanded per Period

12. Estimating Costs Costs set the floor on the price
The company wants to charge a price that covers all its costs and provides a fair rate of return for its effort & risk
Many companies work to become low-cost producers in their industries
Management needs to know how its costs vary at different production levels (cost per unit)

13. Sum of the Fixed and Variable Costs for a Given
Estimating Costs Types of Costs
Fixed Costs
Costs that don’t
vary with sales or
production levels.
(e.g. executive
salaries, rent)
Variable Costs
Costs that do vary
directly with the
level of production.
(e.g. raw materials)
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production

14. Estimating Costs Costs Considerations
Cost Per Unit at Different Levels of Production Per Period 1 2
Cost per unit 3
SRAC 4
LRAC
1,000
2,000
3,000
4,000
Quantity Produced per Day

15. Estimating Costs Experience Curve
As the firm gains experience in production;
The experience curve (or the learning curve) ğ average cost drops with accumulated production experience.
Strategy ğ company lowers the prices  sales increases  costs continue to decrease  and then lower prices further.
Risks are present with this strategy: aggressive pricing may give the product a “cheap image”
Assumption: the competitors are not fighting back

16. Estimating Costs Differentiated Marketing Offers
Activity-based accounting
ğ used in estimating the real profitability when dealing with different customers
To identify the real costs associated with serving each customer
By identifying the true costs ğ the company is able to explain its charges to the customer
Target costing
Establish a new product’s desired functions
Determine the price at which the product will sell
Price - desired profit margin = target cost
Examine each cost element /
consider ways to reengineer components, eliminate functions & bring down supplier costs
The objective ğ to bring the final cost projections into the target cost range

17. Analyzing Competitors’ Costs, Prices & Offers
Consider the closest competitor’s price
In case of offering additional differentiation points;
their worth to the consumer should be evaluated & added to the competitor’s price
Decide whether to charge more, the same, or less than the competitor
Be aware that competitors can change their prices in reaction to the price set by the firm

18. General Pricing Approaches The Three C’s Model for Price Setting

19. General Pricing Approaches Cost-based pricing
Cost-plus pricing
Adding a standard markup to the cost of the product
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
Break-even pricing (target return pricing)
Setting price to break-even on the cost of making and marketing products / or to make the target (desired) profit
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.
Companies wishing to make a profit must exceed the break-even unit volume.

20. General Pricing Approaches
Cost-Plus Pricing Example
- Variable costs: $ Fixed costs: $ 500,000
- Expected sales: 100,000 units - Desired Sales Markup: 20%
Variable Cost + Fixed Costs = Unit Cost
Unit Sales
$20 + $500,000 = $25 per unit
100,000
Unit Cost = Markup Price
(1 – Desired Return on Sales)
$ = $31.25
( )

21. General Pricing Approaches
Total Revenue
1000
800
600
400
200
Target Profit $200,000
Total Cost
Break-even point
Thousands of Dollars
Fixed Cost
Sales Volume in Units (thousands)
Quantity To Be Sold To Meet Target Profit
Break-Even Analysis and Target Profit Pricing

22. General Pricing Approaches Value-based Pricing
Percieved-value pricing ğ Setting prices based on buyers’ perceptions of value, rather than on the seller’s cost.
Measuring perceived value can be difficult.
The firm use the nonprice variables to build up perceived value in the buyers’ minds ğ price is set to capture this perceived value
Companies using this approach ğ must find out what value the buyer assigns to different competitive offers
More and more marketers have adopted value pricing strategies ğ offering just the right combination of quality and good service at a fair price.
Value pricing at the retail level ğ Everyday low pricing (EDLP) vs. high-low pricing (hi-lo)

23. Cost-Based vs. Value-Based Pricing
Product
Cost
Price
Value
Customers
Customer
Cost-Based Pricing
Value-Based Pricing

24. Example of Perceived Value to Set Prices
Utility: The attribute that makes it capable of want satisfaction
Value: The worth in terms of other products
Price: The monetary medium of exchange.
Value Example: Caterpillar
Tractor is $100,000 vs. Market $90,000
$90,000 if equal
7,000 extra durable
6,000 reliability
5,000 service
2,000 warranty
$110,000 in benefits - $10,000 discount!

25. General Pricing Approaches Competition-based pricing
Going-rate pricing ğ prices are set based largely on following competitors’ prices rather than on company costs or demand.
Firms feel that the going rate represents the collective wisdom of the industry
They also feel that holding to the going-rate price will prevent harmful price wars.
Sealed-bid pricing
The firm sets prices based on how the firm thinks competitors will price, rather than on its own costs or demand estimates
Auction-type pricing
Becomes popular esp. with the growth of the Internet

26. Pricing Decisions and Relation with Marketing Mix Strategy
Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent mktg program
Some companies make their pricing decisions first and base other mktg mix decisions on
Some others de-emphasize price and use other mktg mix tools to create nonprice positions

27. Pricing Strategies
A company sets no single price, but ğ a pricing structure that covers different items in its line
Pricing structure changes over time ğ as products move through their life cycles
The company adjusts prices ğ in order to reflect changes in costs and demand & to account for changes in buyers and situations
The company initiates price changes and respond to them ğ as the competitive environment changes

28. New Product Pricing Strategies
Market Skimming ğ setting a high price for a new product to “skim” maximum revenue from the segments willing to pay the high price.
Conditions:
A sufficient number of buyers must have a high current demand
The product’s quality and image must support its high price (high price should communicate a superior product)
The unit costs of producing a small volume cannot be so high that they cancel the advantage of charging more
The high initial price should not attract more competitors to the market

29. New Product Pricing Strategies (cont.)
Market Penetration ğ setting a low price for a new product in order to attract a large number of buyers and a large market share
Conditions:
The market must be highly price sensitive and low price produces more market growth
Production and distribution costs fall as sales volume increases (result of accumulated production experience)
The low price discourages actual and potential competition

30. Product Mix Pricing Product Line Pricing Optional-Product Pricing
Captive-Product Pricing
By-Product Pricing
Product Bundle Pricing

31. Product Mix Pricing
1.) Product Line Pricing ğ setting the price steps between various products in a product line;
based on cost differences between the products, customer evaluations of different features, and competitors’ prices.
Sellers use a well-established price points for the products in their line
The seller’s major task is to establish perceived quality differences that support the price differences

32. Product Mix Pricing
2.) Optional Product Pricing ğ pricing optional or accessory products sold with the main product.
3.) Captive Product Pricing ğ setting a price for products that must be used along with a main product.
Two-Part Pricing ğ in the case of services
the price of the service is broken into a fixed fee plus a variable usage rate)

33. Product Mix Pricing (cont.)
4.) By-Product Pricing ğ setting a price for byproducts in order to make the main product’s price more competitive
5.) Product Bundle Pricing ğ combining several products and offering the bundle at a reduced price

34. Price Adjustment Strategies
Discount and Allowance Pricing – reducing prices to reward customer responses such as paying early or promoting the product
Segmented Pricing – adjusting prices to allow for differences in customers, products, or locations
Psychological Pricing – adjusting prices for psychological effect
Promotional Pricing – temporarily reducing prices to increase short-run sales
Geographical Pricing – adjusting prices to account for the geographic location of customers
International Pricing – adjusting prices for international markets

35. Price Adjustment Strategies (cont.)
Discount and Allowance Pricing
A cash discount ğ price reduction to buyers who pay their bills without delay
A quantity discount ğ price reduction to buyers who buy in large volumes
A functional discount ğ price reduction offered by the seller to the trade channel members if they perform certain functions such as selling, storing and record-keeping
A seasonal discount ğ price reduction to buyers who buy merchandise or services out of season
Allowances ğ other types of reductions from the list price (trade-in-allowances, promotional allowances)

36. Price Adjustment Strategies (cont.)
Segmented (Discriminatory) Pricing ğ when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs
Customer-segment pricing ğ different customer groups are charged different prices for the same product
Product-form pricing ğ different versions of the product are priced differently but not accoding to differences in their costs
Location pricing ğ the same product is priced differently at different locations, even though the cost of offering at each location is the same
Time pricing ğ prices are varied by season, day or hour

37. Price Adjustment Strategies (cont.)
Psychological Pricing ğ psychology of prices are considered in addition to their economics
Especially effective with ego-sensitive products
(such as perfume and expensive cars)
Relationship between price and quality perceptions
when alternative information about true quality is available ğ price becomes a less significant indicator of quality
when this information is not available ğ price acts as a quality signal
“Reference prices” ğ prices that buyers carry in their minds and refer to when looking at a given product
Setting prices ending with odd numbers (e.g.19.9YTL)

38. Price Adjustment Strategies (cont.)
Promotional Pricing ğ temporarily pricing products below the list price and sometimes even below the cost, to increase short-term sales
Several forms of promotional pricing:
Loss leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer warranties
Free maintenance and service contracts
Discounts from normal prices

39. Price Adjustment Strategies (cont.)
Geographical Pricing ğ involves the company deciding how to price its products to different customers in different parts of the country.
Important issues:
Whether the company should charge higher prices to distant customers to cover the higher shipping costs and risk losing their business
Whether it should charge a lower price hoping that a lower price will generate a higher sales volume
How to get paid?

40. Price Adjustment Strategies (cont.)
International Pricing ğ involves companies in deciding what prices to charge in different international countries in which they market
The price to be set in a specific country depends on:
Economic conditions
Competitive situation
Laws and regulations
Development of the retailing and wholesaling system
Specific consumer perceptions and preferences
Marketing objectives of the company

41. Price Changes
Price Cuts – situations leading a firm to consider price cutting:
Excess capacity
Declining market share
To dominate the market through lower costs
Price Increases
Cost inflation
Overdemand

42. Price Changes (cont.) Buyers’ Reactions to Price Cuts:
Current models are being replaced by newer models
Current models have some fault and are not selling well
The firm is in financial trouble and may not stay in business
Price will come down even further
Quality has been reduced
Buyers’ Reactions to Price Increases:
The item is in demand and will be unobtainable unless it is purchased soon
The item represents an unusually good value

43. Price Changes (cont.) Competitors are most likely to react when:
the number of the firms in the industry is small
the product is homogenous
the buyers are higly informed
Competitors’ Reactions on a price cut:
the company is trying to obtain a larger market share
the company is dooing poorly and trying to increase its sales
the company wants the whole industry to reduce prices to increase total demand

44. Price Changes (cont.): Responding to Price Changes

45. Price Changes (cont.) Responses to Competitors’ Price Cuts:
Reduce the price to match competitor’s price
Maintain the company’s price but raise the perceived quality of its offer
Improve quality and increase price
Launch a new low-price fighting brand