1. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Principles of Marketing Theocharis Katranis Lecture 6 Spring Semester 2013 1

2. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 2 Issues discussed in Previous Lecture - Summary 1. Defined Product and Product Classification 2. Defined and Discussed Consumer and industrial Products 3. Discussed branding, Packaging, Labeling, and product Support Services. 4. Discussed the Product mix Decisions. 5. Discussed the New Product Development Strategy and Process as well as the Product Life-cycle Strategies.

3. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Today’s Lecture Lecture 6 3 1. We will deal with Pricing Considerations and Approaches 2. We will discuss the importance of understanding customer value perceptions when setting prices 3. We will discuss the importance of company and product costs in setting prices 4. Identify and define other important external and internal factors affecting a firm’s pricing decisions.

4. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Lecture 6 4 Pricing Products: Pricing Considerations and Approaches What is Price? Price is the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.

5. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Factors to Consider When Setting Prices Lecture 6 5 1. Customer Perceptions of Value 2. Company and Product Costs 3. Other Internal and External Considerations affecting Price Decisions

6. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Lecture 6 6 The customer will decide whether a product’s price is right. Factors to Consider When Setting Prices 1. Customer Perceptions of Value

7. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Lecture 6 7 1.1 Value-bases Pricing Factors to Consider When Setting Prices 1. Customer Perceptions of Value 1.2 Good-value Pricing 1.3 Value-added Pricing

8. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Lecture 6 8 Factors to Consider When Setting Prices 1. Customer Perceptions of Value 1.1 Value-bases Pricing - Definition It is the action of setting price based on buyers’ perceptions of value rather than on the seller’s costs.

9. Principles of MarketingTheocharis Katranis, MBA,Spring Semester 2013 Lecture 6 9 Factors to Consider When Setting Prices 1. Customer Perceptions of Value 1.2 Good-value Pricing - Definition It is the action of offering just the right combination of quality and good service at a fair price.

10. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 10 Factors to Consider When Setting Prices 1.3 Value-added Pricing - Definition 1. Customer Perceptions of Value It is the action of attaching value-added features and services to differentiate a company’s offers and charging higher prices.

11. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 11 2.1 Cost-based Pricing Factors to Consider When Setting Prices 2. Company and Product Costs 2.2 Cost-Plus Pricing 2.3 Break-even Pricing

12. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 12 Factors to Consider When Setting Prices 2. Company and Product Costs 2.1 Cost-based Pricing - Definition It is the action of setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.

13. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 13 Types of Costs 1. Fixed Costs - (also known as overheads) 2. Variable Costs Company and Product Costs

14. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 14 They are the costs that do not vary with production or sales level. Company and Product Costs Types of Costs 1. Fixed Costs - Definition

15. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 15 They are the costs that vary directly with the level of production. Company and Product Costs Types of Costs 2. Variable Costs

16. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 16 Total Costs is the sum of the Fixed and Variable costs for any given level of production. Company and Product Costs Types of Costs Total Costs= Fixed Costs + Variable Costs

17. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 17 Company and Product Costs 2.2 Cost-Plus Pricing - Definition It is the action of adding a standard markup to the cost of the product.

18. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 18 Company and Product Costs 2.2 Cost-Plus Pricing - Example

19. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 19 It is the action of setting price to break even on the costs of making and marketing a product, or setting price to make a target profit. Company and Product Costs 2.3 Break-even Pricing - Definition Break-Even Volume = Fixed Cost Price – Variable Cost = $300,000 $20 - $10 =$30,00

20. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 20 Company and Product Costs 2.3 Break-even Pricing - Chart

21. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 21 Other Internal and External Considerations Affecting Price Decisions 1. Overall Marketing Strategy, Objectives, and Mix 2. Organizational Considerations 3. The Market and Demand 4. Competitors’ Strategies and Prices 5. Other External Factors

22. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 22 A company can: Other Internal and External Considerations Affecting Price Decisions 1. Overall Marketing Strategy, Objectives, and Mix 1. Set Prices to attract New customers or to profitably retain existing ones. 2. Set Low Prices to prevent competition from entering the market or set prices at competitors’ levels to stabilize the market. 3. Set Prices to keep the loyalty and support to resellers or to avoid government intervention. 4. Temporarily reduce prices to create excitement for a Brand. 5. Price one product to help the sales of other products in the company’s line.

23. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 23 Other Internal and External Considerations Affecting Price Decisions 2. Organizational Considerations Management must decide who within the organization should set Prices.

24. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 24 1. Top Management Other Internal and External Considerations Affecting Price Decisions 2. Organizational Considerations Pricing Decisions can be made by: 2. Marketing or Sales Departments 3. Divisional or Product Line Managers 4. Pricing Departments – (Large Companies i.e. airlines)

25. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 25 It is very important for the marketers to understand the relationship between price and demand for the company’s product BEFORE deciding which pricing strategy to follow. Other Internal and External Considerations Affecting Price Decisions 3. The Market and Demand

26. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 26 In setting its prices, a company must consider competitors’ costs, competitors’ prices, and competitors’ market offerings. Other Internal and External Considerations Affecting Price Decisions 4. Competitors’ Strategies and Prices

27. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 27 Other Internal and External Considerations Affecting Price Decisions 5. Other External Factors 5.1 Economic Conditions (boom/recession/inflation) 5.2 The Government 5.3 Social Concerns

28. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 28 New-Product Pricing Strategies Pricing Strategies usually change as the product passes through its life cycle.

29. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 29 Companies choose between TWO strategies: New-Product Pricing Strategies 1. Market-skimming Pricing 2. Market-penetration Pricing

30. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 30 Definition: It is the action of 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. New-Product Pricing Strategies 1. Market-skimming Pricing

31. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 31 It is the action of setting a low price for a new product in order to attract a large number of buyers and a large market share. New-Product Pricing Strategies 2. Market-penetration Pricing Definition:

32. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Product Mix Pricing Strategies Lecture 6 32 Pricing is difficult because the various products have related demand and costs and face different degrees of competition.

33. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 33 1. Product Line Pricing Product Mix Pricing Strategies 2. Optional-Product Pricing 3. Captive-Product Pricing 4. By-Product Pricing 5. Product Bundle Pricing

34. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 34 It is the action of setting price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Product Mix Pricing Strategies 1. Product Line Pricing - Definition

35. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 35 It is the action of pricing optional or accessory products along with the main product i.e. buy a car and optional GPS or buy a refrigerator and optional ice maker. Product Mix Pricing Strategies 2. Optional-Product Pricing - Definition

36. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 36 It is the action of 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. Product Mix Pricing Strategies 3. Captive-Product Pricing - Definition

37. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 37 It is the action of setting a price for by-products in order to make the main product’s price more competitive i.e. Salt from desalination or feathers from poultry processing. Product Mix Pricing Strategies 4. By-Product Pricing - Definition Note: A by-product is a secondary or incidental product deriving from a manufacturing process, a chemical reaction or a biochemical pathway and is not the primary product or service being produced!

38. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 38 It is the action of combining several products and offering the bundle at a reduced price I.e. burger with fries and soft drink at a “combo” price OR Hotel Package with air ticket, accommodation, meals and entertainment. Product Mix Pricing Strategies 5. Product Bundle Pricing - Definition

39. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 39 1. Discount and Allowance Pricing Price-Adjustment Strategies 2. Segmented Pricing 3. Psychological Pricing 4. Promotional Pricing 5. Geographical Pricing 6. Dynamic Pricing 7. International Pricing

40. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 40 Discount is a straight reduction in price on purchases during a stated period of time. Allowance is the promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products is some way i.e. turning in an old item when buying a new one – Turning in an old car and buy a new one. Price-Adjustment Strategies 1. Discount and Allowance Pricing

41. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 41 It is the action of selling a product or service at two or more prices, where the difference in prices is not based on differences in costs i.e. Museum tickets to students Vs citizens, Customer-segment pricing / Evian water from local supermarket Vs Evian water in Sport Centres, Product-form pricing / Theatre front seats Vs Back seats, Location pricing / Winter Air tickets Vs Summer Air tickets, time pricing. Price-Adjustment Strategies 2. Segmented Pricing

42. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 42 It is the action of setting a pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product i.e. a $100 bottle of perfume may contain only $3 worth of scent but some people are willing to pay the $100 because this price indicates something special. Price-Adjustment Strategies 3. Psychological Pricing Also another aspect of psychological pricing is Reference prices I.e. the prices the buyers carry in their minds and refer to when they look at a given product.

43. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 43 It is the action of temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. Price-Adjustment Strategies 4. Promotional Pricing

44. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 44 It is the action of setting prices for customers located in different parts of the country or world. Price-Adjustment Strategies 5. Geographical Pricing

45. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 45 Price-Adjustment Strategies 5. Geographical Pricing - Strategies 5.1 FOB – Origin Pricing 5.2 Uniform-delivered Pricing 5.3 Zone Pricing 5.4 Basing-point Pricing 5.5 Freight-absorption Pricing

46. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 46 It is a geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination Price-Adjustment Strategies 5. Geographical Pricing - Strategies 5.1 FOB – Origin Pricing - Definition

47. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 47 It is a geographical pricing strategy in which the company charges the same price plus freight to all customers, regardless of their location. Price-Adjustment Strategies 5. Geographical Pricing - Strategies 5.2 Uniform-delivered Pricing - Definition

48. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 48 It is a geographical pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price. Price-Adjustment Strategies 5. Geographical Pricing - Strategies 5.3 Zone Pricing

49. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 49 It a geographical pricing strategy in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer. Price-Adjustment Strategies 5. Geographical Pricing - Strategies 5.4 Basing-point Pricing

50. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 50 It is a geographical pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business. Price-Adjustment Strategies 5.5 Freight-absorption Pricing 5. Geographical Pricing - Strategies

51. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 51 It is the action of adjusting prices continually to meet the characteristics and needs of individual customers and situations. Price-Adjustment Strategies 6. Dynamic Pricing

52. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 52 Some companies may decide to set a uniform worldwide price but... Price-Adjustment Strategies 7. International Pricing A company must always take into consideration the factors affecting its decision on pricing issues i.e. Economic conditions / competitive situation / laws and regulations / development of the wholesale and retailing system / consumers’ perception and preferences

53. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 53 Price Changes 1. Initiating Price Changes 2. Responding to Price Changes

54. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 54 Price Changes 1. Initiating Price Changes 1.1 Initiating Price Cuts 1.2 Initiating Price Increases 1.3 Buyer Reactions to Prices Changes 1.4 Competitor Reactions to Prices Changes

55. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 55 Reasons can be Excess Capacity / Strong competition / Price Changes 1.1 Initiating Price Cuts 1. Initiating Price Changes

56. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 56 Reason can be the over demand for a specific product Price Changes 1.2 Initiating Price Increases 1. Initiating Price Changes

57. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 57 Companies must always take into consideration the reaction of their product buyers when deciding to increase of decrease the prices of their products I.e. for an increase in the price of a product customers may think that the company is getting greedy / for a decrease in the price of a product, customers may think of cheaper raw materials henceforth low quality product. Price Changes 1. Initiating Price Changes 1.3 Buyer Reactions to Prices Changes

58. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 58 Companies must also take into consideration the reaction of their competitors. An increase in the price of their products may increase sales of competitors products and henceforth losing of market share / A decrease in the price of their products may attract more competitors in the market Price Changes 1. Initiating Price Changes 1.4 Competitor Reactions to Prices Changes

59. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 59 Assessing and Responding to Competitor Price Changes

60. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 60 Public Policy and Pricing In many countries, companies are not free to charge whatever prices they wish due to legislation. Manufacturers cannot tell to sellers the price to sell. They can only give them a recommend price. Sellers will decide what is best to do.

61. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 61 Summary - Lecture 6 1. Defined Product and Product Classification 2. Defined and Discussed Consumer and industrial Products 3. Discussed branding, Packaging, Labeling, and product Support Services. 4. Discussed the Product mix Decisions. 5. Discussed the New Product Development Strategy and Process as well as the Product Life-cycle Strategies.

62. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Lecture 6 62 6. Described the major strategies for pricing initiative and new products. 7. Explained how companies find a set of prices that maximizes the profits from the total product mix. 8. Discussed how companies adjust their prices to take into account different types of customers and situations. 9. Discussed the key issues related to initiating and responding to price changes. Summary - Lecture 6

63. Principles of MarketingTheocharis Katranis, MBASpring Semester 2013 Chapters 10 and 11 Lecture 6 63 END of Lecture 6 Thank you for your attention