Marketing, Demand, and Pricing Strategies

Introduction to Pricing

• Pricing involves how companies process and evaluate prices.
• Companies need to set initial prices for products/services and adapt them to changing circumstances and opportunities.
• Determining when to initiate a price change and how to respond to competitors' price changes is very important.

Overview of Marketing & Demand

• Marketing: Societal process where individuals/groups obtain needs/wants by creating, offering, and exchanging valuable products/services with others (Philip Kotler).
• Demand: Economic principle of a consumer's ability and willingness to pay for specific goods/services.

Marketing Mix (The 4 P's)

• Marketing Mix: Controllable variables firms use to influence a buyer's response.
• Place: Distribution strategy to reach the right customers; corresponds to Customer Solution.
• Product: Goods/services meeting customer needs/wants; corresponds to Customer Cost.
• Price: Amount customers pay considering value, demand, and competition; corresponds to Communication.
• Promotion: Strategies to advertise, market, and communicate to consumers; corresponds to Convenience.

Marketing Concept

• Marketing > Transaction > Satisfaction > Customer
• Focuses on selling, promoting, and developing strategies for profitability and customer satisfaction.
• Transaction Components:
  • Buyer: Purchasing the product.
  • Seller: Offering the product/service.
• Satisfaction: Expectations meet reality.

Types of Customers

• Potential Customers: Interested, but haven't purchased.
• Actual Customers: Have already made a purchase.

Market Segmentation, Targeting, & Positioning

• Market segmentation divides the market into smaller groups based on shared traits.

Types of Segmentation

• Demographic Segmentation: Based on who they are: - Age, gender, religion, income, ethnicity, household size, occupation, education, marital status.
• Geographic Segmentation: Based on where they are: - Location (city, state, country, zip code), culture, time zone, language, climate, population density.
• Psychographic Segmentation: Based on how they think: - Attitudes, values, social status, lifestyle, personality, interests, opinions.
• Behavioral Segmentation: Based on how they act: - Purchasing behavior, customer journey stage, occasion/timing, benefits sought, customer loyalty, engagement level.

Targeting & Positioning

• Targeting: Evaluate each segment and choose ones aligning best with the product/service. - Consider market size, profitability, and accessibility. - Marketing efforts focus on a specific segment, Niche marketing targets a specialized consumer group.
• Positioning: Creating a unique brand image differentiating the product from competitors. - Focus on how consumers perceive the brand.

Price

• Price: Monetary value of a product.
• Buyers can compare prices instantly, name a desired price and have it met, or get products for free.
• Sellers can monitor customer behavior to tailor offers, offer access to special prices, or negotiate prices.
• Understanding consumer perception of prices is key, including reference prices, price-quality inferences, and price endings.

Reference Pricing

• Includes "Fair Price" (what consumers feel the product should cost), typical price, last price paid.
• Could also include: upper and lower-bound prices, historical competitor prices, expected future price, and usual discounted price.

Price Quality

• Consumers associate higher prices with better quality.
• Fair Price suggests reasonable value.
• Upper Price denotes premium pricing for exclusivity.
• Knockoff Price indicates cheaper alternatives.
• Prices ending in odd numbers (e.g., $99) are perceived as more affordable.

Setting the Price

• Involves a multistep process:
  • Selecting the Pricing Objective.
  • Determining Demand.
  • Estimating Costs.
  • Analyzing Competitors' Costs, Prices, and Offers.
  • Selecting a Pricing Method.
  • Selecting the Final Price.

Step 1: Selecting the Pricing Objective

• Five major objectives of prices are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership.
• Survival: Companies use this to combat overcapacity, competition, or changing wants. - It's a short-term objective that may require adding value long-term.
• Maximum Current Profit: Achieved by maximizing current profits.
• Maximum Market Share: This objective aims to maximize market share. - Works best when market is price-sensitive, costs decrease with production, and low prices deter competition.
• Maximum Market Skimming: Common with new technology, using high prices to maximize market skimming under specific conditions: - Sufficient high-demand buyers, high unit costs for small volumes, no attraction of competitors, superior product image.
• Product-Quality Leadership: Aims to position as the product-quality leader, offering "affordable luxuries".

Step 2: Determining Demand

• Price Sensitivity: Affected when product distinctiveness, buyer awareness of substitutes, easy quality comparison, expenditure portion of income, end product cost, cost-sharing, asset conjunction, perceived prestige, and storability are low.

Estimating Demand Curves (Estimating Demand)

• Employ various methods:
  • Surveys to assess consumer buying intentions.
  • Price experiments by varying prices in stores/territories.
  • Statistical analysis of past sales data.

Price Elasticity of Demand

• Price elasticity of demand determines responsiveness to price changes.
• Elastic Demand: Price changes cause large quantity changes.
• Inelastic Demand: Price changes cause small quantity changes.

Step 3: Estimating Costs and Level Production

• Companies fixed and variable forms,
• Fixed Costs: Overhead costs not based on sales/production: - Example: rent, interest, salaries - they must be paid, regardless of output.
• Variable costs: Vary depending on production level. - Example: cost of plastic, materials etc
• Total costs: Fixed costs + Variable costs.
• Average cost: Cost per unit - Total costs divided by production volume.
• Management aims to set prices to cover given production level costs.

Step 4: Analyzing Competitors' Costs, Prices & Offers

• Firms must account for competitors' costs, prices, reactions, and possible price reactions.
• Firms can anticipate competitor reactions in 2 ways: - Assume competitors will standard price changes/settings. - Assume competitors treat changing price/difference or change as fresh challenge, relating to their profit

Step 5: Selecting a Pricing Method

• Consists of 6 possible price-setting methods:
  • Markup pricing, target-return pricing, perceived-value pricing, pricing and value pricing, going-rate pricing, and auction-type pricing.
• Markup Pricing: Add a standard markup to a product's cost. - The formula being: Total Cost + Mark-up = Selling Price - Markup can be in the form of percentage (%) or absolute value. - Generally aren't logical because it ignores customer demnad and value, and general levels of competition - But still popular because it helps determine costs, keeps prices similar in the industry (minimizing competition), and is seen as the fairest approach for both buyers and sellers.
• Target-Return Pricing: Sets prices to achieve target ROI. - Often ignores other aspects of sales

Perceived Value Pricing

• Product performance depends on customer service, reputation, support etc

Value Pricing Strategies

• Value Pricing: Charging a low price for a high-quality offering by reengineering operations to become a low-cost producer without sacrificing quality.

  • Key questions: - Market strategy for the segment? - Differential value made, customer transparent pricing by supplier? - Standard costing for any given market strategy - Pricing used, and market expectation?

• Everyday low pricing (EDLP) is an important type of value pricing - A retailer charges a constant low price with little or no price promotions and special sales.

Pricing Cont.

• Going-Rate Pricing: Firm bases price on competitors' prices, common in oligopolies. - Firms normally charge the same price and "follow the leader". - Minor gas retailers charge lower per gallon than the major oil companies, but let the change increase/decrease - Going-rate pricing is popular because it affects costs, and is very good for solutions
• Auction-Type Pricing: Grows in popularity, helps excess goods in electronic marketplaces be purchased.
  • There are 3 procedures of separate pricing
    • English auctions (ascending bids): One seller, many buyers, puts items prices, raises price, high price reaches.
    • Dutch auctions (descending bids): Feature sellers/buyers, auctioneer announces product cost then decrease until bidder accept, or buyer wants to buy, potential servers compete lowest. -Sealed-bid auctions: Would get supplier submit the bid (can't know other bids), often used between US government to procure suppliers.

Step 6: Selecting The Final Price

• Pricing methods narrow range from which company can select a final price.
• Company must consider factors.

Impact of Advertising Activities

• Final price must account brand's quantity /advertisement
• Important to see quality/advertising depending on busniness/customer
• Brands with relative quantity, high advertiser budgets could charge premium pricing
• Brands with high quality and advertising obtained highest prices, otherwise charge lowest prices

Company and Price Polices

• Price must be consistent will company polices
• Must be reasonable, customisable/profitable
• Buyers might resist to seller proposal high risk
• Seller may absorb parts and risk

Step 7: Impact of Price

• Must consider distribution/dealers
• Also take sales force pricing, company and supplier prices into account
• Company usually do not single price but develop structure demand/cost, purchase timing , order levels, guarantees etc
• Can do this via: - geographical pricing, price discounts and allowances, promotional pricing/ differentiated

Geographical Pricing

• Company may decide prices to different location/ countries
• Many buyers offer items in payments, countertrades helps world trade

Countertrade Takes Sevral Form

• Barter: Buy/Seller Exchange Goods, no market/ Thrid party involved
• compensation deal: seller receives some % of paying cash + products
• Buy back Arrangement: Seller sells plan, pays cash/ equipments, etc.
• OffSet: Seller receive full payment (cash) - agree to spend money in countries and periods

Price Discount/ Allowance

• Most companies assist/adjust their prices. Provide volume customer
• Must check for allowance carefully for planned profits

Forms of Price Discount/Allowance

Price reduction to lowers/pays builds - known as "discount"

• Those who buy discount on amount is quantity must equal, not go over certain level

Seasonal Discount - price adjust during season

• Functions Discount/Trade Discount*- given channel members
• Allowance* : extra payment for special reseller
• Prices Allowance* : reward dealings for participate

Promotional Pricing

• Company Use Techniques
• Loss- Leader Pricing: Decrease prices to boost in stores Other types of -
• Special Customer Pricing, Cash, Low interest, Long term etc

Differentiated Pricing

• Comp Adjust price for customer with productions location
• Priced discriminate happen when company product different level than cost
• IN First degree - charged a different amount to each customer degree depends
• In Second Degree - changes buyer degree based on usage , volumes , tier etc
• In ThRID- Degree - degree based on different classes/buyers, customer segments, product forms. ImAGE pricing, location pricing

Initiating and Responding to pricing Changes

• Several circumstance that lead firms
• excess plan capacity, forms needs, companies drive pricing to dominate initiating pricing cuts, cut startegy leads to possible steps

Low Market Shares= Consumer quality is lost Fragile Market Shares = Low Price and bad shares will shift to lower Shallow pockets= Lower Prices + deeper cash Price War = Competitors

Customers Question The Changes

• Make assumptions about model, fault, prices

Other Methods

• Delayed quotation
• Escalator Clauses
• Unbunding Reduction of discounts Shrinking number of products,
• create economy brands