6_Hard_Managing Pricing and Sales Promotions

• Pricing plays a key role in marketing management, influencing consumer perceptions, profitability, and brand positioning.

Pricing in the Digital Age

• Consumers can instantly compare thousands of vendor prices online via mobile platforms.
• Sellers can dynamically adjust prices based on real-time demand and tailor promotions to specific segments.

Common Pricing Mistakes

• Cost-Plus Mindset: Adding a standard margin to costs without considering customer perceptions.
• Infrequent Revision: Not adjusting prices to market changes.
• Disconnection from Strategy: Treating price as an afterthought.
• Limited Variation: Not fine-tuning prices for different segments.

Strategic Importance of Pricing

• Price can position a product by signaling quality, prestige, or value.
• Adjusting the price can significantly impact revenue and profit.
• Pricing needs to consider consumer psychology.
• Pricing decisions should align with product, promotion, and distribution strategies.

Psychological Factors Influencing Consumer Price Perception

• Reference Prices: Consumers compare prices to a mental standard or external benchmark like "fair price".
• Marketers can influence perception by displaying a "regular" price next to a discounted price.
• Consumer Perception: Unexpectedly higher prices than the reference point can affect purchase decision.
• Quality Signal: A higher price can imply higher quality, especially for luxury goods.
• Scarcity and Exclusivity: Limiting product availability can justify a premium price.

Pricing Cues

• Odd-Endings: Prices ending in "9" or ".99" often signal a bargain.
• Round Numbers: Prices ending in "0" or "5" are considered easy to remember.
• "Sale" Signs: Can stimulate demand, but overuse diminishes credibility.
• Limited Availability: Phrases like "One weekend only" can increase urgency.

Factors Managers Must Consider When Setting Prices

Define the Pricing Objective

• Short-Term Profit (Current Profit Maximization): Sets a price to optimize cash flow, ROI, or immediate profit.
• Market Penetration: Aims to gain market share quickly with a very low price.
• Market Skimming: Involves setting a high initial price to "skim" the market of buyers willing to pay more.
• Quality Leadership: Aims to be the highest-quality option, typically at a premium.

Determine Demand

• Each price point can lead to a different level of demand.
• Demand Curve: Shows the relationship between price and sales volume.
• Price Elasticity of Demand: Reflects sensitivity of sales volume to price changes.
• Inelastic Demand: If demand is inelastic, price increases can boost total revenue.
• Elastic Demand: If demand is elastic, a price cut can raise total revenue if costs don't rise significantly.

Factors Affecting Elasticity

• Uniqueness or differentiation makes products less elastic.
• Consumer brand habits and brand loyalty makes products less elastic.
• Smaller expenditure in total budget makes products less elastic.
• Buyer's ability to postpone the purchase makes products less elastic.

Estimate Costs

• Price must cover total production and marketing costs.
• Fixed Costs: Do not vary with sales or output.
• Variable Costs: Directly tied to production level.
• Total Costs = Fixed + Variable.
• Average Cost: Total costs divided by number of units produced.
• Experience Curve Effects: As a company gains production experience, per-unit costs often fall.

Analyze Competitors' Prices and Offers

• Compare rival prices, features, and likely reactions.
• Adjust for Attribute Differences: Evaluate extra benefits to assess worth.
• Value Players: Firms offering quality at low prices require decisions on matching, undercutting, or premium positioning.

Select a Pricing Method

• Markup (Cost-Plus) Pricing: A standard markup to costs (common in retail). Follows specific calculations.
• Target-Rate-of-Return Pricing: Aims for a specific ROI and is common in regulated industries. The calculation exists.
• Economic-Value-to-Customer (EVC) Pricing: Sets price based on the customer's total cost of ownership or "lifetime value”.
• Competitive Pricing (Going-Rate Pricing): Prices are based primarily based on competitors' prices.
• Auction Pricing: Used on electronic marketplaces.
• English (ascending bids): Bidders raise their offers until one bidder remains.
• Dutch (descending bids): reverse english
• Sealed-bid auctions: A single confidential bid is used to sell goods or services to a buyer.

Set the Final Price

• Adjustments must reflect discounts, promotional deals, and geography:
• Price Variations: Discounts, allowances, promotional deals or geographic adjustments.
• Price discrimination can occur if different demographic segments pay different prices.
• Customer-segment and product-form pricing exist.

Product-Mix Pricing

• Coordination across the product line.
• Loss-Leader Pricing: Sell one item cheaply to stimulate other profitable sales.
• Optional-Feature: Low base price, premium on add-ons.
• Captive Pricing: Low main product cost, high markup on ancillary products.
• Two-Part Pricing: Fixed fee plus variable usage.
• By-Product Pricing: Offset cost by selling leftover or secondary items.
• Product-Bundling: Sell products in a combined bundle at a deal.

Responding to Competitive Price Cuts

Understand the Competitor's Move by Identifying Motivation

• Questions to ask include did the competitor drop prices to gain market share? Is the cut temporary?

Anticipate Consequences

• Assess what will happen to market share and profits if you do nothing.
• Consider whether other competitors will also respond with cuts or new strategies.

Possible Response Strategies

• Further Differentiate: Increase the perceived value despite the competitor's lower price.
• Launch a Low-Cost Venture: Introduce a separate, cheaper line or brand to compete at the low end.
• Reinvent Yourself as a Low-Cost Player: Reposition to match or underprice the competitor, only if you can cut costs.

Guidelines for Action

• Speed of Response: Quick action is vital in some industries, as prices change frequently.
• Advance Preparation: Anticipate possible moves and plan responses.
• Evaluate Competitor's Likely Counter-Response: Check whether the competitor might respond by cutting prices again, or increasing marketing.

Designing and Managing Incentives

• Incentives: Sales promotion tools designed to stimulate quicker or greater purchases, in the short term

Establish the Objectives

• Consumer Incentives: Encourage purchases among current buyers, entice switchers, and the like.
• Common consumer incentives included.
• Retailer Incentives: Persuade wholesalers or retailers to stock or promote the product.
• Sales Force Incentives: Encourage the sales force to support a new product, boost prospecting, and stimulate off-season sales.

Develop the Program

• Determine Size: The incentive must be meaningful enough.
• Set Conditions: Decide which segments qualify.
• Duration & Timing: Consider start/end dates and ensure minimal promotion overlap.
• Distribution Vehicle: Consider coupons (print or digital), in-store displays, direct mail, among others.

Push vs. Pull Strategies

• Calculate administrative costs and incentive costs.
• Push: Use sales force and trade promotions.
• Pull: Use advertising and consumer incentives.