Module 1: Pricing Strategies

Module 1: Pricing

• Price refers to the money charged for a product or a service, representing what a customer gives up to acquire it, usually expressed in currency
• Four views of price exists economist, accountant, customer, and marketer

Four Views of Price

• Economist's View: Price is determined by supply and demand forces
• Accountant's View: Price should cover costs to ensure profitability
• Customer's View: Price reflects the perceived value of the product
• Marketer's View: Pricing is an opportunity for competitive advantage

Factors Affecting Price

• Costs of production
• Competitors' prices
• Customer perception of value
• The firm's objectives
• Customer demand
• Price elasticity of demand
• Target market
• Marketing mix
• Stage in the product life cycle
• State of the economy
• Expectations of distributors
• State of competition
• Likely customer reaction

Setting Price

• Stages include:
• Develop pricing objectives
• Assess target market's ability to purchase
• Determine product demand
• Analyze demand, cost, and profit
• Evaluate competitors’ prices
• Select pricing strategy & tactics
• Decide on price

Pricing Objectives

• Financial:
  • Maximize profit
  • Achieve a target level or rate of return
  • Maximize sales revenue
  • Improve cash flow
• Marketing:
  • Maintain or improve market share
  • Beat or prevent competition
  • Increase sales
  • Build a brand

Price Takers vs. Price Makers

• Price Takers:
  • Have no option but to charge the current market price
• Price Makers:
  • Able to set their preferred price
• Price Leaders:
  • Market leaders whose price changes are followed by competitors
• Price Followers:
  • Follow the price-changing lead of the market leader

Module 2: Price Segmentation

• Price segmentation or price discrimination involves charging different prices to different customers for similar products
• Market Homogeneity:
  • Buyers have uniform needs, habits, choices, and nature
• Market Heterogeneity:
  • Different needs, preferences, and behaviors exist among consumers, leading to market fragmentation

Limited Transferability and Value of Price Segmentation

• Limited Transferability:
  • Once a product is sold, it should be difficult for the customer to resell it.
• Value of Price Segmentation:
  • Improves a firm's profits.
  • Increases the number of customers by lowering the market entry price.

Segmentation Hedges and Price Segmentation Strategies

• Segmentation Hedges:
  • Separate customers willing to pay more from those who aren't
• Seats example:
  • Seats are the same, but price varies based on which customer is purchasing
• Price segmentation strategies classified by Arthur Cecil Pigou (1920) include
  • First-degree (perfect price discrimination)
  • Second-degree (quantity-based)
  • Third-degree (different markets)

Price Discrimination

• First Degree Price Discrimination:
  • Achieved by charging every customer at the maximum price they are willing to pay
• Second Degree Price Discrimination:
  • Achieved by charging different prices based on the quantity purchased
• Third Degree Price Discrimination:
  • Achieved by charging different prices in different markets with higher prices for greater benefits

Strategic vs. Tactical Price Segmentation

• Tactical Price Segmentation:
  • Captures specific customers in unique situations
• Strategic Price Segmentation:
  • Defines the price structure itself to enable different customers to pay different prices
• Strategic Approach:
  • Planning, large scale, difficult to copy, and long-term focused
• Tactics Approach:
  • Doing, smaller scale, easy to copy, and short-term focused

Designing Segmentation Hedges and Requirements

• Segmentation Hedges:
  • Barriers that prevent customers willing to pay more from paying a lower price
• Requirements for Effective Segmentation Hedges
  • Highly correlated with customer willingness to pay
  • Culturally acceptable

Common Price Segmentation Hedges

• Price products differently for different customer segments.

Customer Demographics/Firmographics Segmentation

• Uses demographic segmentation for consumers
  • Gender, age, income, profession, and family structure
• And firmographic segmentation for businesses
  • Based on industry, location, company size, status, performance, executive title, and sales cycle stage

Time & Location of Purchase

• Purchase Time:
  • Indirectly tracks customer behavior to correlate with willingness to pay
• Purchase Location:
  • Price varies greatly based on the location of purchase due to differing customer expectations and heterogeneity in willingness to pay

Buyer Self Identification and Quantity Purchased

• Buyer Self-Identification:
  • Relies on buyers identifying their willingness to pay through
    • promotional sales
    • buyer's clubs
    • coupons
    • rebates
• Measures willingness to buy, customer loyalty, and signals price sensitivity
• Quantity Purchased:
  • Price segmentation can be based on the quantity purchased
• Quantity Purchased info
  • Can either be in a single or multiple transactions
  • Uses quantity purchase and order size

Customer Usage and Bank Fees

• Customer Usage:
  • Price segmentation based on the heterogeneity of value customers place on product usage patterns.
• Bank Fees:
  • Bank fees are charges for services or penalties assessed on customer bank accounts.

Module 3: Price Promotion

• Definition:
  • Price promotions lower prices temporarily to enhance product sales to cost-sensitive consumers
• Manufacturers use it to spread customer awareness
• Retailers use it to boost general sales, not just a specific product or brand

Promotional Pricing Strategy

• Definition:
  • Sells a product for less than its normal price
• Strategy details:
  • Emphasizes affordability to encourage purchases
  • Benefits firms through customer loyalty and inventory clearance

Advantages of Price Promotion

• Advantages:
  • Convinces customers to buy,
  • Helps companies stay competitive,
  • Increases short-term sales,
  • Increases customer loyalty,
  • Makes product marketing easy,
  • Generates excitement for a product,
  • Liquidates inventory,
  • Is customizable to an organization

Disadvantages of Price Promotion

• Disadvantages
  • Requires more complicated calculations,
  • Customer price expectations may be lowered,
  • May question product quality,
  • Limits options for customers,
  • May undermine local businesses,
  • Can affect long-term profits

Market Impact of Price Promotion

• Positive Impacts:
  • Increased market size and share,
  • Brand switching,
  • Increased value perception,
  • Revenue growth,
  • Customer retention and loyalty
• Negative Impacts:
  • Imperfect segmentation hedge,
  • Customer churn,
  • Reference price effect,
  • Loss of price credibility,
  • Increased price sensitivity

The Vagueness of Price Promotions

• Promotions drive marginal sales from customers with a lower willingness to pay, but too many promotions can negatively impact profits because of decreased price credibility

Price Promotion Design

• Targeted
• Temporary
• Special
• Irregular

Price Promotion Strategies

• Psychological Pricing Strategies:
  • Artificial Time Constraints
  • Charm Pricing
  • Innumeracy
  • Price Appearance
• Common forms of Price Promotions
  • Coupons
  • Trail offers
  • Rebates
  • Promotional Bundles

Price Promotion Examples

• Discount Coupons
• Free Shipping Coupons
• Expiring Coupons
• Printable Coupons
• E-Coupons
• Presale Coupons
• Automatic Coupons
• Reserve Coupons
• Gift Certificates

Module 4: Discount Management

• Definition:
  • A discount is a reduction in the price of a good or service
• Cash Discount:
  • Incentive offered by the seller for early payment
• Trade Discount:
  • Reduction from list price, typically between manufacturer/wholesaler or wholesaler/retailer.
• Retail Discount:
  • Similar to trade discount, offered by merchants to customers or between wholesalers and retailers.

Challenges in Discount Management

• Discounting decisions can challenge organizational unity because incentives and expertise differ between field staff and centralized executives

Field vs Central Discount Mngmt.

• Field Executives:
  • Push for more discounts to increase market share, with incentives tied to sales volume
• Centralized Executives:
  • Push for higher prices through centralized decision-making.Disparity occurs due to conflicting incentives and knowledge

Executive Reactions to Discounting

• Some executives stop all discounts, which is disruptive and unprofitable.

Discount Pricing

• Discounts and Allowances:
  • Cash, Quantity, Trade, Seasonal, Special Allowances

Cash Discount and Quantity Discounts

• Cash Discount:
  • Offered for quick payment (e.g., 2/10, n/30 terms).
• Quantity Discounts:
  • Larger orders receive bigger discounts, applicable to the same or different items.

Employee and Trade Discounts

• Employee Discounts:
  • Given as a perk, usually 10-30% off.
• Trade Discounts:
  • Granted to wholesalers and retailers for performing trade-related services

Trade Discount Example

• If a supplier offers a 10% trade discount to customers who purchase 100 units, the customer pays only 90% of the list price, these are not usually advertised publicly
• Series Discounting:
  • Trade discounts offered in a series, calculated sequentially (e.g., 20% and 10%)

Seasonal and Promotional Discounts

• Seasonal Discounts:
  • Offered on products purchased outside the customary season.
• Promotional Discounts and Allowances:
  • Given to wholesalers and retailers willing to advertise or promote a manufacturer's product

Promotional Discount Examples

• Free merchandise,
• Price reduction,
• Aisle displays,
• Shelving allowances
• Rebates:
  • A partial refund offered to consumers as an incentive

Module 6: Computation

• Basic computations: computing cost basis for price

Computing for the Cost of Production

• Fixed Costs:
  • Do not change with the amount of output produced.
  • Tend to be time-limited, examples include:
    • Rent, salaries, equipment leases
• Variable Costs:
  • Change with the level of production
  • Sales commissions, utility costs, raw materials, direct labor costs

Total and Average Cost

• Total Cost:
  • Includes both variable and fixed costs
• Average Cost:
  • Is total production cost divided by the number of units produced
  • Used by management for pricing decisions to maximize revenue or profit

Product Costs

• Product Costs:
  • Incurred directly from manufacturing
• Includes:
  • Direct material, direct labor, manufacturing overhead

Direct Material and Labour

• Direct Material:
  • Costs of raw materials or parts directly used to produce products
• Direct Labor:
  • Wages, benefits, and insurance paid to employees directly involved in manufacturing

Manufacturing Overhead and Indirect Costs

• Manufacturing Overhead:
  • Factory-related costs during production, including machinery costs
• Indirect Materials:
  • Materials used in production but not directly traceable to the product (e.g., glue, oil, tape)
• Indirect Labor:
  • Labor of those not directly involved in production (e.g., security guards, supervisors)

Example Product Cost in Table Manufacturing

• Direct Material: The cost of wood
• Direct Labor: The cost of carpenters' wages
• Manufacturing Overhead (Indirect Material): The cost of nails
• Manufacturing Overhead (Indirect Labor): The cost of security guards
• Manufacturing Overhead (Other): The cost of utilities

Break-Even Analysis

• Definition:
  • The point at which total cost equals total revenue.
  • Determines the units or revenue needed to cover total costs
• Break-Even Point Formula
  • Fixed Cost / (Unit Price Variable Unit Cost)

Sales v Costs

• Sales Target:
  • A goal set for a salesperson measured in revenue or units sold
• Markup:
  • The value added to the cost price of a product
• Gross:
  • The total amount
• Net:
  • What remains after deductions

Target Sales Calculations

• Total Cost of Goods: 45,000
• Target Net Profit: 40,000
• Target Sales: 85,000
• Net Income (NI):
  • Calculated as sales minus cost of goods sold, selling expenses, operating expenses, depreciation, interest, and taxes

Target Sales

• Item priced at 300 (unit cost at 150, 100% markup).
• Target Sales: 8
  • Divide by the number of operational days. Target gross income sales: 2,833.33/day Target units sold per day: 2,833.33/ 150 (markup) =18.8 or 19 units Target units sold per month: 19 (target sales per day) x 30 days (ave. Days of operation)=570 units Target gross sales per month: 2,833.33 ( daily target gross sales per day) x 30 days (ave. Number of operations)= 84,999.9 for 85,000