Price Strategy and Considerations

• Price represents the amount of money charged for a product/service or the sum of values customers exchange for the benefits of having/using the product/service.
• Price is the only element in the marketing mix that produces revenue.
• Price has a direct impact on the firm's bottom line.
• Price is the most flexible element in the marketing mix.
• Price plays a key role in creating customer value and building customer relationships.

Considerations in Setting Price

• Customer perceptions of value determine the price ceiling, above which there is no demand.
• Product costs determine the price floor, below which there are no profits.
• Other internal and external considerations also affect pricing.
• Includes marketing strategy, objectives and mix, the nature of the market/demand, and competitors' strategies/prices.

Major Pricing Strategies

Cost-Based Pricing

• Prices are set based on the costs for producing, distributing, and selling the product, plus a fair rate of return for effort and risk.
• Total costs equal fixed costs (overhead) plus variable costs.
• Cost-Plus Pricing (markup pricing) and Break-Even Pricing (target return pricing) are examples of cost-plus pricing.
• Only focuses on company costs.
• Ignores the relationship between price and demand.
• Prices are similar in the industry, thus minimizing competition.
• Ignores customer wants and needs, “value requirements”.

Competition-Based Pricing

• Prices are set based on competitors' strategies, prices, costs, and market offerings.
• Consumers will base their judgments of a product's value on the prices that competitors charge for similar products.
• The marketer must always compare its market offering with competitors' offerings in terms of customer value.
• Consumers' perceptions of the value of the company's product/service, in comparison to competing products, will determine its price.
• The strength of current competitors and their current pricing strategies will directly influence the company's pricing strategy.

Customer Value-Based Pricing

• Price is set based on buyers' perceptions of value rather than the seller's cost.
• The price is considered along with the other marketing mix variables before the marketing program is set.
• Good-Value Pricing offers the right combination of quality and service at a fair price.
• Value-Added Pricing involves attaching value-added features and services to differentiate a company's offers and charge higher prices.
• Customers are motivated not by price, but by the value offered for what they pay.
• Everyday low pricing (EDLP) retailers charge a constant everyday low price with few or no temporary price discounts.
• High-low pricing is when Department stores charge higher prices on an everyday basis but run frequent promotions to lower prices temporarily on selected items.

Other Internal & External Considerations Affecting Price Decisions

Overall Marketing Strategy, Objectives, and Mix

• A company's selected target market and positioning largely determine its pricing strategy and its implementation.
• The company's overall business environment and strategy will also affect its pricing.
• Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and integrated marketing program.
• Pricing can play an important role towards reaching company objectives at many levels.
• Target costing starts with an ideal selling price, then targets costs to ensure that the price is met.

Organizational Considerations

• A coordinated internal effort and information sharing among different company departments should result in an efficient and effective pricing decision.

The Market and Demand

• Marketers must understand the relationship between price and demand as buyers balance a product’s or service’s price against the benefits of owning it.
• The seller's pricing freedom varies in different types of markets, including pure competition, monopolistic competition, oligopolistic competition, and pure monopoly.
• The type of market affects the demand curve.
• Marketers need to know price elasticity, also known as how responsive or sensitive demand will be to a change in price (elastic demand or inelastic demand).

The Economy and other External Factors

• Economic conditions (boom or recession, inflation, interest rates) impact on the firm's pricing strategies because they affect consumer spending, consumer perceptions of the product's price and value, and the company's costs of producing and selling a product.

The Strategic "Pricing Pyramid"

• Pricing is key to a successful organization. The pricing pyramid encompasses all aspects of pricing.
• The Pricing Pyramid structure is as follows from top to bottom:
• Price Level (Price setting, Pricing Policy, Negotiation tactics & Pricing, Setting Procedures)
• Value Communication (Communication, Value Setting Tools)
• Price Structure (Metrics, Fences, Controls)
• Value Creation (Economic Value, Offering Design, Segmentation)