6_Easy_Managing Pricing and Sales Promotions

• Pricing plays a key role in marketing management by empowering consumers in the digital age.
• Online and mobile platforms enable buyers to compare the prices of thousands of vendors instantly.
• Sellers can use dynamic and personalized pricing by monitoring real-time demand and adjust prices, similarly to Uber's surge pricing.
• Promotional offers can be tailored to specific segments or individual consumers, exemplified by Amazon's personalized promotions.

Common Mistakes in Pricing

• Cost-Plus Mindset refers to marketers simply adding a standard margin to costs without considering customer perceptions or market dynamics.
• Infrequent Revision is failing to adjust prices in response to market changes or evolving conditions, such as competitor moves or shifts in demand.
• Disconnection from Strategy is when price is treated as an afterthought rather than an integral part of the marketing mix or value proposition.
• Limited Variation means not fine-tuning prices for different segments, channels, or occasions.

Strategic Importance of Pricing

• Serves as a positioning tool by signaling quality, prestige, or value, which supports brand image and positioning.
• It is a critical profit driver, where even a modest price adjustment can significantly impact revenue and profit.
• Effective strategies consider buyers' perceptions, sensitivities, and willingness to pay (customer psychology).
• Should be aligned with product, promotion, and distribution strategies to deliver a cohesive customer experience (marketing integration).

Psychological Factors Influencing Consumers' Price Perception

• Reference Prices: Consumers compare an observed price to a mental standard or external benchmark ("fair price," "last price paid," "competitor's price").
• Marketers can influence consumers' perceptions by displaying a "regular" or "suggested" price next to a discounted price to make the discount more noticeable.
• Consumer Perception: If the posted or final price is unexpectedly higher than the reference point, it can negatively affect the purchase decision.
• Price as Quality Signal: A higher price can imply higher quality or exclusivity, especially for ego-sensitive or status-driven items like luxury cars or designer goods.
• Perceived uniqueness and justify a premium price is enhanced by scarcity and exclusivity (limiting product availability).
• Odd-Endings (prices ending in "9" or ".99") often signal a discount or bargain ($299 suggests the "$200 range” rather than $300).
• Round Numbers (prices ending in "0" or "5") are considered simpler to process and remember.
• "Sale" Signs lower prices, which can stimulate demand, although overuse diminishes credibility.
• "Limited Availability" phrases, such as “One weekend only" or "While supplies last," increase urgency, and boosts sales.

Factors to Consider When Setting Prices

• Managers identify what they want their pricing to achieve, such as short-term profit maximization, which sets a price that optimizes immediate cash flow, ROI, or profit.
• Downside: This ignores long-term effects (e.g., brand image and competitor responses).
• Market Penetration Pricing: Employ a very low price to grow market share quickly. Suitable if the market is highly price-sensitive and costs fall with higher volume. A low price can deter competitors.
• Market Skimming: High initial price to “skim” the market of buyers willing to pay more, used for new technology. Price is then lowered over time.
• Quality Leadership: Aims to be the highest-quality option, premium price, supports reinvestment in R&D, service, and brand reputation.
• Determine Demand: Each price will lead to a different level of demand and impact a company's marketing objectives.
• A demand curve shows the relationship between volume and price. Prestige goods may have an inverse slope initially (higher price might signal higher quality
• Price Elasticity of Demand: Sensitivity of sales volume to price changes.
• Inelastic Demand: Small change in volume despite price shifts, meaning price increases can boost total revenue.
• Elastic Demand: Large change in volume if price changes, meaning a price cut can raise total revenue if costs don't rise significantly.

Factors Affecting Elasticity

• Uniqueness/differentiation of the product (fewer substitutes leads to less elastic).
• Consumer habits and brand loyalty increases the strength of preference and leads to less elastic demand.
• Portion of expenditure in total budget shows a smaller share which leads to less elastic demand.
• Buyer can postpone the purchase if there are fewer substitutes, leading to urgent need, and lower price elasticity.
• Price must cover total production and marketing costs, including a fair return.
• Fixed Costs: Do not vary with sales or output (e.g., rent and salaries).
• Variable Costs: Directly tied to production level (e.g., materials and labor).
• Total Costs = Fixed + Variable.
• Average Cost = Total costs / number of units produced.
• As output rises, average cost drops (economies of scale) but can rise again if production exceeds plant capacity.
• As a company gains cumulative production experience, per-unit costs often fall (experience curve effects).
• This justifies aggressive pricing to increase volume and reduce costs.
• Compare rival prices, features, and likely reactions when analyzing competitor's prices and offers.
• Adjust for Attribute Differences by assessing how much extra benefits are worth
• Value Players: Firms offer quality at low prices, altering consumer expectations.
• Decide whether to match, undercut, or position at a premium.

Methods of Pricing

• Markup (Cost-Plus) Pricing: Adding a standard markup to costs (common in retail).
• Target-Rate-of-Return Pricing: Aims for a specific ROI (e.g., 10% of sales revenue).
• This is common in regulated industries.
• It may ignore market factors if not adjusted carefully
• Economic-Value-to-Customer (EVC) Pricing: Set price based on total cost of ownership or "lifetime value” to the customer.
• This justifies premium prices if you demonstrate your offering's greater long-term value.
• Competitive Pricing (Going-Rate Pricing): Primarily based on competitors' prices, especially in commodity markets.
• This minimizes the risk of being undercut but may ignore cost structure or brand uniqueness.
• Auction Pricing: Widely used on electronic marketplaces (eBay, B2B auctions).
  • English (ascending bids): The auction system starts with a reserve or low opening price.
  • Bidders raise their offers until only one bidder remains.
  • Dutch (descending bids): Is a reverse english variation.
  • Sealed-bid auctions: Confidential bid to sell goods or services to a buyer (often in government procurements).
• Buyers pick the best offer, typically the lowest price meeting specific requirements.
• It is necessary for companies to fine-tune prices to reflect discounts, allowances, promotional deals, dynamic changes, or geographic adjustments.
• Price discrimination can occur if different segments pay different prices (e.g., student or senior discounts) if it's legal and accepted by the market.
• Customer-segment: Different customer segments pay different prices same product or service.
• Product-form Pricing: Versions of the product are priced differently, but not in proportion to their costs.
• Channel Pricing: Different for the consumer based on whether the consumer purchases it from a fine restaurant, a fast-food restaurant, or a vending machine.
• Location Pricing: The same product is priced differently at different locations, even though the cost is the same.
• Time Pricing: Prices vary by season, day, or hour.
• Marketers must modify their price-setting logic when the product is part of a product mix and coordinate pricing across a line of product.

Types of Product-Mix Pricing

• Sell one item cheaply to stimulate other profitable sales (loss-leader).
• Low base price; premium on add-ons, and optional features.
• Low main product cost; high markup on ancillary (e.g., razors and blades), known as Captive pricing.
• Two-Part Pricing: Combination of a fixed fee plus variable usage (e.g., cell phone plans).
• By-Product Pricing: Offset cost by selling leftover or secondary items.
• Product-Bundling: Sell products in a combined bundle at a deal price.
• One must understand the competitor's move and identify whether the competitor drops prices to gain market share, use excess capacity, meet new cost conditions, or lead an industry-wide price shift
• Determine whether the pricing is intended to be temporary or permanent.
• Anticipate Consequences by assessing the impact on market share and profits.
• Consider whether other competitors will also respond with cuts or new strategies. Depending on firm's strengths and competitor's reasons, you might launch a low-cost venture, introduce a separate, cheaper line or brand to compete at the low end
• Ensure main brand which retains its higher-value positioning.
• Increase perceived value so customers stay, despite competitor is lowering price, highlighting benefits, heritage, service, or quality.
• Reinvent as a Low-Cost Player if circumstances allow: significantly cut costs, match or underprice the competitor, maintain profitability at the lower price.
• Speed of Response: Quick action.
• Advance Preparation is better: to anticipate possible competitor price moves and plan contingent responses.
• Make sure to check whether the competitor might respond, increase marketing, or improve their offering & Understand their cost structures (share vs. profit focus).

Incentives and Objectives

• Used as short-term sales promotion.
• Designed with intention to stimulate quicker or greater purchase of particular products/services.
• Encourage bigger purchases amount buyers, entice first-time or competitor switches.
  • Price Reductions, Coupons & Cash Refunds, Price Packs & Premiums
  • Used for frequency programs
  • Contests & Sweepstakes tie-in promotions.
• Retailer Incentives are good to have in order to persuade retailers to stock, promote, display products, or support the brand more actively through:
  • Allowances
  • Free Goods
  • Price-Off
  • Payment Discounts
• Sales Force Incentives: To encourage new products or models, boost prospecting, stimulate off-season sales, and conduct sales Contests, Leads / Demonstrations.
• Set Conditions: to decide which segments qualify, and have them be meaningful enough to motivate behavior.
• Plan start/end dates: with minimal overlap.
• Coupons in print, digital coupons push notifications, and budgets with administrative costs by sales.

Push and Pull Strategies

• Push: To use sales force and trade promotions (allowances, price-offs) to move through distribution channels.
• Pull: To use advertising and consumer incentives (coupons, price packs, etc.) to induce customers.

Explore pricing strategies like competitive, markup, and target-rate-of-return pricing. Understand how businesses use price to influence consumer perception, employing tactics such as reference prices and dynamic pricing. Learn about aligning pricing decisions within the marketing mix and adjusting to market changes.