Pricing Strategies

• Pricing
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What is Price?

• Price is the amount of money charged for a product or service.
• It may be the sum of all the values that customers exchange for the benefits of having or using the product or service.
• The Sacrifice Effect of Price: Price is what is sacrificed to get a good or service.
• The Information Effect of Price: People infer quality information based on price.
• Value Is Based upon Perceived Satisfaction: "Reasonable price" means "perceived reasonable value."

The Importance of Price

• To the seller, price is revenue.
• To the consumer, price is the cost of something.
• Price allocates resources in a free-market economy.

The Importance of Price to Marketing Managers

• Revenue: the price charged to customers multiplied by the number of units sold.
• Gross Margin (Profit): Revenue minus expenses.

The Demand Determinant of Price

• Demand is the quantity of a product that will be sold in the market at various prices for a specified period.
• Supply is the quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

The Cost Determinant of Price

• There are two types of costs: Variable and Fixed
• Variable Cost: Varies with changes in level of output
• Fixed Cost: Does not change as level of output changes

Setting Prices

• Some Methods Used to Set Prices:
  • Markup Pricing / Keystoning
  • Break-Even Pricing

Markup Pricing

• Markup Pricing: The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.
• Keystoning: The practice of marking up prices by 100 percent, or doubling the cost.
• Markup price (e.g., retail price) = Unit cost / (1-desired return on sales)
• Markup percentage may vary depending on which price you use to determine the percentage.
• Based on the percentage (20% of $125) of the retail price($125).
• Based on the percentage (25% of $100) of the unit cost ($100).
• The cost added to the unit cost is $25.

Other Determinants of Price

• Stages of the Product Life Cycle
• Competition
• Distribution Strategy
• The Internet and Extranets
• Promotion Strategy
• Demands of Large Customers
• Price versus Quality

Profit-Oriented Pricing Objectives

• Profit Maximization
• Satisfactory Profits
• Target Return on Investment

Sales-Oriented Pricing Objectives

• Market Share: A company's product sales as a percentage of total sales for that industry.
• Sales Maximization
  • Rather than strive for market share; sometimes companies try to maximize sales.
  • Uses a short-term objective to maximize sales
  • Ignores profits, competition, and the marketing environment
  • May be used to sell off excess inventory

Major Pricing Strategies

• Considerations in Setting Price
  • Product costs
  • Competition and other external factors
  • Consumer perceptions of value
• Customer Value-Based Pricing (customer-oriented)
• Set target price to match customer-perceived value.
• Determine costs that can be incurred.
• Design product to deliver desired value at target price

Customer Value-Based Pricing

• Good-value pricing is offering just the right combination of quality and good service at a fair price.
• Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts.
• High-low pricing involves charging higher prices on an everyday basis, but running frequent promotions to lower prices temporarily on selected items
• Value-added pricing attaches value-added features and services to differentiate the companies offers and thus their higher prices.

Cost-Based Pricing

• Cost-based pricing sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.
• Fixed costs are the costs that do not vary with production or sales level.
• Variable costs vary directly with the level of production.
• Total costs are the sum of the fixed and variable costs for any given level of production.

Product Mix Pricing Strategies

• Product line pricing
• Optional product pricing
• Captive product pricing
• By-product pricing
• Product bundle pricing

Product Mix Pricing Strategies

• Product line pricing takes into account the cost differences between products in the line, customer evaluations of their features, and competitors' prices.
• Optional product pricing takes into account optional or accessory products along with the main product.
• Captive product pricing sets prices of products that must be used along with the main product.
• By-product pricing sets a price for by-products in order to make the main product's price more competitive.
• Product bundle pricing combines several products at a reduced price.

Pricing Strategies by Product Life Cycle

• Introductory stage: Price is high
• Growth stage: Price stabilizes
• Maturity stage: Price decreases
• Decline stage: Price decreases

New Pricing Strategies

• Market-skimming pricing strategy sets high initial prices to "skim" revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
• Market-penetration pricing involves setting a low price for a new product in order to attract a large number of buyers and a large market share.

Price Skimming

• Situations When Price Skimming Is Successful:
  • Strong Demand
  • Unique/Superior Advantages
  • Legal Protection of Product
  • Technological Breakthrough
  • Blocked Entry to Competitors

Penetration Pricing

• Advantages:
  • Can lead to lower cost per unit as production expands
  • Discourages or blocks competition from market entry
  • Boosts sales and provides large profit increases
• Disadvantages:
  • Requires gear up for mass production
  • Selling large volumes at low prices
  • The strategy to gain market share may fail
  • Negatively influences perceived product quality

Price Adjustment Strategies

• Discount and allowance pricing reduces prices to reward customer responses such as making volume purchases, paying early, or promoting the product.
• Segmented pricing involves selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.
  • Customer-segment pricing
  • Product-form pricing
  • Location-based pricing
  • Time-based pricing

Price Adjustment Strategies

• Psychological Pricing considers the psychology of prices and not simply the economics; the price is used to say something about the product.
• Reference prices are prices that buyers carry in their minds and refer to when they look at a given product.
• Promotional Pricing is characterized by temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales, such as:
  • Special-event pricing
  • Limited-time offers
  • Cash rebates
  • Low-interest financing, extended warranties, or free maintenance

Price Adjustment Strategy

• Geographical pricing is used for customers in different parts of the country or the world:
  • FOB-origin pricing
  • Uniform-delivered pricing
  • Zone pricing
  • Basing-point pricing
  • Freight-absorption pricing (a strategy in which the seller absorbs all or part of the freight charges in order to get the desired business.)
• Dynamic pricing involves adjusting prices continually to meet the characteristics and needs of individual customers and situations.
• International pricing involves adjusting prices for different countries or different international regions.