Pricing Strategy: Profitability and Market Position

• Pricing is crucial for profitability and market position
• Understanding pricing strategy is essential for marketing professionals

Importance of Price

• Price directly impacts revenue and profitability
• Price changes immediately affect revenue, unlike other marketing mix elements
• A 1% price increase can lead to an 11% operating profit increase, assuming sales volume is maintained
• Price differentiates a company in competitive markets, especially online
• Pricing influences the perception of a product's or brand's value
• Many consumers equate higher prices with better product quality
• Price and unit margins determine profitability
• Price decisions should align with expected sales volume for optimal unit margin and sales turnover

Initial Price Setting

• Determine pricing objectives before setting a price
• Objectives include market positioning, competitive positioning, and ability to supply or increase demand
• Aligning pricing objectives with business and marketing goals is crucial

Steps in Initial Price Setting

• Analyze costs, including production and overhead costs, to determine the break-even point
• Understand customer demand via market research, price elasticity of demand, and competitor pricing analysis
• Select a pricing strategy based on objectives, costs, and demand analysis
  • Cost-plus pricing: adding a fixed percentage to production cost
  • Value-based pricing: setting prices based on perceived customer value
  • Competition-based pricing: pricing relative to competitors
  • Penetration pricing: low initial prices for market share
  • Price skimming: high initial prices for new innovations
• Consider psychological factors, such as charm pricing (e.g., $9.99 instead of $10), prestige pricing, and price anchoring
  • Price anchoring establishes a reference price point for customers when making decisions
• Test and adjust initial pricing using a system that Includes testing price points, monitoring market response, and adjusting prices based on performance and conditions

Critical Role of Price in Marketing Strategy

• Price is a fundamental marketing component, impacting a company's profitability and position
• Pricing decisions are vital for successful marketing strategy development and execution
• Price communicates value to consumers, influencing product or service quality perception
• Higher prices suggest premium quality, while lower prices may suggest inferiority
• Price directly impacts a company's bottom line
• Small price changes can substantially impact profitability
• Initial price setting sets the tone for the product's market position and can influence its success

Pricing Objectives and Strategies

• Penetration Pricing sets a low initial price for market share
• Price Skimming charges a high introductory price to maximize short-term profits
• Profit Maximization and Target ROI sets prices to achieve profit or ROI goals
• Competitor-Based Pricing aligns prices with competitors
• Value Pricing sets prices based on perceived customer value

Factors Influencing Initial Price Setting

• Determine production and overhead costs
• Assess target audience willingness to pay
• Analyze competitor pricing and market positioning
• Consider how the price aligns with brand image
• Think about future price adjustments and product lifecycle

Innovative Pricing Strategies

• Price Bundling: offering multiple products or services for a single price
• Reference Pricing: setting prices relative to a benchmark or competitor
• Prestige Pricing: using high prices for quality and exclusivity
• Odd/Even Pricing: using psychological tactics (e.g., $9.99 instead of $10)

Role of Price Elasticity

• Understanding price elasticity is crucial for effective initial price setting
• Price elasticity assesses how demand changes in response to price
• This helps in more accurate pricing decisions and aids in predicting the impact of pricing strategies on sales and revenue

Pricing in the Digital Age

• Dynamic Pricing: Adjust prices in real-time based on market conditions and demand
• Personalized Pricing: Offering different prices to customer segments based on willingness to pay
• Subscription Models: Implement recurring revenue models, especially for digital products and services

Government and Pricing in Marketing Management

• Government intervention shapes pricing and market dynamics
• Price controls are government-mandated minimum or maximum prices

Types of Price Controls

• Price Ceilings: Maximum prices set by the government to prevent suppliers from raising prices excessively
  • Executive Order 124 set price ceilings of P270 per kilogram for pork shoulder and pork butt, and limit pork belly prices to P300 per kilogram. Cap dressed chicken prices at P160 per kilogram
• Price Floors: Minimum prices set by the government to protect suppliers from selling below a certain level
  • NFA sets price floors for palay to protect farmers
• Price controls prevent monopolies from exploiting consumers, ensure affordability of essential goods, and protect certain industries
• Unintended consequences include shortages or surpluses

Anti-Price Discrimination Laws

• The laws prevent different prices to different customers for the same product/service
• Aims to ensure fair pricing and prevent discriminatory behavior
• Businesses must be aware of regulations in market segmentation or dynamic pricing
• The Price Act (Republic Act No. 7581) prohibits price discrimination and unfair pricing practices

Taxation

• Taxes impact pricing decisions, increasing production costs, affecting final consumer prices and influencing demand
• High taxes on cigarettes or alcohol are often used to deter consumption
• The Sin Tax Reform Law increased taxes on cigarettes and alcohol

Subsidies and Tariffs

• Subsidies: Financial support given to specific industries to make them more profitable
  • Department of Agriculture partnered with LandBank to launch a P15-billion SWINE program
• Tariffs: Taxes applied to foreign products to make them more expensive
  • The Philippines imposes tariffs on imported rice to protect local farmers

Regulatory Compliance

• Follow regulations when setting and advertising prices
  • Comparative Pricing, Recommended Retail Price (RRP), Predatory Pricing, Price Fixing
• Comparative Pricing: ensure businesses do not mislead consumers
• Recommended Retail Price (RRP): It is illegal for suppliers to put pressure on selling at certain prices
• Predatory Pricing: Businesses with high market share cannot reduce prices to eliminate competitors
• Price Fixing: Agreements between competitors to have set prices is illegal

Multiple Pricing and Unit Pricing Code

• Businesses must sell at the lower price or withdraw the item
• Certain retailers display both a product price, unit price (e.g., price per gram)
• Certain retailers must display price and unit price (e.g., price per 100 grams)

Credit Card Surcharging

• List credit card surcharges and only charge what it costs to accept the payment
• Credit card fees include annual and cash advance fees

Public Policy Considerations

• Economic conditions, government economic policies, regulations, and political climate
• The examples demonstrate how government interventions/regulations directly impact pricing, market dynamics in the Philippines, affecting businesses/consumers

Impact on Pricing Strategy

• Cost-Plus Pricing: Taxes and regulations may increase costs, necessitating price adjustments
• Value-Based Pricing: Government policies might influence consumer perceptions of value
• Competition-Based Pricing: Subsidies or tariffs can alter the competitive landscape
• Dynamic Pricing: Anti-discrimination laws may limit the use of certain dynamic pricing strategies

Discounting and Profit Sensitivity to Price

• Pricing is more critical than ever, influencing customer perception, and positioning
• Discounting attracts consumers, increases sales and penetrates new markets
• Properly managed discounting can increase profitability

Types of Discounts

• Trade: Offered to intermediaries like wholesalers or retailers
• Cash: Incentives for early payment
• Seasonal: Encouragement to purchase during off-peak times
• Promotional: Temporary price reductions to stimulate demand
• Volume: Incentives for bulk purchases

Discounts in the Philippine context

• Seasonal Sales: Uniqlo Philippines holds end-of-season clearances and back-to-school promotions
• Member Discounts: Uniqlo loyalty program offers exclusive discounts and early access to sale items
• Limited-time Offers: Blenders has had significant success with flash sales
• Buy One, Get One Free (BOGO): Supermarkets widely use "buy 1 take 1" promotions

Price Waterfalls

• Price waterfall represents decreases applied to a product's price until the final price is reached
• It helps identify where discounts are being given and their impact on profitability

Managing Discount Policies

• Use volume hurdles to evaluate whether a discount is profitable
• Sales increase due to lower price must be great enough to make discount worthwhile
• Align discount decisions with organizational goals
• Do this by limiting decision-making authority and linking incentives to profitability

Shaping Discounts for Maximum Impact

• Focus on discounts that drive sales (e.g., in-store promotions) than minimal ones
• Tailor discounts based on customer needs
• An instance where price-sensitive customers may respond better to percentage discounts

Risks of Over-Discounting

• Erosion of brand value
• Reduced profit margins
• Difficulty in reverting back to original pricing without losing customers

Profit Sensitivity to Price Adjustments

• Should only be implemented after in-depth assessment of its impact
• Formula is: π=Q×(P-V)-F
  • π = Profit
  • Q = Quantity sold
  • P = Price
  • V = Variable costs per unit
  • F = Fixed costs

Volume Hurdles

• A volume hurdle states the sales needed to offset decreased price
• For a price decrease, it identifies the minimum sales that will prevent loss
• For a price increase, it defines the allowable sales volume

Elasticity of Demand

• Elastic markets (E>1): Small price changes lead to significant changes in demand
  • They favor price cuts
• Inelastic markets (E<1): Large price changes lead to small changes in demand
  • They favor price increases

Asymmetric Sensitivity of Profits

• Profits are more sensitive to price cuts than price hikes due to their impact on margins and volumes
• A 1% increase in price can improve profits by up to 10%
• Conversely, A 1% decrease can lead to significant profit erosion if not offset by higher volumes

Economic Price Optimization

• Identifies the optimal price by balancing improvements with losses

Strategic Implications for Marketers

• Complete a sensitivity analysis
• Consider market elasticity

Three Levels of Price Management

• Effective management involves at three distinct levels:
  • industry supply and demand
  • product/market strategy
  • transaction pricing

Industry Supply and Demand Level

• Industry needs to consider:
  • supply
  • demand
  • costs
  • regulations

Product/Market Strategy Level

• Companies must identify the product attributes that drive purchase decisions
• Market research tools tell one customer preferences
• Company should compare with what competitors are doing

Transaction Level

• Key Factors
  • base price
  • discounts and incentives
  • payment terms

Three Levels of Pricing

• Cost-Based Pricing
  • Prices are set based on costs of production and distribution
  • Advantage is easy to implement
• Competition-Based Pricing
  • Prices are set based on competitors' prices
  • This is easy to implement
• Customer Value-Based Pricing
  • This has the potential to have higher profit margins

Fluctuations Effects

• Businesses must adjust prices
• Market fluctuations impact:
  • demand fluctuation
  • competitor actions

Quantitative Price Adjustments

• Price based on value exchanged between buyer and seller
• Utilizes data to create optimization
• Sets prices based on perceived consumer value

Basic Costing

• Should always be used to cover and calculate total prices
• Includes direct variable, indirect or fixed costs

Importance of Costing

• Competitive for sellers if needed
• Assists in break-even analysis