Chapter 8 Pricing: Understanding Buyer Behavior (IPK College) PDF

Topic 8: Pricing After reading this chapter, you should be able 8.1Define price. to : 8.2Describe factors that influence price decisions. 1) Define price and discuss the importance of 8.3 Describe...

Topic 8: Pricing After reading this chapter, you should be able 8.1Define price. to : 8.2Describe factors that influence price decisions. 1) Define price and discuss the importance of 8.3 Describe the initial pricing strategies of a new product. pricing in today’s fast-changing environment. 8.4 Describe the different price adjustment 2) Identify the three major pricing strategies strategies.  Introduction  Price of product means revenue to the firm, having the right price will determine the profitability & long-term survival of the firm. Factors Initial Influencing Pricing Price Changes in Pricing Pricing Strategy of a Adjustment Price Strategy Decision New Product  Importance of Pricing Decisions  The only marketing mix strategy that brings revenue to a firm. 1st : Price will influence whether consumers or org. will make purchases. Price needs to be set right as to attract customers or sales will be lost. 2nd : Price will determine the profit of a firm as price multiplied by the number of goods sold gives the company its revenue. After deduction of costs, the extra revenue becomes profits. 3rd : If firms get too high revenue it may attract new competitors to join in and produce similar products.  Definition of Price  The amount of money charged for a product or service or the sum of all the values that customers give in order to gain benefits of having or using a product or service.  The perceived value at the time of the transaction & depends on the amount of expected satisfaction to be received from goods or services. 5 Learning objective 1  Definition of Price  Not based on the actual satisfaction because consumption is normally done after the transaction.  Can be expressed in terms of other goods like during barter trading.  Other name of price are : - Rate - Interest - Fare - Fee - Salary - Premium - Rent - Wage  Role of Price in marketing Mix Price decision must be coordinated with other marketing (4P’s) to form a consistent & effective marketing programme. Pricing : Affects the image of the product in consumer’s eyes High prices are often perceived to indicate high quality. In distribution : Prices gives profit to retailers or wholesalers thru a large profit margin & trade allowances given by manufacturers. In promotion : Thru discounts, allowances & rebates attracting customers to buy more of the product.  Setting the Price  Fall within a range.  Ceiling price : Maximum price in the range is based on customers’ willingness to pay.  Floor price : Minimum price in the range is based on producer’s costs. Setting the Price Consumers’ Price Ceiling perception of product (Maximum Price) value Price Other factors to Range consider Price Floor Firm’s cost Minimum Price)  Setting the Price : Value-based Pricing  Consumer’s perception of a product’s value determine the max. price they are willing to pay for the product.  No demand if the product above max. price.  Value : the monetary worth of something.  Value-based pricing : The practice of setting a price that captures the worth that consumers place on the benefits they receive from the products.  Have 2 types of value-based pricing : a)Good-value pricing strategy b)Value-added pricing  Setting the Price : Value-based Pricing a)Good-value pricing strategy : – Marketers offer suitable amount of quality & expected service at a fair price. – Entails marketers to either offer more quality at the same price or the same quality at lower price. b)Value-added pricing : – Marketers highlight the added value & services to a product & charge a higher price to match competitors’ offerings.  Setting the Price : Product Costs Serve as a min. price of which a good should not be priced under it or else the marketer will be selling each unit at a loss. Set price of a product that will generate sufficient revenue to cover the cost of production, marketing & fair rate of return at every level of production. Setting the Price : Product Costs 1.Product cost elements Variable cost : Costs that change with the level of output. Fixed cost : Includes rent, building insurance, vehicles insurance & administrative salaries. Average variable cost : Total variable costs divided by the quantity of output. Average total cost : Total costs divided by total output. Marginal cost : The change in total costs in relation to a unit change of output.  Setting the Price : Product Costs 2.Cost behaviour at different production levels Economic of scale : lead to reduction in the average costs per production unit as production approaches a plants production size capacity because the fixed costs of the plant are spread over more production.  Setting the Price : Product Costs Costs based on experience curve (learning curve) : The reduction in average costs per production unit that comes form build-up knowledge & experience of producing products. – Benefits is gained from improved work org, efficient employees & economies of scale from larger more production volume. Cost after 20000 units product Cost after 40000 units product Cost after 80000 units product Setting the Price : Product Costs Setting the Price : Product Costs 3.Cost-based pricing Mark-up pricing : Popular pricing method because of the simplicity of calculation. – Selling price is calculated by adding to the cost of a product a standard mark-up for profit & for expenses not covered in cost. Example : Cost-based Pricing Variable cost (VC) : RM 10 Fixed costs (FC) : RM 100,000 Expected sales (ES) : 20,000 units Desired mark-up on selling price : 20% Cost per unit = VC + FC / ES (RM10 + RM100,000/20,000 = RM15 per unit) *Mark-up price : Unit cost – (1 – Desired mark-up on selling price) = RM15 / ( 1 – 0.2) = RM 18.75 per unit Setting the Price : Product Costs Break-even pricing : The quantity when the company’s total revenue just covers the costs. Profit not made at this point. – Additional quantity sold beyond that break-even point will bring profit to the company. Example : Break-even pricing (Graph) Example : Break-even pricing (Calculation) Variable cost : RM10 Fixed cost : RM100,000 Selling cost : RM20 Total revenue – Total cost = Break-even volume (Selling x Quantity) – (Fixed cost + Variable cost x Quantity) = Break-even volume (RM20 x Q) – (RM100,000 + RM10 x q) = q RM10 q = RM100,000 q = 10,000  Factors Influencing Pricing Decision Factors Influencing Pricing Decision Pricing marketing Mix Demand Competition Objectives Decisions Sales, Profit- Product, oriented, Distribution, Survival, Social Promotion responsibility  Demand  DD (demand) & SS (supply) equilibrium determines the equilibrium price of the product’s market.  Ineffective pricing causes shortages & surplus.  Lower prices, the higher will be demand for goods &  services. TR (Total Revenue) = P (Price) x Q (Quality)  Price elasticity of demand influences the marketers’ decisions on the price of product  measure the sensitivity of DD to a change in price.  Competition Competitors entering a new market may decide to : 1.Price the product below the market price in order to gain market share. 2.Price the product above the market price if it has a unique competitive advantage. 3.Price the product equal to the dominant price to avoid price war & if it can succeed with non-price competition. Initial Pricing Strategy for A New Product Skimming Pricing : Penetration Pricing : Demands for a higher Sets a relatively lower price to a new introductory price for a product in order to reach mass market new product. in the introduction stage of a PLC. The firm may lower the Is designed to dominate the market, producing large volume, which will price once goods are lower the production cost  delay distributed widely. potential new entrants into the market because of the cost factors.  Product Lining  Allows marketers to set a few pricing points & price each product at one of the points.  Example : The cost of several different ballpoint pens are different but the retailer charges 3 levels of price RM1.00, RM1.50 & RM2.00.  Optional Product Pricing Examples : During recession 1997, stripped down Proton Iswara minus the normal accessories like air conditioner & radio was offered at a very low price & attracted a lot of attention. Captive Product Pricing  Price Adjustment Strategies  Discounts Special Pricing  Rebates  Single Price Tactic  Allowances  Flexible Pricing  Odd-even Pricing  Geographic  Bundle Pricing  Free on Board (FOB)  Two-part pricing.  Uniform Delivered Pricing  Zone Pricing  Freight Absorption Pricing  Base Point Pricing Discounts A reduction in price. Reducing the discounts from the list price or base price will give the market price. Have several types of discounts : 1. Quantity discount :Divide into cumulative quantity & non-cumulative quantity 2. Seasonal discount : Price reduction for out-of-season products or for products during low demand seasons. 3. Trade discount : A percentage reduction from list price/base price offered to members of the trade. A carpenter is given discounts on purchase of woods & tools because involved in their business. 4. Cash discount : Reduction offered to prompt payment of a receipt.Incentive for purchasers to pay quickly. Example : 10% discount are given if payment is made within 10 days of invoice date. 5. Functional discount : A discount for wholesaler & retailers who perform distribution channel functions for the manufacturer like storage & promotion.  Allowances  A seller offer an allowance to a buyer in return for a good provided.  Example : A hand phone dealer offers trade in allowance to buyers if they trade in their old hand phones in order to buy new ones form the seller.  Promotional allowances is a payment made to a distributor for promoting the manufacturer’s product.  The reimbursement can either be in form of cash or merchandise.  Rebates A cash refund given to the customer for the purchase of a product during a specified period. Purchasers will have to send a filled up form, which is attached to the product’s package to the marketer for rebate claims. Free on Board (FOB) Special Pricing  Single Price Tactic Firms sell all goods & services at the same price for 2 or 3 prices. Eliminates price comparisons from buyer’s decision making process. Examples : RM 5 stores for all products.  Flexible Pricing Odd-Even Pricing  A seller may charge different customer different (Psychological Pricing) prices for the same merchandise bought in equal  A strategy setting prices a few quantities.  Often used for sales of shopping goods, speciality ringgit or cents below a round goods & industrial goods. number.  To satisfy price-conscious customers who would bargain for lower price. Bundle Pricing 2 or more goods or services are packaged together for a special price.  Two-part Pricing  Establish 2 separate prices to consume a single product or service.  Example : A health club member prefers to pay annual membership fee of RM200 & an additional fee each time the member wants to use the club facilities rather than paying RM600 annually.  SUMMARY Answer the question “What is a price?” and discuss the Identify the three major pricing strategies. importance of pricing in today’s fast-changing environment. Companies can choose from three major pricing strategies: Price can be defined narrowly as the amount of money charged customer value–based pricing, cost-based pricing, and for a product or service. Or it can be defined more broadly as the competition- based pricing. Customer value–based pricing sum of the values that consumers exchange for the benefits of uses buyers’ perceptions of value as the basis for setting having and using the product or service. The pricing challenge price. Good pricing begins with a complete understanding is to find the price that will let the company make a fair profit by of the value that a product or service creates for customers getting paid for the customer value it creates. and setting a price that captures that value. Customer Despite the increased role of nonprice factors in the modern perceptions of the product’s value set the ceiling for prices. marketing process, price remains an important element in the If customers perceive that a product’s price is greater than marketing mix. It is the only marketing mix element that produces revenue; all other elements represent costs. More its value, they will not buy the product. important, as a part of a company’s overall value proposition, price plays a keyrole in creating customer value and building customer relationships. Smart managers treat pricing as a key strategic tool for creating and capturing customer value. References 1. Kotler, P., Armstrong, G. (2020). Principles of Marketing, Global Edition. United Kingdom: Pearson Education. 2. Marc Oliver Opresnik and Svend Hollensen (2018) Marketing: Principles and Practice: A management-oriented approach.Independently published  KEY TERMS Customer value–based pricing Bundle Pricing good-value pricing Fixed costs (overhead) Value-added pricing Variable costs Cost-based pricing Total costs DISCUSSION QUESTIONS Question 1: Pricing strategy is a way of finding a competitive Question 2: price of a product or a service. This strategy is combined with A pricing strategy takes into account the other marketing pricing strategies that are the 4P strategy segments, ability to pay, market (products, price, place and promotion) economic patterns, conditions, competitor actions, trade competition, market demand and finally product characteristic. margins and input costs, amongst others. This strategy comprises of one of the most significant ingredients of the mix of marketing as it is focused on generating and increasing the revenue for an organization, REQUIRED which ultimately becomes profit making for the company. a) Define value-based pricing. (10 marks) b) Good-value pricing strategy (5 marks) REQUIRED c) Value-added pricing (5 marks) Distinguish between a) Market-skimming pricing. (10 marks) (TOTAL 20 MARKS) b) Market-penetration pricing. (10 marks) (TOTAL 20 MARKS)  MODEL ANSWER FOR DISCUSSION QUESTIONS Answer Q1-Syllabus chapter 8: Pricing (CLO 2) Answer Q1-Syllabus chapter chapter 8: Pricing (CLO 2) Model Answer to Question b) Model Answer to Question a) 1. The pricing strategy in which high markup is charged for the new 1. Penetration Pricing implies a pricing technique in product, leading to the high price, so as to skim the cream from which new product is offered at low price. the market, is known as Skimming Pricing. 2.  This is by adding a nominal markup to its cost of 2.  It entails fixing a high price for the new product before other production, to penetrate the market as early as competitors step into the market. possible. 3.  This technique is used in case of new product, which faces no 3.  It aims at maximizing the market share of the to little competition in the market, and have a great extent of product, and once it is achieved, i.e. when the consumer acceptability. demand picks up, the firm can increase the price of 4.  Market skimming pricing is adopted by the company, due to the the product. early stages, the demand for the product is inelastic, till the 4.  Penetration pricing results in lower profits in the product occupies a good position in the market. short run, however, in the long run, it results in higher 5.  In the initial phase, the demand for the product is not known, profits because it increases the market base. and high price helps in covering the cost of production. 5.  The reasons behind adopting penetration pricing 6.  In the beginning, there is a huge requirement of capital for are as under new product offered by the firm is producing the product, resulting in high production cost. already provided by other well-established brands. 7.  Further, a huge amount is invested in the promotional 6.  The low price will lure customers to switch to the activities, that also adds to its cost. new product, who are already familiar with other 8.  When the product is charged high, it will cover the cost of brands. production and promotion expenses easily. 7.  It can help in increasing sales of the product in 9.  Android aims for greater market penetration with a penetration short period. scheme. Android phones are available at a steep discount, in the 8.  It restricts new entrants from entering the market. hopes that users will become loyal to the brand. 9.  An example of price skimming would be mobile, 10.  In this scheme, providers sell cheap or free smart phones in laptops and other technological things which when return for long-term contract with customers. Consumers get newly launched are sold at higher prices and as time excited about the cheap phone, and fail to notice that the passes price of these products tend to decline. contract costs much more in the long-term than the phone would.  MODEL ANSWER FOR DISCUSSION QUESTIONS Answer Q1-Syllabus chapter chapter 8: Pricing (CLO 2) Model Answer to Question a) Model Answer to Question 22c)  Consumer’s perception of a product’s value determines  Marketers highlight the added value and services to a the maximum price they are willing to pay for the product product.  Charge a higher price to match competitors’ offerings.  No demand if the product above maximum price.  The practice of setting a price that captures the worth (Student must include examples in order to achieve that consumers place on the benefits they receive from full marks) the products.  Marketers ask consumers on what price they willing to pay for the value they gets & design the product offering  Calculated the costs involved. Model Answer to Question b)  Marketers offer suitable amount of quality & expected service at a fair price.  Entails marketers to either offer more quality at the same price or the same quality at lower price.