IEP 416 Chapter 9: Pricing PDF

IEP 416 – Marketing Systems Chapter 9 – Pricing: Understanding Costumer Value and Strategies Prepared by: Manulat, Trisha Feb L. INTRODUCTION...

IEP 416 – Marketing Systems Chapter 9 – Pricing: Understanding Costumer Value and Strategies Prepared by: Manulat, Trisha Feb L. INTRODUCTION  One product might be priced All profit and nonprofit organizations must set prices on their products and services. 2. Marketing Mix Strategy – prices are only one of the marketing mix tools that a Price – amount of money charged for a product or service or company uses to achieve its marketing the sum of the values that consumers exchange for the benefits objectives. of having or using the product or exchange. 3. Costs – sets the floor for the price that the Prices were set by negotiation between buyers and sellers: company can change.  Fixed Pricing - involves setting a predetermined a. Companies want to charge a price price for a product or service that remains constant that covers all their costs for over a specific period. This traditional approach producing, distributing, and selling offers predictability and simplicity for both the product and provides a fair rate businesses and consumers. of return for their effort and risk.  Dynamic Pricing - a strategy where prices are b. Costs can take two forms: adjusted in real-time based on factors like demand, i. Fixed Costs (Overhead) – supply, competition, and time sensitivity. This cost that do not vary with approach allows businesses to optimize revenue and sales or production. adapt to changing market conditions. ii. Variable Costs – costs that vary directly with the Many companies do not handle pricing well. Common level of production. mistakes that they make are: c. Total Costs – the sum of the fixed costs and variable costs for any 1. Pricing is too cost-oriented. given level of production. 2. Prices are not revised often enough to reflect market change. 4. Organizational Considerations 3. Prices do not take into account the other elements of  Management must decide within the marketing mix. the organization who should set 4. Prices are not varied for different products, market prices. segments, and purchase occasions.  In small companies, top management usually makes all the pricing decisions.  In large companies, divisional or FACTORS TO CONSIDER WHEN SETTING PRICES product line managers make the decisions. Internal Factors Affecting Pricing Decisions  In industrial markets, salespeople often enter into the process by 1. Marketing Objectives – setting objectives negotiating certain aspects of the (beyond marketing positioning) should be contract and therefore, price. carefully monitored. Clear objectives aid in  Some companies even have a a successful marketing venture. pricing department. a. Companies may set survival as their main objective if they are troubled by too much capacity, External Factors Affecting Pricing Decision heavy competition, or changing consumer wants. 1. Market and Demand – it set the upper b. Current profit maximization – limit. Pricing freedom varies with different they estimate what demand and types of markets: costs will be at different prices and a. Pure competition many buyers and choose the price that will produce sellers who have little effect on the the maximum current profit, cash price. flow, or return on investment. b. Monopolistic competition many c. Market share leadership – they buyers and sellers who trade over a believe that the company with the range price. largest market share will enjoy the c. Oligopolistic competition few lowest costs and highest long-run sellers who are highly sensitive to profit. each other’s pricing and marketing d. Product quality leadership – strategies. charging a high price to cover d. Pure monopoly single seller. higher performance quality and the e. Pricing freedom also varies with high cost of R&D. consumer’s perception of price and e. Other specific objectives include: value.  Set prices low to prevent f. Price-demand relationship competition g. Price elasticity – a measure of the  Set prices to keep loyalty sensitivity of demand to changes in and support of resellers price:  Prices can be reduced  Inelastic demand – hardly temporarily changes with a small change in price.  IEP 416 – Marketing Systems Chapter 9 – Pricing: Understanding Costumer Value and Strategies Prepared by: Manulat, Trisha Feb L.  Elastic demand – changes b. Sealed-bid – company sets prices with a small change in based on what they think price. competitors will charge. 2. Competition – another external factor affecting the company’s pricing decisions, New-product pricing strategies competitors’ costs and prices, and possible competitor reactions to the company’s own 1. Pricing involves complex dynamics. pricing moves. 2. Pricing decisions are subject to an incredibly 3. Other external factors: complex array of environmental competitive a. Economic conditions forces. b. Resellers policies c. Government actions 3. The introductory stage of the PLC is d. Social concerns particularly challenging. General Pricing Approaches Market-skimming pricing Companies set prices by selecting a general pricing Marketing-skimming pricing involves setting a approach that includes one or more of three sets of high price for a new product to skim maximum factors: revenue from the segments willing to pay the high  Product Costs price.  Competitors’ prices and other external and internal factors Use under these conditions:  Consumer perceptions of value  Product’s quality and image must support its higher price.  Cost can not be so high that they cancel the Cost-based Pricing advantage of charging more.  Competitors should not be able to enter 1. Cost-plus pricing – an approach that adds a market easily and undercut the high price. standard markup to the cost of the product.  Certain about costs  Pricing is simplified Market-penetration pricing  Price competition is minimized  Fairer to buyers and sellers Marketing-penetration pricing means setting a low price for a new product in order to penetrate the 2. Break-even pricing – an approach to setting market quickly and deeply. price to break-even on the cost of making and marketing products or to make the target Use under these conditions: profit.  Market must be highly price-sensitive so a low price produces more market growth.  Production/distribution cost must fall as Valued-based Pricing sales volume increase.  It must keep out competition and maintain Value-based pricing is setting prices based on its low price position or benefits may only buyers’ perception of value rather that on the seller’s be temporary. cost. 1. A company using this approach must find PRODUCT-MIX PRICING STRATEGIES out what value the buyer assigns to different competitive offers. Buyers must then be Product Line Pricing convinced that the product’s value justifies the price. Product line pricing involves setting price steps between various products in a product based on: 2. Value pricing strategies are generated, i.e.,  Cost differences between products offering just the right combination of quality  Customer evaluations of different features and good service at a fair price.  Competitors’ price Competition-based pricing Optional Product Pricing The final approach is competition-based pricing. Optional-product or accessory products sold with Variations include: the main product 1. Methods for selling prices: a. Going-rate – company sets prices Captive Product Pricing based on what competitors are charging. Captive-product must be used with the main product.  IEP 416 – Marketing Systems Chapter 9 – Pricing: Understanding Costumer Value and Strategies Prepared by: Manulat, Trisha Feb L. 3. Price becomes an important quality signal  Producers of the main product offer them at when customers can not judge quality; price low prices and set high markups on the is used to say something about a product. samples.  If the producer does not make the supplies, they price their products higher. Promotional Pricing  Two-part pricing is where the price of the service is broken into a fixed fee plus a Promotional pricing is temporary pricing products variable usage rate. below list price through: 1. Loss leaders 2. Special-event pricing By-product Pricing 3. Cash rebates 4. Low-interest financing By-product pricing is low value by-products to get 5. Longer warranties rid of them and make the main product’s price more 6. Free maintenance competitive. 7. Discounts Product-bundle Pricing Geographical Pricing Product-bundle pricing is a combination of several Geographical pricing is a product for customers products and offering the bundle at a reduced price. located in different parts of the country or world. Some form of this are as follows: PRICE-ADJUSTMENT STRATEGIES 1. FOB-origin pricing 2. Uniform-delivery pricing Discount and Allowance Pricing 3. Zone pricing 4. Basing-point pricing Discount is a straight reduction in price on purchases 5. Freight-absorption pricing during a stated period of time. Allowances is a price reduction given for turning in International Pricing an old item when buying a new one. International pricing is that adjusting prices for Discount and allowance pricing is the reducing of customers in different countries. prices to reward customer responses such as paying early or promoting the product Factors that affect this decision include: 1. Economic conditions. Example are: 2. Competitive conditions. 1. Cash discount 3. Laws and regulations. 2. Quantity discount 4. Development of the retailing and 3. Functional discount or trade discount wholesaling system. 4. Promotional allowances PRICE CHANGES Segmented Pricing Initiating Price Changes Segment pricing is selling products at two or more prices even though there is no difference in cost. a. Price cuts  Excess capacity Possible form include:  Falling market share 1. Customer segment pricing  Dominate market through lower costs 2. Product-form pricing b. Price increase 3. Location pricing  Cost inflation 4. Time pricing  Overdemand-company can not supply all customers’ needs. Psychological Pricing Responding to Price Changes Psychological pricing is a pricing approach that considers the psychology of prices and not simply the Reaction to competition might be to: economics; the price is used to say something about 1. reduce the product’s price the product. 2. maintain the company’s price but raise the perceived quality Considering: 3. improve quality and increase price 1. The psychology of prices and not simply the 4. launch a new low-price “fighting brand” economics 2. Customers use price less when they can judge quality of a product.  IEP 416 – Marketing Systems Chapter 9 – Pricing: Understanding Costumer Value and Strategies Prepared by: Manulat, Trisha Feb L. Pricing Within Channel Level Price fixing policy states that sellers must set prices without talking competitors. Sellers are also prohibited from using predatory pricing. Price discrimination is the policy that attempts to ensure that sellers offer the same price terms to a given level of trade. 1. Resale price maintenance 2. Deceptive pricing 3. Scanner fraud 4. Price confusion