Lecture Session 6 - Setting Motivating Prices.pptx

Kwame Nkrumah University of Science & Technology, Kumasi, Ghana Public Sector Marketing Setting Motivating Prices: Understanding and Capturing Customer Value Prof Nathaniel Boso KNUST School of Business  Lecture...

Kwame Nkrumah University of Science & Technology, Kumasi, Ghana Public Sector Marketing Setting Motivating Prices: Understanding and Capturing Customer Value Prof Nathaniel Boso KNUST School of Business  Lecture Outline Explain how public sector organisations can use pricing as a strategic tool to create and capture value for citizens Identify the three major pricing strategies Identify and explain key external and internal factors that affect pricing decisions www.knust.edu.gh  Using Pricing as a Strategic In its narrowest sense, PRICETool is the amount of money charged for a product or a service. More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a product or a service. It is the only element of the marketing mix that produces revenue: all other elements (product, distribution and promotion) represent costs to the firm. Smart public managers, therefore, use pricing as a strategic tool to create and capture customer value. www.knust.edu.gh  Public Sector Organisations and Profit Orientation A key motivation for pricing is to help companies generate revenue and ultimately profit. However, do public sector organisations have a mandate to pursue a profit orientation goals? Profit orientation captures the inclination of top management to emphasize profitability as a primary strategic goal of the firm. The other approach is revenue maximisation goal - attempts to sell at a price which achieves the greatest www.knust.edu.gh sales revenue.  Major Pricing Strategies Available to Public Sector Organisations Cost-based Pricing strategies customer value-based Competition- based 5  Customer Value-Based Pricing Managers try to understand how much value consumers place on the benefits they receive from a product and then set a price that captures that value. Such companies compete on differentiated value proposition rather than on price.  Customer Value-Based Pricing Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before product design and other marketing mix programmes are set. Value-based pricing is customer- driven Cost-based pricing is product-driven Visa Fee Categories to the United Kingdom is charged based on both cost and quality perception of applicants  Value-Based Pricing in UK Visa Acquisition Optional Premium Optional Premium Services in the Services outside the UK UK Fee Fee Before Curre Fee Fees category Before 6 April 2018 Fees category nt Chan 6 April Fee ge 2018 Priority visa Expedited processing of an service – £551 application (premium £490 £510 £20 settlement service centre) Priority visa Expedited processing of an service – non- £184 application (premium £100 £100 £0 settlement service centre) – appointment booking fee Super priority Expedited processing of an £919 visa service application (premium £75 £75 n/a service centre) – outside User-pay visa office hours fee application £55 £53.0 centre Provision of Immigration £53.08 8 Officer at the border per £0 per (hourly rate) hour International hour Contact Centre Priority service £459 £477 £18 £5.48 – Email Service (per query) £10,5 Super premium service £10,500 £0 00  Visa Prices at Ghana Embassy in Washington DC Regular Services Expedited Services Single Entry - $60.00 Single Entry - $100.00 Multiple Entry - $100.00 Multiple Entry- $200.0 Waiting time for service delivery Waiting time for service delivery Walk-in Applicants: 5 Business Walk-in Applicants: 2 Business Days Days Mail in Applicants: 10 Business Mail in Applicants: 5 Business Days Days  Customer Value-Based Pricing Good-value pricing - offer the right combination of quality and good service at a fair price. Everyday low pricing - charge a constant everyday low price with few or no temporary price discounts. High-low pricing – charge higher prices on everyday basis but running frequent promotions to lower prices temporarily on selected items.  Cost-Based Pricing Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Cost-based pricing adds a standard markup to the cost of the product.  Cost-Based Pricing There must be a consideration for Fixed costs (also known as overheads)– which is the costs that do not vary with production or sales level: e.g., – Rent – Heat – Interest – Executive salaries  Cost-Based Pricing Also, consider Variable costs – which are the costs that vary with the level of production – Packaging costs – Raw material costs – Transportation cost – Cost of hiring temporary staff  Total production cost Total costs are the sum of the fixed and variable costs for any given level of production. Total Costs of Production = Fixed costs + Variable Costs Management wants to charge a price that will at least cover the total production costs at a given level of production.  Costs as a Function of Production Experience Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units produced over time.  Cost-Plus Pricing Cost-plus pricing adds a standard markup to the cost of the product Benefits – Sellers are certain about costs – Prices are similar in industry and price competition is minimized – Buyers feel it is a fair deal Disadvantages – This strategy ignores demand and competitor prices on the market  Break-Even Analysis and Target Profit Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit to the producer or service provider. Target return pricing is the price at which the firm will break even or make a surplus (or profit) it is seeking. Determining the break even point Total revenue Break even point Total cost Money (£) Profits Total variable costs Losses Fixed costs Units of Production 18  Competition-based pricing This has to do with setting prices based on competitors’ strategies, costs, prices, and market offerings. It is assumed that consumers will base their judgments of a product’s value on the prices that competitors charge for similar products.  The demand curve The demand curve explains the relationship between the price of a product or service and the quantity Price demanded by consumers for a given period of time. It is estimated that as the price of a P1 given commodity increases, the quantity demanded decreases, all else being equal. P2 Q1 Q2 Quantity 20  The demand curve Thus, all things being equal, demand and price are inversely related. Higher price = lower demand However, for prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality. For example, premium eye care service at Komfo Anokye Hospital and Premium Medical Services at Ridge Hospital!  Price elasticity of demand Price elasticity of demand illustrates the response of demand to a change in price. Inelastic demand occurs when demand hardly changes when there is a small change in price. Elastic demand occurs when demand changes greatly for a small change in Price elasticity of demand = price. % change in quantity demanded % change in price Price elasticity of demand Pricing Strategy for Public Organisations Nature of Competition The public sector is dominated by few organisations providing services to the public. Public sector organizations, such State Transport Corporation, may consider a combination of these three pricing strategies  Other Internal and External Consideration Affecting Price Decisions Economic conditions Reseller’s response to price Government Social concerns Conditions for charging When: high prices A product must provide high value to customers Customers have high ability to pay Consumers and bill payers are different There is lack of competition There is excess demand for high value products Consumers are under high pressure to buy Switching costs is high 26 Conditions for charging When : low prices seeking market presence/entry or domination experience curve effect helps a firm earn low cost of production the intention is to make money later the objective is to take money elsewhere the goal is to erect barrier to entry to market seeking to send a predatory threat to competitors 27 Ethical issues in pricing Price fixing Predatory pricing Deceptive pricing Price discrimination Penetration pricing and obesity issues Product dumping 28