Unit 10 - Pricing Strategies PDF

Unit 10 Pricing strategies Unit 10 - Contents I. Pricing in marketing strategy II. Pricing methods: based on cost III. Pricing methods: based on demand IV. Individual products pricing strategy V. Subscription-Based Pricing...

Unit 10 Pricing strategies Unit 10 - Contents I. Pricing in marketing strategy II. Pricing methods: based on cost III. Pricing methods: based on demand IV. Individual products pricing strategy V. Subscription-Based Pricing Market-Based Management Copyright 2022  Pricing Strategies Pricing strategies “The single most important decision in evaluating a business is Pricing Power... If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. -Warren Buffet Unit 10 – Part I Functions of price in the marketing Functions of price in the marketing strategy Main function Contribute to generating Highlight the product quality. Other functions revenue. Encourage the collaboration of intermediaries. Entry barriers in the industry. Instrument against seasonality of sales. Instrument of sales promotions. Instrument of competition. Factors influencing pricing strategy setting Members of Competitors Environment: the economic, political External distribution and legal channel Internal Demand of Marketing end users strategies Business Pricing Costs objectives Unit 10 – Part II Pricing Methods: Cost  II. Pricing Methods: Cost No company can survive for long without profits (Total revenue>Total cost). For this reason, the decision on the sales price is conditioned by the costs. But it is the price that determines the cost and not the opposite. The income provided by each unit of product sold does not necessarily have to cover all its costs. It will be necessary in all cases that the selling price is higher than the unit variable cost. Pricing to cover Level of Product costs and make a Costs Objectives Price sales Reactive (definition) profit necessary Pricing based on the Level of Proactive Value for value of the product Objectives Price sales Costs customers to customers necessary Cost-Plus Pricing Market-Based Management Copyright 2022 Unit 10 – Part III Pricing Methods: Demand  III. Pricing Methods: Demand Customer’s reaction: some aspects  Understand and know the meaning of prices for customers.  Different factors that can have an influence on price sensitivity: perceived‐value, the existence of different options, value for money, the option of sharing the cost with others, criteria to measure effectiveness and success, risk of changing the brand (or supplier).  Price sensitivity could differ among various groups of consumers (price discrimination).  III. Pricing Methods: Demand Consumer reaction: lower sensitivity factors The product is unique. Buyers are less aware of substitutes. Buyers cannot easily compare the quality of substitutes. The expense is a smaller part of the buyer’s total income. The expense is small compared to the total cost of the end product. Cost is shared with another party (cost‐sharing). The product is used as a complement of another that was bought previously. The product is assumed to have more quality, prestige, or exclusiveness. Buyers cannot store the product.  III. Pricing Methods: Demand Consumer reaction: Perceived value  Customer perception is influenced by other factors besides product price: substitute product prices, factors related to the presentation of the product, brand image, existence of other options, etc.  The application of this approach is useful when the price sensitivity factor is the importance (or relevance) of the product for the buyer as well as qualitative factors such as image.  Perceived value relies upon knowledge and the understanding of the end use of the product by the customer. Determines the price that the customer is willing to pay for the satisfaction they hope to get when they use the product.  Distinguish between REAL (which the customer recognizes in the moment) and the POTENTIAL (which they could have after being educated on the way to see and use the product).  Buyers compare the advantages and the cost of the purchase. When the advantages (perceived value) are higher than the costs, the customer proceeds with the purchase.  III. Pricing Methods: Demand Calculate prices based on perceived value  Perceived value is the level of appreciation of a product (higher or lower) as a tool to satisfy the needs and wishes of a potential customer.  Indicates the top limit for the price. Customers buy when perceived value is higher than price.  III. Pricing Methods: Demand Calculate prices based on perceived value 1. Determine product uses. 2. List the advantages for each use that customer is looking for. 3. Weigh the importance of every advantage for the customer. 4. Establish product lists that satisfy the same needs. 5. Establish the evaluation assigned to each brand for every advantage considered. 6. Determine perceived value for every brand. 7. Determine price for each brand based on their perceived value. Unit 10 – Part IV Pricing Strategies for Individual Products IV. Pricing Strategies for Individual Products A. Launch of innovative products Penetration strategy. Skimming strategy. B. Against the competition Maintain the price. Reduce the price. Increase the price. Frequent price changes. Parity strategy. C. Adjustments in the base price Negotiation, discounts, psychological prices. Skim Pricing Strategy Market-Based Management Copyright 2022  Unit 10 – Part V Pricing Strategies for Subscription Models Market-Based Management Copyright 2022  V. Subscription Models Premium model: Users pay for full initial access to all features. Freemium model: Offers limited free access with the option to pay for additional features or exclusive content. Mixed subscription model: This model combines aspects of freemium and premium. For example, a service offers a free basis with ads but allows you to pay to remove ads and access more features. Free trial: Some services allow access to all premium content for a limited time to get users to subscribe after the trial period ends. Types of Subscription Pricing Market-Based Management Copyright 2022 Examples of Subscription Pricing Market-Based Management Copyright 2022 V. Pricing Strategies for Subscription Models Flat Rate Model Description: In this model, users pay a flat fee, regardless of how much they use the service or product. It is a one‐time fee that covers full access to services within a specific period, such as monthly or yearly. Advantages: Ease for users, as they know exactly how much they must pay. Predictability of revenue for the company. Examples: Telecom services, subscriptions to streaming platforms such as Netflix or Spotify. Disadvantages: Fixed and limited revenue: Although predictable, revenue potential from excessive user usage cannot be tapped. Excessive usage: Users may make intensive use of the service without generating additional revenue, which can result in high costs for the firm. Market-Based Management Copyright 2022 V. Pricing Strategies for Subscription Models Tiered Pricing Model Description: This model establishes different pricing tiers based on usage or volume of services. As users consume more, a different or higher price is applied. Advantages: Flexibility to adapt to different types of users. Encourages higher consumption, as users can opt for a higher tariff if they use more. Examples: Cloud storage services (such as Dropbox), where prices vary according to the space used. Disadvantages for the firm: Administrative complexity: Different pricing tiers must be managed, which can lead to customer confusion and require more administrative resources. Pricing mismatch: This may result in inefficient pricing for some users, which could reduce revenue potential for those who stay at low levels. Market-Based Management Copyright 2022 V. Pricing Strategies for Subscription Models Per Unit/Per User Model Description: This model's pricing is based on specific units or users. Each additional unit or user generates a cost. The term "unit" can refer to different things, depending on the service (e.g., a user, an account, a device, a unit of consumption, etc.) A specific price is charged for each unit consumed or each additional user. Advantages: Scalable, as the price increases proportionally with usage or number of users. Allows cost to be tailored to the exact needs of each customer. Examples: Zoom, Sales Force. Disadvantages for the firm: Complicated loyalty: If users must pay for each additional unit or user, this may discourage expansion or long‐term loyalty. Revenue instability: The firm depends on the number of active users, which can generate volatile revenue, especially if customers churn. Market-Based Management Copyright 2022 V. Pricing Strategies for Subscription Models Usage‐Based Model Description: Also known as “pay‐per‐use”, it is charged according to the actual amount of use of the service, not by units or fixed users. The price is directly related to the level of consumption. This model is suited to services where usage may vary and is not directly related to the number of users or units. Advantages: Customers only pay for what they use, which can make the service more affordable. Increases flexibility and can attract users with varying needs. Examples: Cell phone services where users only pay for the number of minutes, data or messages they consume, UBER does not charge you for the number of passengers. Disadvantages: Unpredictable revenues: since prices depend on consumption, revenues can be unstable and difficult to predict, complicating financial planning. Low profitability if consumption is low: If users do not make intensive use of the service, revenues generated may be lower than expected. Market-Based Management Copyright 2022