M5 Lecture 7 Price Strategies (Student) 2024 PDF

Module 5 Creating value through marketing  Module 5: Creating value through marketing M5 Lecture: L7 – L12 Name: Ms. Katherine Wong Tel: 2768 6968 Email: [email protected]  Module 5: Creating value through marketing Topics ...

Module 5 Creating value through marketing  Module 5: Creating value through marketing M5 Lecture: L7 – L12 Name: Ms. Katherine Wong Tel: 2768 6968 Email: [email protected]  Module 5: Creating value through marketing Topics  Module 5: Creating value through marketing The magic behind pricing strategy Why these “odd numbers”? Reference: https://www.broadwaylifestyle.com/hk_en/products/mobile-product  Module 5: Creating value through marketing The magic behind pricing strategy Why prices are breaking down into “smaller amounts” when you buy Apple products? https://www.apple.com/hk/shop/buy-ipad/ipad-pro  Module 5: Creating value through marketing The magic behind pricing strategy Why monthly plan for fitness centre membership and NGOs soliciting donations are advertised in $xx/day?  Module 5: Creating value through marketing The magic behind pricing strategy What images do Mardi Mercredi and Uniqlo give you when Mardi Mercredi is selling a T-shirt at $330 whereas Uniqlo T-shirt at $79? Pricing Strategies Custom Textbook Unit 3: Module 3 and Module 4  Module 5: Creating value through marketing Learning Objectives 1. Discuss the importance of understanding customer value perceptions and product costs when setting prices 2. Identify important internal and external factors affecting a firm’s pricing decisions 3. Describe the major strategies for pricing new products and total product mix as well as how to adjust prices in various types of situations What is a price?  Module 5: Creating value through marketing What is a Price? Consider the following: What is the most you are willing to pay for a night in the Li Jing Hotel (麗晶大賓館)? What is the most you are willing to pay for a night in the the Four Seasons Hotel?  Module 5: Creating value through marketing What is a Price? Price is the sum of all the values that customers give up to gain the benefits of having the products or services The only element in the marketing mix that generates revenue  Module 5: Creating value through marketing Considerations in Setting Prices Poll 1 Major Pricing Strategies  Module 5: Creating value through marketing Cost-based pricing vs Value-based pricing ◼ Value-based pricing is customer-driven ◼ Cost-based pricing is product-driven  Module 5: Creating value through marketing Cost-based pricing Sulwhasoo First Care Activating Mask HK$440 for 5 sheets  Module 5: Creating value through marketing Cost-based pricing Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits Type of cost-based pricing: Cost-plus pricing  Module 5: Creating value through marketing Cost-based pricing: Cost-plus pricing The simplest pricing method of cost-based pricing is cost-plus pricing (or markup pricing) —simply adding a standard markup to the cost of the product. For example: Cost: $100; Markup: 20%; Final price: $100 + ($100*20%) = $120 Cost-plus pricing is popular because sellers are certain about costs Cost: fixed and variable costs  Module 5: Creating value through marketing Customer value-based pricing Based on buyers’ perceptions of value rather than on the seller’s cost Price is considered along with other marketing mix variables before the marketing program is set. Types of value-based pricing: 1. Good-value pricing In skincare product category, 2. Value-added pricing essences are selling at much higher prices compared to other products  Module 5: Creating value through marketing Good-value Pricing Good value ≠ low price e.g. Someone bought a second-hand mini cooper (2 years, 3,000km) at HK$200,000. He thinks it’s good value because: Low mileage Interior very new – new and a famous brand stereo system Good maintenance He is a big fan of mini cooper  Module 5: Creating value through marketing Good-value pricing Uniqlo, which already practices value-for-money pricing, has a lower-end brand “GU”  Module 5: Creating value through marketing Everyday low pricing Everyday low pricing (EDLP) involves charging a constant, everyday low price with few or no temporary price discounts. E.g. Walmart promises everyday low pries on everything it sells High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items e.g. Sogo Department Store  Module 5: Creating value through marketing Value-added Pricing Value-added pricing is the strategy of attaching value-added features and services to differentiate their offers and thus support higher prices (so there is no need to match competitors’ lower prices) Citysuper uses unique features such as simple and clean store layout and imported high quality products to support its higher prices compared to other supermarkets. Considerations Affecting Price Decisions  Module 5: Creating value through marketing Considerations in Setting Prices  Module 5: Creating value through marketing Factors to consider when setting prices  Module 5: Creating value through marketing Internal considerations: Overall marketing strategy, objectives, and mix Before setting price, the company must decide on its overall positioning → Pricing strategy is largely determined by decisions on market positioning. HK Express: Budget airline market Rolex watch: Premium market → low price → high price  Module 5: Creating value through marketing Internal considerations: Overall marketing strategy, objectives, and mix Before setting price, the company must decide on its overall positioning → Pricing strategy is largely determined by decisions on market positioning. Maridi Mercredi: Stylish fashion – Uniqlo: Value-for- modern money fast fashion minimalism → → low price mid-high price  Module 5: Creating value through marketing Internal considerations: Overall marketing strategy, objectives, and mix Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program. Rolex store is decorated in a premium way to reinforce its positioning  Module 5: Creating value through marketing Internal considerations: Overall marketing strategy, objectives, and mix Price is one of the marketing mix tools that a company uses to achieve its marketing objectives. Examples: Attract new customers Set it low to prevent competition from entering the market Can be reduced temporarily to create excitement for a brand  Module 5: Creating value through marketing Internal considerations: Overall marketing strategy, objectives, and mix Sometimes products are priced to help the sales of other products in the company’s line Coca-Cola 330ml x 8 can Coca-Cola 330ml x 12 can pack: pack: HK$40* i.e. $5/can HK$50* i.e.$4.16/can *Source: HKTV Mall – 12 Sept 2024  Module 5: Creating value through marketing Internal considerations: Organizational considerations Small companies → owner, top management Large corporations → sales or marketing department, divisional or product managers Industrial markets → salespeople may be allowed to negotiate with customers within certain price ranges  Module 5: Creating value through marketing External considerations: Nature of market - Pure competition Many buyers and sellers. No single buyer or seller has much effect on the going market price, e.g. uniform commodity (wheat, copper, sugar, salt) - Monopolistic competition Many buyers and sellers who trade over a range of prices. A range of prices can occur because sellers can differentiate their offers to buyers, e.g. different quality, styles (Apple iPhone vs. Xiaomi) - Oligopolistic competition Few large sellers who are sensitive to each other’s pricing/marketing strategies - Pure Monopoly A single seller who enjoys freedom in setting prices, e.g. government (postal service), public utilities. Government permits the company to set rates that yield’s a fair return  Module 5: Creating value through marketing External considerations: Nature of market Poll 2 - Oligopolistic competition Few large sellers who are sensitive to each other’s pricing/marketing strategies e.g. Petrol stations, airlines  Module 5: Creating value through marketing External considerations: Price elasticity Elastic and inelastic demand Demand changes Demand hardly Demand is elastic → seller can decrease greatly with a small changes with a small price to increase revenue change in Price change in Price With advance in technology price comparison becomes easy. Marketers have to work harder to differentiate their offerings from competitors Price comparison websites make comparing prices much easier than before  Module 5: Creating value through marketing External considerations: Price elasticity Is the demand of the following elastic or inelastic? Diamonds Kit Kat Chocolate  Module 5: Creating value through marketing External considerations: The economy Economic conditions can have a strong impact on the firm’s pricing strategies. A boom or recession, inflation, and interest rates affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product. “2-dish rice” emerged since COVID-19 due to the poor economic condition Pricing Strategies  Module 5: Creating value through marketing Pricing strategies – A summary New product pricing Product mix pricing Price adjustment strategies strategies strategies  Module 5: Creating value through marketing New product pricing strategies Market skimming pricing Many companies that invent new products set high initial prices to “skim” revenues from the market Company makes fewer but more profitable sales. Conditions favouring market skimming: 1. The product’s quality and image must support its higher price, and enough buyers must want the product at that price. 2. The costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. 3. Competitors should not be able to enter the market easily and undercut the high price.  Module 5: Creating value through marketing Skimming Pricing - example Example of skimming pricing: Apple iPhones – new models start at a high price then work all their way down as newer models are introduced.  Module 5: Creating value through marketing New product pricing strategies Market penetration pricing Companies set a low initial price in order to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share. Conditions favouring market-penetration pricing: 1. The market must be highly price sensitive so that a low price produces more market growth. 2. Production and distribution costs must fall as sales volume increases. 3. The low price must help keep out the competition  Module 5: Creating value through marketing Penetration pricing strategies - Examples Xiaomi Miniso Product Mix Pricing Strategies  Module 5: Creating value through marketing Product mix pricing strategies Price is not set individually when a product is part a product mix → looks for a set of prices that maximizes the profits on the total product mix Example: Dove shampoo product line  Module 5: Creating value through marketing Product mix pricing strategies Strategy Description Product line pricing Setting price steps between product line items Optional-product pricing Pricing optional or accessory products sold with the main product Captive-product pricing Pricing products that must be used with the main product Product bundle pricing Pricing bundles of products sold together  Module 5: Creating value through marketing Product line pricing Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between the various products in a line. How much customers are willing to pay for the additional/ different features for each model in the display monitor product line e.g. 22” vs. 24”? Better resolution?  Module 5: Creating value through marketing Product line pricing The price steps should take into account cost differences between the products in the line. They should account for differences in customer perceptions of the value of different features. The seller’s task is to establish perceived quality differences that support the price differences. Example: iPad (https://www.apple.com/hk- edu/shop/buy-ipad/ipad-pro)  Module 5: Creating value through marketing Optional product pricing Many companies use optional product pricing—offering to sell optional or accessory products along with their main product e.g. car accessories, Apple: pay additional for various accessories or better specifications (https://www.apple.com/hk-edu/shop/buy-ipad/ipad-air) The company has to decide which items to include in the base price and which to offer as options Customers have to pay additional amount for the “white strips” on Mini Cooper  Module 5: Creating value through marketing Captive product pricing Companies that make products that must be used along with a main product are using captive product pricing. Producers of the main products often price them low and set high markups on the supplies. E.g. printer and printer cartridges, razors, game consoles  Module 5: Creating value through marketing Product bundle pricing Using product bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price. Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle. E.g. Klook package tour (e.g. https://www.klook.com/en-HK/activity/80114-in- the-soop-pyeongchang-filming-location-tour/); Microsoft Office 365 includes Word, Excel, PowerPoint, Outlook, One Drive McDonald’s value meal is adopting product bundle pricing strategy Price Adjustment Strategies  Module 5: Creating value through marketing Price adjustment strategies Companies often adjust their basic prices to account for various customer differences and changing situations. Strategy Description Discount and allowance Reducing prices to reward customer responses pricing such as paying early or promoting the product Segmented pricing Adjusting prices to allow for differences in customers, products, or locations Psychological pricing Adjusting prices for psychological effects  Module 5: Creating value through marketing Discounts and allowances Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases, and off- season buying. Common types: Quantity discount: price is lower when buying a large volume e.g. cash coupons, body massage packages Seasonal discount: price is lower when buying out of season, e.g. hotel and airline prices during low periods  Module 5: Creating value through marketing Discounts and allowances Promotional allowance: payment to a retailer for promoting the manufacturer’s products Trade-in allowance: price reduction given for turning in an old item when buying a new one, common among durable goods e.g. iPhone, automobiles Trade in allowance is commonly found in higher-priced and products especially those where new models are regularly introduced. Brands have to pay retailers for displaying their products prominently in their stores  Module 5: Creating value through marketing Discounts and allowances Using discounts too frequently can lead to adverse effects… Create ‘deal-prone’ customers Customers may wait until brands go on sale before buying them Erode brand equity Marketers may use price promotions as a quick fix instead of developing effective longer-term strategies for building their brands Lead to industry price wars When a company reduces its price, other companies may follow, resulting in price wars which threatens profitability  Module 5: Creating value through marketing Segmented pricing Companies will often adjust their basic prices to allow for differences in customers, products, and locations e.g. movie tickets, transportation fees In segmented pricing, the company sells a product or service at two or more prices, even though the difference in price is not based on differences in costs.  Module 5: Creating value through marketing Segmented pricing Common types: Customer-segment pricing: different customers pay different prices for the same product/service e.g. ladies’ night for bars, cinemas/transportation companies charging different prices to students/elderly  Module 5: Creating value through marketing Segmented pricing MTR fare (e.g. from Causeway Octopus Bay to Ho Man Tin station) Adult $13.2 Elderly (JoyYou Card) $2.0 Student $6.5 Customer segmented pricing: Charging students and elderly a cheaper movie ticket price is NOT because the cost of providing transportation to them is lower!  Module 5: Creating value through marketing Segmented pricing Product-form pricing: different versions of the product are priced differently e.g. Evian drinking water vs. facial spray (more expensive than drinking water), Airline business class vs. economy class  Module 5: Creating value through marketing Segmented pricing Location-based pricing: different prices for different locations e.g. concert tickets Time pricing: a firm varies its price by the season, the month, the day, and even the hour e.g. hotel rooms Bear in mind: The difference in price is not based on differences in costs!  Module 5: Creating value through marketing Psychological pricing (sometimes knowns as odd- even pricing) Considers the psychology of prices and not simply the economics Many consumers use price to judge quality Higher price implies higher quality (e.g. a watch priced at $398,000 must be of better quality than the $699 one) Price: Price: $398,000 $699  Module 5: Creating value through marketing Psychological pricing Numbers can play psychological tricks Marketers often use odd-numbered prices to suggest a bargain (e.g. $199, feeling much cheaper than $200) Some numbers are more preferable in certain cultures e.g. ‘8’ for Chinese (banquets or dinner during festives)  Module 5: Creating value through marketing Pricing strategies – A summary Poll 3 New product pricing Product mix pricing Price adjustment strategies strategies strategies Market-skimming – high Product line pricing – Discount and allowance e.g. price e.g. Apple iPhone difference in features/ set of soup coupons quality Market-penetration – low Optional-product pricing Segmented pricing e.g. price e.g. Ikea e.g. Leather seats in cars elderly/ student tickets Captive-product pricing e.g. Psychological pricing e.g. printer and cartridge $199 Product bundle pricing e.g. McDonald’s value meal  Module 5: Creating value through marketing To sum up