Ch09 PDF - Pricing Strategies

Price • Amount of money charged for a product or service • Determines a firm’s market share and profitability • Produces revenue Copyright © 2017 Pearson Education, Ltd. 9-5 Price is the amount of money charged for a product or a service. It is the sum of all the values that customers give up to...

Price • Amount of money charged for a product or service • Determines a firm’s market share and profitability • Produces revenue Copyright © 2017 Pearson Education, Ltd. 9-5 Price is the amount of money charged for a product or a service. It is the sum of all the values that customers give up to gain the benefits of having or using a product or service. Price is one of the most important elements that determines a firm’s market share and profitability. Price is the only element in the marketing mix that produces revenue; all other elements represent costs. 5 Figure 9.1 - Considerations in Setting Price Copyright © 2017 Pearson Education, Ltd. 9-6 This figure summarizes the major considerations in setting prices and suggests three major pricing strategies: customer value–based pricing, cost-based pricing, and competition-based pricing. If customers perceive that a product’s price is greater than its value, they won’t buy the product. If the company prices the product below its costs, profits will suffer. Between the two extremes, the right pricing strategy is the one that delivers both value to the customer and profits to the company. 6 Considerations in Setting Price This figure summarizes the major considerations in setting prices and suggests three major pricing strategies: customer value–based pricing, cost-based pricing, and competition-based pricing. If customers perceive that a product’s price is greater than its value, they won’t buy the product. If the company prices the product below its costs, profits will suffer. Between the two extremes, the right pricing strategy is the one that delivers both value to the customer and profits to the company. Copyright © 2017 Pearson Education, Ltd. 7 Customer Value-Based Pricing • Based on buyers’ perceptions of value rather than on the seller’s cost • Price is considered before the marketing program is set. • Types of value-based pricing: • Good-value pricing: offers just the right combination of quality and good service at a fair price. Ex. less expensive versions , lower-price lines , or more quality for a given price or the same quality for less. • Value-added pricing: involves attaching value-added features and services to differentiate a company’s offers and then charging higher prices. Copyright © 2017 Pearson Education, Ltd. 9-8 Customer value-based pricing uses buyers’ perceptions of value as the key to pricing. Price is considered along with all other marketing mix variables before the marketing program is set. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. There are two types of value-based pricing: good-value pricing and value-added pricing. Good-value pricing offers just the right combination of quality and good service at a fair price. This pricing method involves introducing less expensive versions of established, brand name products or new lower-price lines. It also involves redesigning existing brands to offer more quality for a given price or the same quality for less. Value-added pricing involves attaching value-added features and services to differentiate a company’s offers and then charging higher prices. For example, even as frugal consumer spending habits linger, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices. 8 Figure 9.2 - Value-Based Pricing versus Cost-Based Pricing Copyright © 2017 Pearson Education, Ltd. 9 - 10 This figure compares value-based pricing with cost-based pricing. Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. 10 Cost-Based Pricing • Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk • Types of costs: • Fixed costs (overhead) • Variable costs • Total costs Copyright © 2017 Pearson Education, Ltd. 9 - 11 Cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk. Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits. Other companies pay higher costs so that they can add value and claim higher prices and margins. A company’s costs take two forms: fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales level. Variable costs vary directly with the level of production. Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies with the number of units produced. Total costs are the sum of the fixed and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production. 11 Competition-Based Pricing • Setting prices based on competitors’ strategies, costs, prices, and market offerings • Company should ask several questions to assess competitors’ pricing strategies: • How does the company’s market offering compare in terms of customer value? • How strong are current competitors? • What are their current pricing strategies? Copyright © 2017 Pearson Education, Ltd. 9 - 12 Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings. In assessing competitors’ pricing strategies, the company should ask several questions. First, how does the company’s market offering compare with competitors’ offerings in terms of customer value? Next, how strong are current competitors and what are their current pricing strategies? 12 Considerations Affecting Pricing Decisions • Internal factors • Overall marketing strategy, objectives, and mix • Organizational considerations • External factors • Market and demand • Economy • Impact on other parties in its environment Copyright © 2017 Pearson Education, Ltd. 9 - 14 Beyond customer value perceptions, costs, and competitor strategies, the company must consider several additional internal and external factors. Each of these factors are discussed in greater detail in the following slides. 14 Overall Marketing Strategy, Objectives, and Mix • Pricing decisions must coordinate with packaging, promotion, and distribution decisions. • Positioning may be based on price. Copyright © 2017 Pearson Education, Ltd. 9 - 15 Pricing may play an important role in helping to accomplish company objectives at many levels. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing mix program. For example, a decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices. Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Many firms support price-positioning strategies with a technique called target costing. Target pricing starts with an ideal selling price, then targets costs that will ensure that the price is met. Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price. For example, luxury smartphone maker Vertu puts very high value into its products and charges premium prices to match that value. 15 Organizational Considerations • Management decides who should set prices. • Varies depending on the size and type of company • Small companies - Top management • Large companies - Divisional or product managers • Industries with price as the key factor - Pricing departments ‫وتقدم هذه اﻷقسام تقاريرها الى اﻻدارة العليا أو‬ ‫قسم التسويق‬ Copyright © 2017 Pearson Education, Ltd. 9 - 16 Management must decide who within the organization should set prices. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product managers. In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or help others set them. These departments report to the marketing department or top management. 16 Price Elasticity of Demand • Measure of the sensitivity of demand to changes in price • Inelastic demand: Demand hardly changes with a small change in price. • Elastic demand: Demand changes greatly with a small change in price. • Price elasticity refers to the measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic. Copyright © 2017 Pearson Education, Ltd. 9 - 17 Price elasticity refers to the measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic. 17 Economy Factors impacting pricing strategies • Boom or recession ‫الركود‬ • Inflation ‫التضخم‬ • Interest rates ‫معدﻻت الفائدة‬ Responses to the frugality ‫ اﻻستجابة اﻻقتصادية‬of post recession consumers • Cut prices and offer discounts • Develop more affordable items • Redefine value propositions Copyright © 2017 Pearson Education, Ltd. 9 - 18 Economic conditions can have a strong impact on the firm’s pricing strategies. Factors such as a boom or recession, inflation, and interest rates affect pricing decisions. In the aftermath of the recent Great Recession, many consumers have rethought the price-value equation. As a result, many marketers have increased their emphasis on value-for-the-money pricing strategies. The most obvious response to the new economic realities is to cut prices and offer discounts. Lower prices make products more affordable and help spur short-term sales. However, such price cuts can have undesirable long-term consequences. Once a company cuts prices, it’s difficult to raise them again when the economy recovers. Rather than cutting prices, many companies have instead developed “price tiers,” adding both more affordable lines and premium lines. Other companies are holding prices but redefining the “value” in their value propositions. 18 Other External Factors • Company must consider several other factors in its external environment when setting prices. • Resellers • Government • Social concerns Copyright © 2017 Pearson Education, Ltd. 9 - 19 Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company’s short-term sales, market share, and profit goals may need to be tempered by broader societal considerations. 19 New Product Pricing Strategies Market-skimming pricing (price skimming) • Setting a high price to skim maximum revenues from the segments willing to pay the high price • Company makes fewer but more profitable sales Market-penetration pricing • Setting a low price to attract a large number of buyers and a large market share Copyright © 2017 Pearson Education, Ltd. 9 - 21 Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies. These are market-skimming pricing and market-penetration pricing. Market-skimming pricing or price skimming refers to setting a high price for a new product to skim maximum revenues, layer by layer, from the segments willing to pay the high price. The company makes fewer but more profitable sales. This strategy works only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price. Market-penetration pricing refers to setting a low price for a new product in order to attract a large number of buyers and a large market share. The high sales volume results in falling costs, allowing companies to cut their prices even further. Several conditions must be met for this low-price strategy to work. First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary. 21 Product Mix Pricing Strategies • • • • Product line pricing Optional-product pricing Captive-product pricing Product bundle pricing Copyright © 2017 Pearson Education, Ltd. 9 - 23 This slide summarizes the five product mix pricing strategies. Product line pricing refers to determining the price steps to set between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Optional-product pricing refers to the pricing of optional or accessory products along with a main product. Captive-product pricing refers to setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console. By-product pricing refers to setting a price for by-products in order to make the main product’s price more competitive. Product bundle pricing refers to combining several products and offering the bundle at a reduced price. 23 Product Mix Pricing Strategies Product line pricing refers to determining the price steps to set between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Optional-product pricing refers to the pricing of optional or accessory products along with a main product. Captive-product pricing refers to setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console. Product bundle pricing refers to combining several products and offering the bundle at a reduced price Copyright © 2017 Pearson Education, Ltd. 24 Dynamic and Online Pricing • Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations • Prevalent online where the Internet introduces a new age of fluid pricing ً ‫عصرا‬ ً ‫منتشر عبر اﻹنترنت حيث يقدم اﻹنترنت‬ ‫جديدا من التسعير المرن‬ Copyright © 2017 Pearson Education, Ltd. 9 - 25 Dynamic pricing refers to adjusting prices continually to meet the characteristics and needs of individual customers and situations. It is especially prevalent online, where the Internet seems to be taking us back to a new age of fluid pricing. Such pricing offers many advantages for marketers. These days, online offers and prices might well be based on what specific customers search for and buy, how much they pay for other purchases, and whether they might be willing and able to spend more. Dynamic pricing is legal as long as companies do not discriminate based on age, gender, location, or other similar characteristics. The practice of online pricing, however, goes both ways, and consumers often benefit from online and dynamic pricing. Thanks to the Internet, consumers can get instant product and price comparisons from thousands of vendors at price comparison sites. For example, the RedLaser mobile app lets customers scan barcodes or QR codes while shopping in stores. It then searches online and at nearby stores to provide thousands of reviews and comparison prices. 25 Initiating Price Changes • Reasons for price cuts: • Excess capacity ‫طاقة وسعة زائدة‬ • Falling demand ‫انخفاض الطلب لوجود منافسين‬ • Attempt to dominate the market ‫رغبة في السيطرة‬ ‫على السوق‬ • Reasons for price increases: • Cost inflation ‫تضخم التكلفة‬ • Over-demand ‫زيادة الطلب‬ Copyright © 2017 Pearson Education, Ltd. 9 - 27 Several situations may lead a firm to consider cutting its price. One such circumstance is excess capacity. Another is falling demand in the face of strong price competition or a weakened economy. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume. A successful price increase can greatly improve profits. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand, however, when raising prices, the company must avoid being perceived as a price gouger. 27 Reactions to Price Changes Buyer’s perspective Competitor’s perspective • Price increase: • Product is more exclusive or better made. • Company is being greedy.‫جشعه‬ • Price cut: • Brand wants to get a better deal on an exclusive product. • Product’s quality has been reduced. • Company’s image has tarnished.‫شوهت‬ • Price cut: • Company is trying to grab a larger market share.‫الحصول‬ • Company is doing poorly and trying to boost its sales.‫زيادة‬ • Company wants the whole industry to cut prices to increase total demand. Copyright © 2017 Pearson Education, Ltd. 9 - 28 Customers do not always interpret price changes in a straightforward way. A price increase, which would normally lower sales, may have some positive meanings for buyers. For example, what would you think if Rolex raised the price of its latest watch model? On the one hand, you might think that the watch is even more exclusive or better made. On the other hand, you might think that Rolex is simply being greedy by charging what the traffic will bear. Similarly, consumers may view a price cut in several ways. For example, what would you think if Rolex were to suddenly cut its prices? You might think that you are getting a better deal on an exclusive product. More likely, however, you’d think that quality had been reduced, and the brand’s luxury image might be tarnished. A firm considering a price change must worry about the reactions of its competitors as well as those of its customers. The competitor can interpret a company price cut in many ways. It might think the company is trying to grab a larger market share or that it’s doing poorly and trying to boost its sales. Or it might think that the company wants the whole industry to cut prices to increase total demand. 28 Figure 9.5 - Responding to Competitor Price Changes Copyright © 2017 Pearson Education, Ltd. 9 - 29 This figure shows the ways a company might assess and respond to a competitor’s price cut. If a company learns that a competitor’s price cut that is likely to harm company sales and profits, it might make any of the following four responses: • Reduce its price to match the competitor’s price. • Maintain its price but raise the perceived value of its offer. • Improve quality and increase price, moving its brand into a higher price– value position. • Launch a low-price fighter brand—adding a lower-price item to the line or creating a separate lower-price brand. 29