Chapter 8-Price PDF

Chapter 8. Pricing strategies 8.1.1 Definition Price is the amount of money charged for a 8.1 Price and role of pricing...

Chapter 8. Pricing strategies 8.1.1 Definition Price is the amount of money charged for a 8.1 Price and role of pricing product or service. 8.1.1 Definition The sum of all the values that consumers give 8.1.2 Role of pricing strategies up in order to gain the benefits of having or 8.2 Factors to consider when setting prices using a product or service. Internal factors External factors 8.3 Pricing strategies 8.3.1 New product pricing strategies 8.3.2 Product mix pricing strategies 8.3.3 Price-adjustment strategies 8.4 Process of setting optimal prices 8.1.2 Role of pricing strategies 8.1.2 Role of pricing strategies The Seller’s Perspective on Pricing – Four key issues: A Shift in the Balance of Power Costs – A buyer’s market occurs when: Demand Large number of sellers in the market Customer value Many substitutes for the product Competitors’ prices Economy is weak The Buyer’s Perspective on Pricing – A seller’s market occurs when: – Two key issues: Products are in short supply Perceived value Products are in high demand Price sensitivity Economy is strong 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Customer Perception of Value Effective customer-oriented pricing involves Internal factors External factors understanding how much value consumers Costs Customer perceptions of value place on the benefits they receive from the Marketing Objectives Pricing Nature of the market & Marketing mix strategies Decisions demand product and setting a price that captures that Organizational considerations Competition Other environmental factors value. (economy, resellers, government) 1  8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Customer Perception of Customer Perception of Value Value Value-based pricing Value-based pricing uses the – Good-value pricing buyers’ perception of value, not the – Value-added pricing seller’s cost, as the key to pricing. – Value-based pricing vs. – Cost-based pricing 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Company and Product Costs Company and Product Costs Cost-based pricing involves setting Types of costs prices based on the costs for producing, – Fixed costs distributing, and selling the product plus – Variable costs a fair rate of return for its effort and risk. – Total costs 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Company and Product Costs Company and Product Costs Fixed costs are the costs that do not vary with Variable costs are the costs that vary with the production or sales level. level of production. – Rent – Packaging – Utilities – Raw materials – Interest – Executive salaries 2  8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Company and Product Costs Company and Product Costs Total costs are the sum of the fixed and Experience or learning curve is when the variable costs for any given level of production. average cost falls as production increases Average cost (or cost per unit) is the cost because fixed costs are spread over more units. associated with a given level of output. 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Company and Product Costs Break-Even Analysis and Target Profit Cost-based pricing adds a standard Pricing markup to the cost of the product. Break-even pricing is the price at which total costs are equal to total revenue and Unit Cost Markup Price  there is no profit. (1 - Desired Return on Sales) Target profit pricing is the price at which the firm will break even or make the profit it is seeking. 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Break-Even Analysis and Target Profit Other Internal and External Pricing Considerations Affecting Price Fixed cost Decisions Break - even volume  (Price - Variable cost) Customer perceptions of value set the upper limit for prices, and costs set the lower limit. Companies must consider internal and external factors when setting prices. 3  8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Overall Marketing Strategy, Objectives Other Internal and External and Mix Considerations Affecting Price Marketing objectives include: Decisions – Survival – Profit maximization Internal factors – Market share leadership – Marketing objectives, strategy, and – Customer retention and relationship building marketing mix – Attracting new customers – Organizational considerations – Opposing competitive threats – Increasing customer excitement 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Overall Marketing Strategy, Objectives Organizational Considerations and Mix Organizational considerations include Marketing mix strategies: – Who in the organization should set prices? – Price is the only one of the marketing mix tools used to achieve its marketing objectives – Who can influence prices? – Price decision must be coordinated with – Size of the company product design, distribution, & promotion 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Other Internal and External The Market and Demand Considerations Affecting Price Types of markets Decisions – Pure competition External factors – Monopolistic competition – The market and demand – Oligopolistic competition Types of markets – Pure monopoly Analyzing the price-demand relationship – Competitors’ strategies and prices – Other environmental factors 4  8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices The Market and Demand The Market and Demand  Under monopolistic competition (or Under pure competition imperfect competition) – Market consists of many buyers & – Market consists of many buyers & sellers trading in a uniform sellers who trade over a range of price commodity rather than a single market price – No single buyer or seller has much – A range of price occurs because sellers effect on the going market price can differentiate their offers to buyers – Price in this case is market price – Each firm is less affected by competitors’ pricing strategies 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices The Market and Demand The Market and Demand  Under oligopolistic competition Under pure monopoly – The market consists of a few sellers – The market consists of one seller. who are highly sensitive to each – The seller may be a government other’s pricing & marketing strategies monopoly, a private regulated – The product can be uniform or monopoly, or a private nonregulated nonuniform monopoly – Each seller is alert to competitors’ strategies & moves Pricing is handled differently in each case. 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Analyzing the Price-Demand Analyzing the Price-Demand Relationship Relationship Before setting prices, the marketer must The demand curve shows the number of understand the relationship between price and demand for its products. units the market will buy in a given period at different prices. – Normally: Higher price = lower demand 5  8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Price Elasticity of Demand 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. 8.2 Factors to Consider When 8.2 Factors to Consider When Setting Prices Setting Prices Price Elasticity of Demand Competitors’ Strategies and Prices Factors affecting price elasticity of demand Factors to consider: –… – Comparison of offering in terms of customer – …. value – …. – Strength of competitors – Competition pricing strategies – Customer price sensitivity 8.2 Factors to Consider When Setting Prices 8.3 Pricing strategies Other External Factors Affecting 8.3.1 New product pricing strategies Price Decisions 8.3.2 Product mix pricing strategies 8.3.3 Price-adjustment strategies Other external factors – Economic conditions – Resellers’ response to price – Government – Social concerns 6  8.3.1 New-Product Pricing Strategies 8.3.1 New-Product Pricing Strategies Market skimming pricing Market skimming pricing is a strategy Market penetration pricing with high initial prices to “skim” revenue layers from the market. – Product quality and image must support the price. – Buyers must want the product at the price. 8.3.1 New-Product Pricing Strategies 8.3.2 Product mix pricing strategies Market penetration pricing sets Product line pricing a low initial price in order to Optional product pricing penetrate the market quickly and Captive product pricing deeply to attract a large number of buyers quickly to gain market By-product pricing share. Product bundle pricing – Price sensitive market 8.3.2 Product mix pricing strategies 8.3.2 Product mix pricing strategies Product line pricing takes into account Optional product pricing takes into the cost difference between products in account optional or accessory products the line, customer evaluation of their along with the main product. features, and competitors’ prices. 7  8.3.2 Product mix pricing strategies 8.3.2 Product mix pricing strategies Captive product pricing involves products that By-product pricing refers to products with little must be used along with the main product. or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery. Two-part pricing is where the price is broken into – Fixed fee – Variable usage fee 8.3.2 Product mix pricing strategies 8.3.3 Price-adjustment strategies Product bundle pricing combines Discount and allowance pricing several products at a reduced price. Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing 8.3.3 Price-adjustment strategies 8.3.3 Price-adjustment strategies Discount and allowance pricing reduces Segmented pricing is used when a company prices to reward customer responses… sells a product at two or more prices even – Discounts though the difference is not based on cost. Cash discount – Customer segment pricing Quantity discount – Product form segment pricing Functional (trade) discount – Location pricing – Allowances – Time pricing Trade-in allowance Promotional allowance 8  8.3.3 Price-adjustment strategies 8.3.3 Price-adjustment strategies Conditions for effective segmented pricing: Psychological pricing occurs when sellers – Market must be segmentable consider the psychology of prices and not simply – Segments must show different degrees of the economics. demand Reference prices are prices that buyers carry in – Watching the market cannot exceed the extra their minds and refer to when looking at a given revenue obtained from the price difference product. – Noting current prices – Must be legal – Remembering past prices 9 9 9. – Assessing the buying situations $2 8.3.3 Price-adjustment strategies 8.3.3 Price-adjustment strategies Promotional pricing is when prices are Geographical pricing is used for temporarily priced below list price or cost to customers in different parts of the country increase demand. or the world. – Loss leaders – FOB pricing – Special event pricing – Cash rebates – Uniformed delivery pricing – Low interest financing – Zone pricing – Longer warrantees – Basing point pricing – Free maintenance – Freight absorption pricing 8.3.3 Price-adjustment strategies 8.3.3 Price-adjustment strategies Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations. 9  8.3.3 Price-adjustment strategies 8.4 Process of setting optimal prices 1. Setting objectives of pricing strategies International pricing is when prices are set in a specific country based on country- 2. Analyzing market demand specific factors. 3. Analyzing costs – Economic conditions 4. Analyzing competitors (e.g., using going- – Competitive conditions rate prices) – Laws and regulations – Infrastructure 5. Selecting pricing strategies – Company marketing objectives 6. Decide price levels and price quotations 10