MCV - Pricing PDF

Module 6 Price Introduction Price is a measure of value for buyers and sellers - Buyers need prices that reflect product’s worth - Sellers need prices that reflect cost of production and provide profit margin to justify risk Price is directly related to profitability Profit = (Price x Sales Volume)...

Module 6 Price Introduction Price is a measure of value for buyers and sellers - Buyers need prices that reflect product’s worth - Sellers need prices that reflect cost of production and provide profit margin to justify risk Price is directly related to profitability Profit = (Price x Sales Volume) - Total Costs If buyer and sellers dont agree on value expressed in the price, probably wont transact Price is visible expression of value Intricacies of Pricing Price shoppers/Price seekers will always be key market segment in all market Web has made price comparison shopping easier and efficient Price Aversion; Seeking lower prices for greater value Determining Price Objectives Pricing objectives tend to focus on issues including; - Profitability - Long Term Prosperity - Market Share - Positioning - What customer is prepared to pay Pricing objectives should be specific, measureable, actionable, reasonable and timetabled. Not for Profit Pricing NFP dont seek profits but seek return on activities. Many charge for their products Their pricing objectives may be dot generate enough funds to sustain their activities A NFP org may price products to make them more appealing to target market State governments may often subsidies loss making services as part of their service obligations The Legal Environment All orgs are subject to laws and regulations when establishing prices Number of gov regulations prevent activities aimed at controlling or manipulating prices Under Australian Consumer Law, there is clear intention and expectation that pricing to consumers should be explicit and transparent. Consumers should not be subject to deception or discrimination Consumers should clear know total price before purchasing. Selecting the Pricing Method Pricing based on an understanding of the customer Customer value of a product places a Price Ceiling on Prices Organisations costs places a Price Floor on Prices Pricing must be set so that the product remains competitive in the marketplace Fixing the price Pricing can be based upon 1) Demand Based Pricing: Prices are set according to the level of aggregate or individual consumer demand in the market. - Demand exists when consumers are willing and able to buy a product and when the product can fulfil a unsatisfied want/need. - Understanding the nature and extent of consumer demand is central to formulating a pricing strategy - Surge Pricing: is based on the immediate/current market demand - Demand schedule/curve: Graphing of quantity demanded at particular price -> It’s inversely related, negative slope - Prestige/luxury goods are an exception to negative slope - Price Elasticity of Demand: How quantity changes in response to a change in price. - PEoD varies form product to product and type of industry - Demand is said to be price elasticity or price sensitive if PEoD is greater than 1 - Demand is said to be inelastic or price insensitive if PEoD is less than 1 - Ethical Issues of Demand Based Pricing: High profits but unethical is cost is severely above intrinsic value. 2) Cost Based Pricing: Where the selling organisation adds a percentage or dollar amount to the cost of a product - Used when difficult or impossible to determine the costs of the product until it has been made - Markup Pricing: Used by wholesalers and retailers and involves adding a percentage of their purchase cost to determine the resale price. - Costs and Revenue Analysis: Price floor ca be introduced by the government. - If product is priced near the cost it’s known as a price leader - If the product is priced below cost, it’s known as a loss leader - Net Profit = Total Revenue - Total Costs - Break Even Analysis: Determines volume of units sold at which total costs equals total revenue. Where a loss is no longer made - Estimating break even is crucial for starting pricing, especially for new products - BEA can be conducted form a specific time period, project, or the life of the product - Price x Quantity - Total Fixed Cost + Total Variable Costs - BEP = (Fixed Cost) / Unit Price - Unit Variable Cost - FC / P - UVC - Marginal Analysis: Understanding the effect on costs and revenue when a company produces and sells one more unit of a product. - Useful for pricing individual units of output or for individual buyers. - Profit is maximised by selling the quantity at which marginal cost equals marginal revenue - Marginal analysis requires detailed data on actual and estimated costs and revenues at all volumes and prices - Difficult to implement precisely. - Example; · Solution Fixed Costs = = Unit price = + 200 $1808 1680 $15 800 $1588 LOSS 400 255075100175150175 100 product Total cost of 100 · 1200 Even = profit S $5 Variable cost- Break 500 + 300 Total Revenue product $1000 = + 100 (5) $1500 = Total CStS 3) Competition Pricing: Involves setting prices based on the prices charged by competitors - Ensures an organisation maintains it’s sales volumes and market share but it doesn’t guarantee profitability - Price Competition is a difficult strategy to sustain over the long term unless an organisation enjoys clear market or cost advs. - Understanding Competitor Pricing: In price sensitive industries, organisations monitor their competitor’s prices daily or more frequently. - Likely response of competitors to an organisation’s pricing change will be determined by the competitive structure of the industry; Monopoly, monopsony, oligopoly, monopolistic competition, pure competition. - Alternatives to Competing on Price: Focus on product attributes, uniqueness, quality, brand, image or service. - When feasible, non price competition is preferable as it gives the organisation greater power to decide on the profit margin per unit sold. - Non-Price Competition should form the bases of the competitive strategy. - Business to Business Pricing: B2B marketing relationships between suppliers and organisational buyers tends to be close, long term and formal in nature. - More formal pricing strategies - Pricing is more complex - Business purchases are more likely to consider lifetime costs involved with the purchase - Pricing for intermediaries: Organisations will only choose to deal with intermediaries who can add value to their offering. - Producers provide recommended pricing but intermediaries need to consider if this will enable profits - To ensure profitable operation of various partners involved in getting products from the producer to organisational buyer or consumer, various discounts apply to transactions in business markets. Price Management The Psychology of Pricing Consumer purchasing behaviour is based on rational evaluation of value Importance of price varies between individuals Important indicator of price for a consumer is the perceived uniqueness or differentiation of the product Pricing Throughout the Product Lifestyle Pricing New Products Penetration Pricing uses low launch price below market price to: - Gain maximum sales volume - Gain rapid market share - Gain turnover of a new product Price Skimming: involves charging highest price that customers who most desire the product are WTP Over time, price is lowered to bring in more buyers, maintaining the highest price that those consumers are WTP. Pricing Established Products Differential Pricing: charging different buyers different prices for the same product Special- Event Pricing: Links discounted prices across an organisation’s entire product range with special/seasonal event to increase total sales volumes. This pricing strategy must be combined with promotional AKA Promotional Pricing. Settling and Managing Final Price Once implemented, price must be monitored as external factors can evolve over time Pricing is most flexible element of marketing mix Pricing is most dynamic and volatile element of the marketing mix] Internet makes prices more visible, flexible and competitive.