Pricing Strategy Lesson 1 PDF

Pricing Strategy Hello! Mr. Rayan C. Soriano, MC Faculty Member Department of Marketing Management, Open University System  Pricing Strategy Pricing Strategy Pricing Strategy Pricing Strategy Pricing LESSON LESSON LESSON LESSON Strategy...

Pricing Strategy Hello! Mr. Rayan C. Soriano, MC Faculty Member Department of Marketing Management, Open University System  Pricing Strategy Pricing Strategy Pricing Strategy Pricing Strategy Pricing LESSON LESSON LESSON LESSON Strategy 1 2 3 4 START START START START  Today’s Lesson: Pri The Role of “Optimizing” in cin gS Strategic Pricing LE tra SS teg y ON What is Strategic Pricing? 1 Pricing Structure Pricing Policy ST AR T  By the end of the lesson... Pri Students will be able to review the cin LE gS tra definition of strategic pricing and SS teg y emphasize the importance of ON 1 strategic pricing, and role of value in pricing. ST AR T  The Role of “Optimizing” in Strategic Pricing  The Role of “Optimizing” in Strategic Pricing "Optimizing" in the context of Strategic Pricing refers to the process of finding the most effective pricing strategy and tactics to maximize a company's profits, market share, or other business objectives. Strategic Pricing is a critical component of a company's overall business strategy, and it involves setting prices for products or services in a way that aligns with the company's goals and the competitive landscape. Optimizing plays a crucial role in Strategic Pricing by helping companies find the right pricing strategy to achieve their business objectives. It involves a combination of data analysis, market research, and ongoing adaptation to ensure that prices are set in a way that maximizes profitability and competitiveness Strategic Pricing  What is Strategic Pricing? Strategic pricing is a pricing strategy and management approach that involves setting prices for products or services in a way that aligns with a company's overall business objectives and long-term goals. It goes beyond simply determining a price based on cost or market demand; instead, it considers various factors and employs a deliberate, forward- looking approach to pricing. Strategic pricing is a dynamic and ongoing process that requires careful analysis, data-driven decision-making, and a deep understanding of the market and customer behavior. When executed effectively, it can contribute significantly to a company's profitability and competitive advantage. Pricing Strategies  Pricing Strategies Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be. There are different pricing strategies to choose from but some of the more common ones include: 1. Value-based pricing 2. Competitive pricing 3. Price skimming 4. Cost-plus pricing 5. Penetration pricing 6. Economy pricing 7. Dynamic pricing How to establish a winning pricing strategy? 1. Finding your value metric 2. Setting your ideal customer profiles and segments 3. Completing user research + experimentation  Cost-Based Pricing Cost-based pricing is the practice of setting prices based on the cost of the goods or services being sold. A profit percentage or fixed profit figure is added to the cost of an item, which results in the price at which it will be sold. Cost -Plus Pricing MARKUP COST + % = PRICE  Demand and Price Elasticity Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price. Economists employ it to understand how supply and demand change when a product’s price changes. If a price change for a product causes a substantial change in either its supply or its demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee. If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.  What is the importance of price elasticity of demand? Knowing the price elasticity of demand of a good allows someone selling that good to make informed decisions about pricing strategies. This metric provides sellers with information about consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing plans, as well as for governments to assess how to impose taxes on goods.  Pricing Practices 1. Laws - The legislative branch of the government enacted various laws that concerns on consumers’ welfare and pricing such of which are: Republic Act No. 7581 - The Price Act Republic Act No. 7394 - The Consumer Act of the Philippines Republic Act No. 10667 - The Philippine Competition Act (PCA) 2. Regulations - These are more detailed guidelines established by government agencies such as the Department of Trade and Industry and the Food and Drug Administration, which are tasked with enforcing laws. Suggested retail prices (SRPs) for essential necessities and core commodities such as canned and other food goods, bottled water, dairy, and common household or kitchen supplies are updated by the DTI.  Pricing Practices 3. Ethics - These are rules and principles that governfairness and whether something is regarded right or wrong. People will be outraged and will avoid purchasing the item in issue, as well as other things, as a result of this. This is said to be included when pricing methods have negative consequences that are less important to society's functioning or that are difficult to regulate legally. Any firm must make a crucial decision when it comes to pricing a product responsibly. Businesses that employ ethical pricing tactics to sell their products and profit are significantly more appreciated than those that harm and deceive competitors or even customers. Companies must be able to recognize ethical difficulties that obstruct fair pricing in order to practice ethical pricing. Pricing Strategies  New Product and Service Pricing Penetration and skimming are two strategies which play a crucial role in deciding the price of a new product. When a new product is launched in the market, first and foremost it needs to meet and exceed the expectations of customers and then compete with other brands available in the market.  1. Penetration 2. Skimming Penetration refers to keeping the Organizations which depend on price of a new product relatively low skimming strategy for pricing a new such that it covers just the product often keep it at high prices manufacturing costs while earning and target only those who are minimum profits for the organization. actually interested in buying the new Keeping the price of a new product product. Price-Skimming vs. relatively low in the initial stages Pricing as per skimming strategy Peneteration-Pricing helps it penetrate the market easily ensures respective organizations and also get accepted among target earn huge profits. audience. Organizations, in this case keeps a Keeping the price a little low not only relatively high price for their products reduces the competition from other as they believe there is no harm in brands but also increases the sales charging more from the end-users in and makes the product popular in the exchange of a premium product. market. No one would even bother to look at Organizations dealing in premium your product if it is priced too high at products often depend on skimming the introductory stage, unless and technique to price their product. until it has some exclusive features.  3. Premium Pricing 4. Retail Price High price is used as a defining Many retailers benchmark their criterion. Such pricing strategies work pricing decisions using keystone in segments and industries where a pricing which essentially is doubling strong competitive advantage exists the cost of a product to set a healthy for the company. Ex. Porsche cars profit margin. and Louis Vuitton bag. 5. Psychological Pricing 6. Competitive Pricing Studies have shown that when As the name of this pricing strategy merchants spend money, they're suggests, competitive pricing strategy experiencing pain or loss. Traditionally, refers to using competitors’ pricing merchants have accomplished this with data as a benchmark and consciously prices ending in an odd number, like 5, pricing your products below theirs. 7, or 9. For example, a retailer would This tactic is usually driven by the price a product at 99pesos instead of product value. For example, in 100 pesos. From a customers’ industries with highly similar products perspective, it looks the retailer has where price is the only differentiator slashed every cent possible off the price and you rely on price to win and makes the item seem like a better customers. price.  7. Anchor Pricing Anchor pricing is another product pricing strategy retailers have used to create a favorable comparison. Essentially, a retailer lists both a discounted price and the original price to establish the savings a consumer could gain from making the purchase. 8. Cost-plus Pricing A simple markup - Cost-plus pricing, also known as mark-up pricing strategy, is the easiest way to price a product or service. You make the product, add a fixed percentage on top of the costs, and sell it for the final price.  Pricing Structures  Pricing Structures A pricing structure refers to the framework or model a business uses to determine the prices of its products or services. It is a fundamental component of a company's pricing strategy and plays a crucial role in achieving its financial goals, competitiveness, and customer satisfaction. Here are some common types of pricing structures:  Cost-plus Pricing Value-based Pricing In cost-plus pricing, a business Value-based pricing sets prices calculates the cost of producing based on the perceived value or delivering a product or that a product or service service and then adds a delivers to customers. It focuses markup or profit margin to on what customers are willing to Pricing determine the selling price. pay rather than costs. Structures  Competitive Pricing Dynamic Pricing Competitive pricing involves Dynamic pricing adjusts prices in setting prices in line with or real-time based on various factors slightly below the prices of such as demand, time of day, competitors in the market. It is location, and customer behavior. It often used to gain market share is common in industires like e- or compete on price. commerce, hospitality, and Pricing transportation Structures  Skimming Pricing Penetration Pricing Skimming pricing involves initially Penetration pricing sets initial prices setting high prices for new or lower than the market average to innovative products and gradually gain a larger customer base lowering them as market demand quickly. Prices may be raised later grows or competition increases. once market share is established. Pricing Structures  Bundle Pricing Subscription Pricing Bundle pricing combines multiple Subscription pricing charges products or service into a single customers a recurring fee at package and offers them at a regular intervals for acces to discounted price compared to products or services. Common in purchasing each item separately. software, streaming, and content services. Pricing Structures  Pricing Structures A business may use a combination of these pricing structures for different products or services or adapt its pricing approach over time based on changing market conditions and business objectives. The choice of pricing structure should align with the company's overall pricing strategy and be consistent with its value proposition and target market.  Pricing structure vs. Pricing Strategy: What’s the difference? “Pricing structure” and “Pricing Strategy” are related but distinct concepts in the field of pricing management. They play different roles in how a company determines and implements its pricing decisions. Pricing Structure Pricing Strategy A pricing structure refers to the A pricing strategy is a broader, framework or model a business uses high-level plan or approach that to determine the prices of its guides a company’s overall products or services. It is the decisions and goals. It involves systematic arrangement or layout og making strategic choices about how prices are calculated, typically how a company positions itself in based on certain rules or formulas. the market through pricing.  Example of Pricing Structures Pricing Structures  Examples of Pricing Strategies Pricing Structures  Example of Pricing Structures Example of pricing structure can be seen in the context of a software as a service (SaaS) company offering cloud-based productivity software for businesses. In this example, the pricing structure consists of multiple pricing tiers, each tailored to Pricing different customer need and budgets. Structures Pricing Policy  Pricing Policy A pricing policy is a set of guidelines, principles, and rules that a business establishes to govern how it sets and adjusts prices for its products or services. Pricing policies help companies make consistent and informed decisions regarding pricing strategies, discounts, promotions, and other aspects of their pricing practices. Pricing policies provide a framework for making pricing decisions that are in line with a company’s strategies objectives and market conditions. They serve as a guide for pricing managers and help maintain consistency in practices, which is essential; for building trust with customers and achieving long-term success in the market.  Cost-based pricing policy A cost-based pricing policy calculates the average cost of production for a good or service and then accounts for the profit margin your company desires. Example: A furniture manufacturer calculates the cost of materials, labor, and overhead and adds a 30% profit margin to set the selling price of a sofa. Types of Pricing Policies  Value-based pricing policy Pricing products based on the perceived value they offer to customers, rather than solely on costs. Example: A luxury car manufacturer prices its vehicles higher than competitors due to their superior craftsmanship, features, and brand prestige. Types of Pricing Policies  Demand-based pricing policy Consumer demand has different properties depending on the product. Demand-based pricing policies maximize profit by responding to the various consumer behaviors found in markets. Example: A ride-sharing service uses demand-based pricing to adjust fares based on factors such as location, time of day, traffic conditions, and the availability of drivers. The goal is to balance supply and demand, incentivize drivers to be available during peak Types of times, and provide affordable rides during off-peak hours. Pricing Policies  Competition-based pricing policy With a competition-based pricing policy, a company sets its prices by determining what other companies competing in the market charge. A company begins developing competition-based prices by identifying its present competitors. Example: A retail grocery store adjusts its prices to match or beat the prices offered by other stores in the local market. Types of Pricing Policies Pricing Setting  Pricing Setting Price setting refers to the process of determining the specific prices at which products or services will be sold to customers. There are several methods and approaches to setting prices, depending on factors such as cost structure, market conditions, and business objectives.  Cost-based pricing Determine the price by calculating the total cost of producing or delivering a product or service and adding a predetermined profit margin. Example: A bakery calculates the cost of ingredients, labor, and overhead for a cake and adds a 40% markup to cover expenses and generate profit, Types of resulting in a selling price of ______. Price Setting  Value-based pricing Set prices based on the perceived value of a product or service to the customer. Reflect what customers are willing to pay based on benefits and features. Example: A software company prices its business productivity software higher than its basic version because It offers advanced featured and greater Types of efficiency, which are highly valued by corporate customers. Price Setting  Demand-based pricing Adjust prices in real-time based on factors like demand, time of day, inventory levels, or customers behavior. Example: An airline adjusts ticket prices for specific fights based on factors such as seat availability, time of booking, and route popularity. Types of Price Setting  Competition-based pricing Determine prices by benchmarking against competitors’ prices in the market. Prices may be set at or below the prevailing market rates. Example: A new smartphone manufacturer prices its latest model slightly lower than the establishment competitors with similar specifications to gain market share. Types of Price Setting  Pricing Competition  Pricing Competition Pricing competition refers to the rivalry among businesses in a particular market to gain a competitive advantage by offering attractive prices to customers. This competition can take various forms and strategies, all aimed at gaining market share, increasing sales, and maximizing profitability.  The Role of Value in Pricing  The Role of Value in Pricing The role of value in pricing strategy is central and fundamental. Pricing strategy is not solely about setting a number; it's about understanding and leveraging the perceived value of a product or service to maximize revenue and profitability.  Determining the Differentiation: Optimal Price: Pricing strategy starts with the Value plays a critical role in evaluation of what customers are differentiation strategies. When willing to pay for a product or businesses can demonstrate that service. The perceived value their offering provides superior represents the upper limit of what value compared to competitors, they can justify higher prices. The Role of customers are willing to spend. Value in Pricing  Value-Based Pricing: Market Positioning: This strategy directly ties the price Value also plays a role in how a to the perceived value that business positions itself in the customers derive from a product or market. A company can choose to service. Value-based pricing seeks position itself as a provider of to capture the maximum amount of premium, high-value offerings or as value customers are willing to pay, a budget-friendly, cost-effective rather than relying solely on cost- option. This positioning directly The Role of plus or market-based pricing impacts pricing decisions and methods. customer expectations. Value in Pricing  The Role of Value in Pricing Value is at the core of pricing strategy. Successful businesses are those that can accurately assess and leverage the perceived value of their offerings to set prices that are both competitive and profitable. Value-based pricing, tailored to customer segments, supported by effective marketing, and aligned with competitive positioning, is a key component of strategic pricing decisions. Value-Based Market Segmentation  Segmentation Segmentation (also referred to as market segmentation) is the division of consumer markets into a meaningful and distinct customer group Market segmentation allows businesses to look at consumers as several different groups, instead of one mass market. Correctly segmenting consumers allows companies to target their marketing dollars effectively. The value of market segmentation can be measured through increased market share for a given segment, for example, an increase in sales for women ages 24–35.  Value-Based Market Segmentation Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. It also helps companies determine which segments are the most and least profitable so they can adjust their marketing budgets accordingly. Value-based market segmentation allows businesses to better understand and cater to the diverse value expectations of their customers. By tailoring their strategies to address the specific value drivers of each segment, businesses can enhance customer satisfaction, improve marketing efficiency, and ultimately drive revenue growth.  Value-Based Market Segmentation Market segmentation is one of the most important tasks in marketing. Particular attention should be paid to value-based market segmentation. Identifying subgroups in a market guides marketing and sales decision-making and thereby makes the marketing and pricing process much more effective. For example: customers who are price insensitive, costly to serve, and poorly served by competitors can be charged more than customers who are price sensitive, less costly to serve, and are served well by competitors. Often, however, market segmentation focuses on customer attributes that are not really useful for pricing decisions. Value-based market segmentation helps to identify meaningful subgroups, which supports decision-making. How to conduct value-based segmentation?  Assignment #1 1. What is the importance of pricing? Explain. 2. How do companies in the Philippines determine their pricing strategy for their product and services? 3. How do pricing policies in the Philippines impact businesses, especially small and medium-based enterprises? 4. Give your own understanding of Value-Based Market Segmentation, and why this is very important in Marketing?