3. Price
The amount of money charged for a
product or service, or the sum of the
values that consumers exchange for the
benefits
of having or using the
product or service.
4. •Price and the Marketing Mix:
Only element to produce revenues
Most flexible element
•Price Competition
•Common Pricing Mistakes
6. Factors to Consider When Setting
Internal Factors
Price
1. Marketing objectives
•Market positioning influences strategy
•Other pricing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
•Not-for-profit objectives:
Partial or full cost recovery
Social pricing
7. Factors to Consider When Setting
Price
Internal Factors
2. Marketing mix strategies
•Pricing must be carefully coordinated with
the other marketing mix elements
•Target costing is often used to support
product positioning strategies based on
price
•Nonprice positioning can also be used
8. Factors to Consider When Setting
Price
Internal Factors
3. Costs
•Types of costs:
Variable
Fixed
Total costs
9. Factors to Consider When Setting
Price
Internal Factors
4. Organizational considerations
•Who sets the price?
Small companies: CEO or top
management
Large companies: Divisional or product
line managers
•Price negotiation is common in industrial
settings
•Some industries have pricing departments
10. Factors to Consider When Setting
Price
External Factors
1. Nature of market and demand
•Types of markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
•Consumer perceptions of price and value
•Price-demand relationship
Demand curve
Price elasticity of demand
11. Factors to Consider When Setting
rice
External Factors
2. Competitors’ costs, prices, and offers
•Consider competitors’ costs, prices, and
possible reactions when developing a pricing
strategy
•Benchmarking costs against the competition
is recommended
12. Factors to Consider When Setting
Price
External Factors
3. Other environmental elements
•Economic conditions
Affect production costs
Affect buyer perceptions of price and value
•Reseller reactions to prices must be considered
•Government may limit or restrict pricing options
•Social considerations may be taken into account
18. The Cost-Based Approach:
Cost-Plus Pricing
Adding standard mark-up to costs
Process:
Estimating the per unit cost of
production
Capital(K): land, building, equipment = FC
Labor(L): worker’s wages = VC
Adding a mark-up
Desired profit per item
Sales price = COP + mark-up
19. The Cost-Based Approach:
Cost-Plus Pricing
Customers are price sensitive
Popular pricing technique because:
It simplifies the pricing process.
Buyers are more certain to costs.
Price competition may be minimized.
It is perceived as more fair to both buyers and
sellers.
20. How costs affect gasoline prices
Distribution &
$0.278 10%
Marketing
Refining Costs
$0.1946 7%
& Profits
Federal &
$0.3892 14%
2010 State Taxes
Average
Retail Price:
$2.78
$1.8904 68% Crude Oil
21. The Cost-Based Approach:
Cost-Plus Pricing
Does using standard mark-ups to set
prices make sense?
23. Cost-Based Approach: Break-even
Analysis and Target Profit Pricing
Firm tries to determine the price at
which it will break even or make the
target profit it is seeking.
Companies wishing to make profit must
exceed the break-even unit volume.
24. The Cost-Based Approach
What is ignored:
Brand / Image / Market Position
Price-Demand Relationship
Customer-perceived Value
Problems:
Sub-optimal profits
Difficult to allocate cost
26. Buyer-Based Approach:
Value-Based Pricing
Basing prices on product’s perceived
value
Buyer’s perceptions of value is the key to
pricing.
Price is considered along with the other
marketing mix variables before the
marketing program is set.
27.
28. General Pricing Approaches
Value-based
Cost-based Pricing
Pricing
Easiest pricing method Requires research
Sub-optimal profits Optimal profits
Considered fair Can be considered
Difficult to allocate fixed unfair
costs Complicated to
administer
29. Buyer-Based Approach:
Value-Based Pricing
Measuring perceived value:
Asking customers
Conducting experiments
Situations:
Overpriced = products sell poorly
Underpriced = sell very well, less revenue
* Consumer’s attitudes toward price and quality have
shifted during the last decade.
31. Buyer-Based Approach:
Value-Based Pricing
Jack Welch,
Former CEO of GE
“The value decade is
upon us. If you can’t
sell a top quality
product at the world’s
best price, you’re
going to be out of the
game…. The best
way to hold your
customers is to
constantly figure out
how to give them
more or less.”
32. Buyer-Based Approach:
Value-Based Pricing
Value-pricing strategies – offering just
the right combination of quality and
good service at a fair price
Value pricing has involved redesigning
existing brands in order to offer more
quality for the given price or the same
quality for less.
34. Buyer-Based Approach:
Value-Based Pricing
In business-to-business marketing
situations, the pricing challenge is to find
ways to maintain the company’s pricing
power.
Many companies adopt value-added
strategies.
35. Buyer-Based Approach:
Value-Based Pricing
Value Pricing at the Retail Level
Everyday Low Pricing (EDLP)
Charging a constant, everyday low price
with few or no temporary price discounts
High-Low Pricing
Charging higher prices on an everyday
basis but running frequent promotions to
lower prices temporarily on selected
items below EDLP level
36. Buyer-Based Approach:
Value-Based Pricing
Why adopt Everyday Low Pricing?
Constant sales and promotions are costly
and have eroded consumer confidence in
the credibility of everyday shelf prices.
Consumers have less time and patience
for such time-honored traditions as
watching for supermarket specials and
clipping options.
37. Buyer-Based Approach:
Value-Based Pricing
To EDLP, to Hi-Lo or not to?
What type of market are you in?
Are your customers price sensitive?
Do you have a cost advantage?
Who are your customers? Are your price
sensitive customers willing to invest in
searching for the lowest price (i.e., read
weekly circulars)?
42. Competition-Based Approach:
Going-rate Pricing
A firm bases its price largely on
competitor’s prices, with less attention
paid to its own costs or to demand.
May price at the same level, above, or
below competition.
44. Competition-Based Approach:
Going-rate Pricing
Why is it quite popular?
Represents the collective wisdom of the
industry concerning the price that will
yield a fair return.
Holding on to the going price will prevent
harmful price wars.
46. Competition-Based Approach:
Sealed-bid Pricing
A firm bases its price on how it thinks
competitors will price rather that on its
own costs or on the demand.
Firms bid for jobs.
The firm wants to win the contract.
49. Market Skimming Pricing
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.
50. Conditions that favor Market
Skimming Pricing
•The product’s quality and image must support its
higher price, and image must support its higher
price, and enough buyers must want the product at
the price.
•The cost of producing a smaller volume cannot be
so high that they cancel the advantage of charging
more.
•Competitors should not be able to enter the market
easily and undercut the high price.
51. Market Penetration Pricing
Setting a low
price for a new
product in order
to attract a large
number of
buyers and a
large market
share.
52. Conditions that favor Market
Penetration Pricing
• The market must be price sensitive so that a low
price produces more market growth.
• Production and distribution cost must fall as sales
volume increases.
• The low price must help keep out the competition,
and the penetration pricer must maintain its low-price
position.
54. Product Mix
Pricing Strategies
Product Line Pricing
Setting price steps between product
line items.
Price points
55. Product Mix
Pricing Strategies
Optional-Product Pricing
Pricing optional or
accessory products sold
with the main product
56. Product Mix
Pricing Strategies
Captive-Product Pricing
Pricing products that must be
used with the main product
High margins are often
set for supplies
Services: two-part pricing
strategy
Fixed fee plus a
variable usage rate
62. Price Adjustment Strategies
Strategies Types of segmented pricing
strategies:
Customer-segment
Discount / allowance Product-form pricing
Location pricing
Segmented
Time pricing
Psychological Also called revenue or yield
Promotional management
Geographical Certain conditions must exist
for segmented pricing to be
Dynamic effective
International
63. Price Adjustment Strategies
Conditions Necessary for
Segmented Pricing Effectiveness
Market must be segmentable
Segments must show different demand
Pricing must be legal
Costs of segmentation can not exceed revenues
earned
Segmented pricing must reflect real differences in
customers’ perceived value
64. Price Adjustment Strategies
Strategies The price is used to say
something about the product.
Reference prices
Discount / allowance Numeric digits may have
symbolic and visual qualities
Segmented that psychologically influence
Psychological the buyer
Promotional
Geographical
Dynamic
International
65. Price Adjustment Strategies
Strategies Temporarily pricing products
below the list price or even
below cost
Discount / allowance Loss leaders
Special-event pricing
Segmented
Cash rebates
Psychological Low-interest financing, longer
warranties, free maintenance
Promotional
Promotional pricing can have
Geographical adverse effects
Dynamic
International
66. Price Adjustment Strategies
Promotional Pricing Problems
Easily copied by competitors
Creates deal-prone consumers
May erode brand’s value
Not a legitimate substitute for effective
strategic planning
Frequent use leads to industry price wars
which benefit few firms
72. Price Cuts
Why?
Excess capacity
Falling market share
Drive to dominate the
market share through lower
cost
73. Price Increases
Why?
Cost inflation
Over demand:
Company cannot supply
all customer needs
74. Some techniques in initiating price
increase
Making low visibility price moves
(dropping discounts, increasing minimum
order size, curtailing production of low
margin products )
Unbundling
(removing features, packaging, or services
and separately pricing elements that
where formerly part of the offer)
75. Buyers reaction to
price cuts
POSITIVE: they think they got a better deal
on the product.
NEGATIVE: consumers assume low quality,
new model coming, company is having a
financial trouble, price will decline further.
76. Buyers reaction to
price cuts
POSITIVE: the item is “hot” good value, high
quality, and exclusive.
NEGATIVE: company is just being greedy,
consumer perceived the company as a
price gouger.
78. Responding to price changes
Questions
Why did the competitor change the price?
Price change- temporary or permanent?
What will happen to market share?
Profit? If do not respond?
Other companies will respond too?
What are competitors and other firms
responses to each possible reaction
likely to be?
84. “Treating customers fairly and making
certain that they fully understand
prices and pricing terms is an
important part of building strong and
lasting customer relationships.”