Chapter -10
Pricing Products: Pricing Considerations & Approaches
þ
Understanding Price: “Price is
all around us in different forms.”
§
PRICE
§
Narrowly: The amount of money charged for a product or
service.
§
Broadly: The sum of the values that consumers exchange
for the benefits of having or using the product or service.
§
Dynamic Price
Charging
different prices depending on individual customers and situations is called
Dynamic Pricing.
q
Understanding Price
- Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
- Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.
- Price is the only element in the marketing mix that produces revenues; all others represent costs.
q
Today’s New Pricing Environment
§
Once Prices were set by negotiation means
bargaining.
§
Now, in our country, one price for all i.e.
Super market.
§
Internet is partially reversing the fixed
price trend.
§
Traditionally price was the only element to
determine quality.
§
Now-a-days, Non-price factors are also very
important.
q Pricing: An Important but
difficult Decision
- Price is the only one element in the marketing mix that produces revenues; all others represent costs.
- Only flexible element in Marketing Mix.
- Unlike other elements of marketing mix, Price can be changed very quickly.
- By reducing price, organizations seek immediate result of increasing sales.
- Pricing is too cost oriented than customer value oriented.
q Factors Affecting Price Decisions
q Internal Factors Affecting
Pricing Decisions: Marketing Objectives
q
Other specific objectives include:
a.
Set prices low to prevent competition from entering
the market,
b.
Prices might be reduced temporarily to create
excitement or draw more customers.
q
Nonprofit and public organization may have other
pricing objectives such as:
a.
Public University aims for partial
cost recovery,
b.
Hospital may aim for full cost recovery,
c.
Movie Theater may price to fill maximum number of
seats.
q Internal Factors Affecting
Pricing Decisions: Marketing Mix
q
Internal Factors Affecting Pricing Decisions:
Marketing Mix
§
Companies often position their products on
price. Price is the main positioning factors
i.e. proctor and gamble.
§
Other
companies deemphasize price and use other marketing mix tools to create
nonprice positions. i.e.
Sony.
§
Some marketers even feature high prices as
part of their positioning i.e. Porsche.
ü If
positioned on non price factors: Quality, promotion and distribution will affect
price.
ü If
position on Price: then price will strongly affect other marketing mix element.
q Costs
q Types of Cost Factors that Affect
Pricing Decisions
q Costs at different level of
Production
q Costs at different level of
Production
q
Costs as a function of : Production Experience
- As a firm gains experience in production, it learns how to do it better.
- The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.
- Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further.
q Learning Curve
q
Organizational Consideration
ü Small
companies’ price set by management.
ü Large
companies price set by divisional or product line managers.
ü Industrial
markets: Importance of salespeople.
ü Exception:
Price Department.
v
External Factors Affecting Pricing Decisions
1.
Market
and Demand
2.
Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the
Number of Units the Market Will Buy in a given Time Period at Different Prices
that Might be Charged.
Price Elasticity Refers to How Responsive Demand Will be to
a Change in Price.
v Price Elasticity of
Demand = % Change in Quantity Demanded
% Change in Price
Price Elasticity
of Demand: fig: 10.4
3.
Consumer Perceptions of Price and values
4.
Competitors costs prices and offers.
5.
Other External factors
Ø
Economic Condition
Ø
Resellers reactions to Price
Ø
Government rules and regulations
Ø Social concerns
q
Major Considerations in Setting Price
¯
Cost Based Pricing
q
Cost plus pricing
q Adding standard markup
to the cost of the product.
Fixed Cost
Unit cost
= VC +
Unit Sales
•
Cost plus pricing (Mark Up Pricing)
•
Adding standard markup to the cost of the product.
Unit Cost
Mark up
Price =
(1- R of R on
sales)
•
Breakeven Analysis or Target Return Pricing
Break Even volumes: Figure: 10.5
•
Setting Price to break even on the costs of
making and marketing a product or setting price to make a target profit.
Fixed cost
B/E
Point =
(Price - VC)
¯ Value Based Pricing
Ø Setting
Price based on buyers’ perceptions of value rather than on the sellers’ costs
is called Value based pricing or Perceived Value Pricing.
•
Value
Pricing
Ø Offering
just the right combination of quality and good service at a fair price is
called value pricing.
Ø EDLP
¯
Competition based Pricing
Setting Price based on
the prices that competitors charge for similar products.
o Going-Rate Company Sets Prices Based on What
Competitors Are Charging.
o Sealed-Bid Company Sets Prices Based on What They
Think Competitors Will Charge.
Pricing Products: Pricing Strategy
Chapter -11
Chapter -11
¯
New Product Pricing Strategies
v Market Skimming
Ø Setting
a High Price for a New Product to “Skim” Maximum Revenues from the Target
Market.
Ø Results
in Fewer, But More Profitable Sales.
•
Use Under
these Conditions:
–
Product’s Quality and Image Must Support Its
Higher Price.
–
Costs can’t be so high that they cancel the
Advantage of Charging More.
–
Competitors shouldn’t be Able to Enter Market
Easily and Undercut the High Price.
v Market Penetration
Ø Setting a Low Price for
a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Ø Attract a Large Number
of Buyers and Win a Larger Market Share.
Ø Use Under these Conditions:
Ø Market
must be Highly Price-Sensitive so a Low Price Produces More Market Growth.
Ø Production/
Distribution Costs Must Fall as Sales Volume Increases.
Ø Must
Keep out Competition & Maintain Its Low Price Position or Benefits May Only
be Temporary.
+
Product Mix-Pricing Strategies: Product Line Pricing
1.
Product
Line Pricing
Involves
setting price steps between various products in a product line based on:
·
Cost differences between products,
·
Customer evaluations of different features, and competitors’ prices.
2.
Optional-Product
Pricing optional or accessory products sold with the
main product. i.e camera bag.
3.
Captive-Product
o Pricing products that
must be used with the main product. i.e. film.
o Two-part pricing [fixed
fee plus a variable usage rate.]
4.
By-Product
o Pricing low-value
by-products to get rid of them and make the main product’s price more
competitive.
o i.e. sawdust, Zoo Doo
5.
Product-Bundling
o Combining several
products and offering the bundle at a reduced price.
o i.e. theater season
tickets.
¯ Discount and Allowance Pricing
§
Segmented Pricing: Selling a product or
service at two or more prices; where the different in prices is not based on
different in costs.
§
Psychological
Pricing
·
Considers the psychology of prices and not
simply the economics.
·
Customers use price less when they can
judge quality of a product.
·
Price becomes an important quality signal when
customers can’t judge quality; price is used to say something about a product.
§
Reference
Prices
·
Prices that buyers carry in their minds and
refer to when they look at a given product.
§
Promotion
Prices
·
Temporarily pricing products below the list
price, and sometimes even below cost to increase short-run sales.
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