Pricing Considerations & Approaches

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

¯    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.