Pricing Considerations, Approaches and Strategies

11 - *Price Has Many NamesWhat is Price?RentFeeRateCommissionAssessmentTuitionFareTollPremiumRetainer Bribe Salary Wage Interest Tax

11 - *DefinitionPriceThe 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.

11 - *Fixed vs. Dynamic PricingFixed pricing policyOne price for all buyersDynamic pricingDifferent pricesIndividual customersSituations

11 - *Price and the Marketing Mix:Only element to produce revenuesMost flexible elementCan be changed quicklyPrice Competition Common Pricing MistakesWhat is Price?

Factors to Consider When Setting Price11 - *Price ceilingNo demand above this pricePrice FloorNo profits below this priceCustomerperceptionsof value

ProductcostsOther internal & external considerationsMarketing strategy, objectives, and mixNature of the market & demandCompetitors strategies & prices

Factors to Consider When Setting PriceCustomer Perceptions of ValueValue = priceValue = benefits of having or using the product11 - *

Value-based pricing11 - *

Value-based pricingGood-value pricingQuality and good service at fair price

Value-added pricing11 - *

11 - *Factors to Consider When Setting PriceMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsMarket positioning influences pricing strategyOther pricing objectives:SurvivalCurrent profit maximizationMarket share leadershipProduct quality leadershipNot-for-profit objectives:Partial or full cost recoverySocial pricingInternal Factors

11 - *Factors to Consider When Setting PriceMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsPricing must be carefully coordinated with the other marketing mix elementsTarget costing is often used to support product positioning strategies based on priceNonprice positioning can also be used

Internal Factors

11 - *Factors to Consider When Setting PriceMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsTypes of costs:VariableFixedTotal costsHow costs vary at different production levels will influence price settingExperience (learning) curve effects on priceInternal Factors

11 - *Factors to Consider When Setting PriceMarketing objectivesMarketing mix strategiesCostsOrganizational considerationsWho sets the price?Small companies: CEO or top managementLarge companies: Divisional or product line managersPrice negotiation is common in industrial settingsSome industries have pricing departments

Internal Factors

11 - *Factors to Consider When Setting PriceNature of market and demandCompetitors costs, prices, and offersOther environmental elementsTypes of marketsPure competitionMonopolistic competitionOligopolistic competitionPure monopolyConsumer perceptions of price and valuePrice-demand relationshipDemand curvePrice elasticity of demand

External Factors

11 - *Factors to Consider When Setting PriceNature of market and demandCompetitors costs, prices, and offersOther environmental elementsConsider competitors costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competitionLow-price low-margin strategies inhibit competitionHigh-price high-margin strategies attract competitionBenchmarking costs against the competition is recommended

External Factors

11 - *Factors to Consider When Setting PriceNature of market and demandCompetitors costs, prices, and offersOther environmental elementsEconomic conditionsAffect production costs Affect buyer perceptions of price and valueReseller reactions to prices must be consideredGovernment may restrict or limit pricing optionsSocial considerations may be taken into account

External Factors

11 - *Cost-Based Pricing: Cost-Plus PricingAdding a standard markup to costIgnores demand and competitionPopular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as more fair to both buyers and sellersGeneral Pricing Approaches

11 - * Cost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit Cost$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 Desired Return on Sales) = Markup Price$25 / (1 - .20) = $31.25General Pricing Approaches

11 - *Cost-Based Pricing: Break-Even Analysis and Target Profit PricingBreak-even charts show total cost and total revenues at different levels of unit volume.The intersection of the total revenue and total cost curves is the break-even point.Companies wishing to make a profit must exceed the break-even unit volume.General Pricing Approaches

11 - *Break-Even Analysis and Target Profit Pricing

General Pricing ApproachesFixed CostsTotal CostsRevenuesSales Volume in Thousands of UnitsThousands of Dollars0102030401000

800

600

400

200Break-even pointTarget Profit $200,000Quantity To Be Sold To Meet Target Profit

11 - *Value-Based Pricing:Uses buyers perceptions of value rather than sellers costs to set price.Measuring perceived value can be difficult.Consumer attitudes toward price and quality have shifted during the last decade.Introduction of less expensive versions of established brands has become common.General Pricing Approaches

11 - *Value-Based Pricing:Business-to-business firms seek to retain pricing power Value-added strategies can helpValue pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricingGeneral Pricing Approaches

11 - *Competition-Based Pricing:Also called going-rate pricingMay price at the same level, above, or below the competitionBidding for jobs is another variation of competition-based pricing Sealed bid pricingGeneral Pricing Approaches

11 - *New-Product Pricing StrategiesMarket-Skimming PricingSetting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

Market-Penetration PricingSetting a low price for a new product in order to attract a large number of buyers and a large market share.

11 - *Product Line PricingSetting price steps between product line items. Price pointsOptional-Product PricingPricing optional or accessory products sold with the main productProduct Mix Pricing Strategies

11 - *Captive-Product PricingPricing products that must be used with the main product High margins are often set for suppliesServices: two-part pricing strategy Fixed fee plus a variable usage rateProduct Mix Pricing Strategies

11 - *By-Product PricingPricing low-value by-products to get rid of themProduct Bundle PricingPricing bundles of products sold togetherProduct Mix Pricing Strategies

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

Types of discountsCash discountQuantity discountFunctional (trade) discountSeasonal discountAllowancesTrade-in allowancesPromotional allowances

Strategies

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

Types of segmented pricing strategies:Customer-segmentProduct-form pricingLocation pricingTime pricingAlso called revenue or yield managementCertain conditions must exist for segmented pricing to be effective

Strategies

11 - *Conditions Necessary for Segmented Pricing Effectiveness Price Adjustment StrategiesMarket is segmentableLower priced segments are not able to resellCompetitors can not undersell segments charging higher prices

Pricing must be legalCosts of segmentation can not exceed revenues earnedSegmented pricing must reflect real differences in customers perceived value

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

The price is used to say something about the product.Price-quality relationshipReference pricesDifferences as small as five cents can be importantNumeric digits may have symbolic and visual qualities that psychologically influence the buyer

Strategies

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

Temporarily pricing products below the list price or even below costLoss leadersSpecial-event pricingCash rebatesLow-interest financing, longer warranties, free maintenancePromotional pricing can have adverse effects

Strategies

11 - *Promotional Pricing Problems Price Adjustment StrategiesEasily copied by competitorsCreates deal-prone consumersMay erode brands value

Not a legitimate substitute for effective strategic planningFrequent use leads to industry price wars which benefit few firms

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

Types of geographic pricing strategies:FOB-origin pricingUniform-delivered pricingZone pricingBasing-point pricingFreight-absorption pricing

Strategies

11 - *Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

Prices charged in a specific country depend on many factorsEconomic conditionsCompetitive situationLaws / regulationsDistribution systemConsumer perceptionsCost considerationsStrategies